This document provides context on the telecommunications sector. It notes that telecom operators have weathered economic uncertainty and volatility relatively well due to their defensive positioning. However, their future growth is uncertain as investors question the levels of capital expenditure needed to support growth and whether operators or over-the-top players will monetize new offerings. Some positive trends for operators include easing mobile termination rate regulations and a slowing pace of landline decline, but telecom revenues remain linked to employment rates which are trending downward. Overall, operators can benefit from improving performance supported by structural changes, strong cost control, and network sharing.

1. Top 10 risks in
telecommunications
2012

2. About this report
As the challenges and opportunities facing telecoms operators around the world
continue to evolve, the sector’s risk universe is changing rapidly. And as companies
formulate and execute their strategies to sustain and grow value in today’s fast-
moving environment, they have to ensure that their understanding and management
of risk keeps pace.
Today, navigating through the sheer speed and scale of change presents challenges
for all operators. We have produced Top 10 Risks in Telecommunications 2012 to help
them map out the right path. This is the latest in our ongoing series of studies
designed to pinpoint the most critical risk issues, analyze the sector’s evolving
responses and highlight elements of emerging best practice.
As in previous reports, we do not claim that the list of risks we present here is
comprehensive. Also, by its nature, it can only provide a generalized snapshot of the
risks that we — and the sector as a whole — see at this time. Given this, we would
encourage you to read this report with an open mind and inquisitive attitude. Are
these really the risks you face in your own business? If not, how and why are your
organization’s risks different? And how do those particular risks impact you?
The answers inevitably vary from company to company. But in every case, we believe
that leaders should take the following steps:
• Undertake a thorough risk assessment at least annually, to define your key risks
and weigh their impact on business drivers. The risks in this report can provide a
useful starting point.
• Extend this risk assessment beyond the usual financial and regulatory risks to
consider the wider environment in which the organization operates and the full
extent of its operations, now and into the future.
• Conduct scenario planning for the major risks that you identify, and develop a
range of operational responses, possibly as an integrated part of the planning
cycle.
• Evaluate your organization’s ability to manage its risks — ensuring that the risk
management processes are linked to the actual risks that the business faces,
especially those that are new and emerging.
• Ensure that effective monitoring and controls processes are in place to provide
both earlier warning and an improved ability to respond.
• Keep an open mind about where new risks may come from.
Despite — or, in some cases, because of — the continuing uncertainty and volatility in
the global economy, there are major opportunities for operators. Each company’s
ability to identify and seize these opportunities depends critically on its ability to
understand and manage risk. Unless your growth strategy has a solid underpinning of
risk management, it will never be truly sustainable. This publication aims to help you
build and reinforce that sound platform.

3. Contents
Introduction 02
The Ernst & Young risk radar 2012 03
Editorial committee 04
Sector context 06
Executive summary 08
The top 10 business risks:
1. Failure to shift the business model from minutes to bytes 10
2. Disengagement from the changing customer mindset 11
3. Lack of confidence in return on investment 1
2
4. Insufficient information to turn demand into value 1
3
5. Lack of regulatory certainty on new market structures 14
6. Failure to capitalize on new types of connectivity 15
7. Poorly formulated M&A and partnership strategy 16
8. Failure to define new business metrics 18
9. Privacy, security and resilience 19
10. Lack of organizational flexibility 20
What’s below the radar? 22
Contacts 25

4. Introduction
Amid the recent global economic uncertainty, the telecommunications
sector has performed relatively well, with operators once again
emphasizing their strong defensive qualities and well-developed capex
management capabilities. However, in a sector where new over-the-top
entrants are competing fiercely for revenues from emerging service
areas, the question is: Is now the time to shift from a defensive to
offensive posture? For many telecoms executives, the answer today is a
resounding “Yes.”
As in previous years, we in Ernst & Young’s global telecommunications network seek to
help operators maximize value and tap into new sources of growth through our ongoing
Jonathan Dharmapalan — series of reports identifying the key risks to their businesses. By addressing the top 10
Global Telecommunications risks highlighted in this study, we believe that telecoms providers will position
Leader themselves to take their businesses forward more effectively and make the most of the
growth opportunities that emerge.
This report was produced by collecting and synthesizing the insights of our practitioners
and sector professionals, supplemented by research and analysis by the Ernst & Young
Global Telecommunications Center. During the research process, we asked our sector
professionals to evaluate the most important strategic challenges for telecoms
businesses globally and to rate the severity of these risks for the sector.
As in previous years, our 2012 study indicates that operators face a wide array of risks,
and that the relative positioning and scale of these risks have continued to change. An
understanding of how to respond to these shifts will help operators manage risk more
effectively, optimize performance and increase operational efficiency. It will also
empower them to capitalize on the profound changes under way in the telecoms
ecosystem, ranging from rapid advances in technology to new customer behaviors and
expectations.
The most fundamental of these changes is encapsulated in the risk that tops our list:
the migration of sector value from minutes of usage to bytes of traffic  a change that
must be mirrored in operators’ business models. Many of the other risks in our top 10
spring directly or indirectly from that seismic shift. To help companies formulate and
execute the right responses, we provide an analysis of each of the top 10 risks. We also
report on risks currently “below the radar” that our panelists believe may move up the
risk tables in future years.
I would like to thank all our contributors for their time, insight and cooperation in the
preparation of this report. This is a valuable dialogue that we hope to continue for many
years to come.
Jonathan Dharmapalan
Global Telecommunications Leader
2 Top 10 risks in telecommunications 2012

5. The Ernst & Young
risk radar 2012
Telecommunications
The Ernst & Young risk radar presents a snapshot of the top 10
Top 10 business risks business risks in an industry sector, by dividing risks into four quadrants
for telecoms operators that correspond to Ernst & Young’s Risk Universe™ model. These
quadrants are:
• Compliance threats — originating in politics, law, regulation or corporate governance
1. Failure to shift the
• Operational threats — impacting the processes, systems, people and overall value
business model from chain of a business
minutes to bytes • Strategic threats — related to customers, competitors and investors
2. Disengagement from • Financial threats — stemming from volatility in the markets and in the real economy
the changing The radar below plots the top 10 risks for telecoms operators on the risk radar, and lists
the risks that are currently just “below the radar.”
customer mindset
3. Lack of confidence in
Top 10 business risks for telecommunications in 2012
return on investment
4. Insufficient
ial Co
m
information to turn anc pl
Lack of regulatory
n
ia
certainty on new
Fi
demand into value
nc
market structures
e
5. Lack of regulatory Lack of Privacy,
confidence in return
certainty on new Failure to define
new business on investment
security and
resilience
market structures metrics Failure to shift the
business model
from minutes to bytes
6. Failure to capitalize
Disengagement
on new types of from the changing
Insufficient information to
turn demand into value
customer mindset
connectivity
Poorly
7. Poorly formulated Failure to
formulated M&A
and strategic
capitalize on new
M&A and partnership types of connectivity
partnerships
s
strategy
n
St
Lack of
io
eg r
ra
organizational
at
8. Failure to define new
ic pe
t
flexibility
O
business metrics
9. Privacy, security and
resilience Below the radar
10. Lack of organizational Evolving service cannibalization A more pressing green
scenarios agenda
flexibility
Concentration of equipment Difficulties in managing debt
vendors and cash
3 Top 10 risks in telecommunications 2012

6. Editorial committee
Jonathan Holger Prashant
Dharmapalan Forst Singhal
Global Global Global
Telecommunications Telecommunications Telecommunications
Sector Leader Markets Leader Markets Leader
Jonathan Dharmapalan is Ernst & Young’s With 20 years of experience, Holger Forst has Prashant has extensive experience of over
Global Telecommunications Leader, leading been the Global Client Service Partner for 15 years in Assurance and Advisory Business
a team of over 2,000 telecoms professionals Deutsche Telekom AG since 2007. In 2011 Services, servicing Indian and multinational
across the world in their work with the world’s Holger was appointed the joint Ernst & Young telecom clients. In 2011 Prashant was
leading operators. With 25 years of experience, Global Telecommunications Markets Leader. appointed the joint Ernst & Young Global
Jonathan has served some of the largest Telecommunications Markets Leader.
companies in the telecommunications sector.
He has significant experience in both mobile
and terrestrial communications.
Olivier Luis David
Lemaire Monti McGregor
EMEIA Americas Asia Pacific
Telecommunications Telecommunications Telecommunications
Leader Leader Leader
Olivier has 15 years of experience working in Luis has 19 years experience in the telecoms David has been with Ernst & Young for over
the telecommunication industry. As an Audit industry, and has worked with several large twenty six years and has worked in a number of
and Business Advisory Partner and chartered telecom groups. Luis is the leader of countries including the UK, USA and Australia.
accountant, he has been rendering audit, Ernst & Young’s telecommunications He is the coordinating core assurance partner
transaction support and advisory services to practice for the Americas region. on Telstra and the telecommunications and
many international telecom operators across media & entertainment leader for Asia Pacific.
Europe, Africa and Middle East. Olivier has been
leading the Global Telecom Revenue Assurance
team for 6 years and led several revenue
assurance global studies. He is also experienced
in group reporting under IFRS. Since September
2011 he is the leader of Ernst & Young’s
telecommunications practice for the Europe,
Middle East, India and Africa (EMEIA).
Rohit Bala Adrian
Puri Balakrishnan Baschnonga
Director, Global Telecommunications Senior Analyst, Global
Telecommunications Partner — United States Telecommunications
Center Center
Rohit is a Director within Ernst & Young’s Bala has over 20 years of consulting and Adrian Baschnonga helps produce and
Global Telecommunications Center, and industry experience within telecoms and other deliver thought leadership for the Global
currently leads the development and industries. Bala has assisted several cable Telecommunications Center. He advises clients
implementation of the Center’s strategy. He and telecommunication companies with the on strategic issues in the telecommunications
brings over 12 years of professional services definition and implementation of strategic sector and is a regular speaker at industry
experience focusing on telecoms finance and initiatives, including channel strategy, sales events.
business strategy. effectiveness, marketing effectiveness and
analytics, CRM strategy and implementation,
product profitability, and operations
effectiveness initiatives.
4 Top 10 risks in telecommunications 2012

7. Vincent de La Dennis Mark
Bachelerie Deutmeyer Gregory
Telecommunications Global Telecommunications Telecommunications
Partner — France IFRS Leader Partner — United Kingdom
Vincent de La Bachelerie has been involved in Dennis has over 24 years experience Mark has over 25 years experience in more
the telecommunications sector for 20 years. providing auditing and advisory services than 40 countries as an advisor to the
Vincent has extensive experience working to of our largest U.S. telecommunications telecommunications industry, working in
as lead partner on large telecom groups. clients. Dennis is the Global IFRS Leader strategy, regulation, cost and pricing analysis
He has also participated in other projects for the Telecom Sector. and market analyses. In his career he has
for telecommunications operators including undertaken engagements for several large
consulting and advisory work, merger and telecom groups.
acquisition projects and valuations.
Manesh Michael G. Jeremy
Patel Stoltz Thurbin
Telecommunications Telecommunications Telecommunications
Partner — India Partner — United States Partner — France
With over 19 years of experience working With 35 years of experience serving global Jeremy is a partner in the Paris Assurance
with Indian and multinational companies in clients, Mike has extensive experience practice experienced in telecoms and media.
the telecommunications sector, Manesh Patel working as lead partner on large telecom His experience covers the audit of the
currently leads the telecommunications risk groups. He has also participated in other €30b French fixed line, internet and mobile
advisory services group in India. projects for telecommunications operators, operations, the internal control 404 audit, and
including risk reviews, regulatory, the international operations. He has extensive
operational assurance and improvement experience of internal audit, fraud, internal
and valuations. control and risk management issues within the
telecommunications industry.
Pieter
Verhees
Telecommunications
Partner — Netherlands
With over 15 years of experience, Pieter
Verhees is currently working with leading fixed
and mobile telecom operators, in and outside
Europe, delivering and implementing complex
projects, including price squeeze methods and
models, costing models, cash-flow forecasting
capabilities, performance management and
regulation.
5 Top 10 risks in telecommunications 2012

8. Sector context
“Safe haven” positioning threatened by
questions over future growth
Telecommunications has weathered the downturn Figure 1. Europe — GDP and telecoms revenue development1
and subsequent economic uncertainty and volatility % change y/y
relatively well compared to many other sectors. As a 6.0
result, the sector is quite solidly positioned as a 4.0
defensive “safe bet” in the eyes of investors (though 2.0
the mobile segment is slightly more exposed). 0.0
-2.0
Looking ahead to future structural trends in the
-4.0
sector, players in Europe and other developed
-6.0
markets are likely to benefit from some easing of the Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
regulations on mobile termination rates, while 08 09 09 09 09 01 10 10 10 11 11
landline is set to see the pace of its structural decline European telecoms revenue growth Euro area real GDP growth
slow down. More generally, the outlook is positive as
smartphone growth opens doors to new However, challenges remain. Experience shows that operators’
revenue performance tends to be linked to employment rates 
opportunities in the sector.
which are trending downward and under threat of an
But this silver lining comes with a cloud: investors accelerating decline. And of the sector’s segments, the still-
are taking an increasingly ambivalent view of the growing mobile segment is the most economically sensitive,
having seen its voice volumes fall significantly during 2009 in
sector, asking questions about the levels of capital the wake of the recession.
expenditure that will be needed to support future
growth. They are also questioning whether operators Improving performance — supported by structural
will take their fair share of future expansion in trends
service revenues, or whether the over-the-top Operators can look forward to improving performance, helped by
players will once again seize the initiative in positive structural trends. For example, rates of landline loss are
slowing in the European fixed-line. And operators worldwide
monetizing new offerings. have proved themselves strong on cost control in recent years,
Reaping the rewards of a defensive status with strategies such as network sharing helping to ease the
pressure on infrastructure upgrades.
Through its history, the telecommunications sector has often
demonstrated its robustness in downturns and periods of market Figure 2. Telecoms companies’ Operating Cash Flow margin
2
uncertainty. The recent past has been no exception. The sector is percentage by region, 2011F–2013F
riding out the economic storms relatively well. For example, as
Figure 1 shows, the fluctuations in telecoms revenue growth in Operating cash flow margin (%)
Europe have been far smaller than the volatility in European GDP 25
over last three years.
This picture is being replicated in other regions across the world, 20
with operators’ robust defensive positioning generally regarded
as being reinforced by strong cash flow and rising dividend 15
yields. In Asia, the high valuation multiples currently being
applied to mobile players signal continued confidence in the 10
outlook for the sector. And in North America, investors remain
optimistic about the ongoing impacts of increasing smartphone 5
penetration and investment in 4G networks.
0
Global Americas Asia ex Japan Europe Africa
Japan
FY 2011 FY 2012 FY 2013
1Eurostat; Deutsche Bank, “European Telcos: The best way to play,” 5 September 2011
(reports were sourced from author website unless otherwise noted).
2Macquarie, “Global Telecoms,” 15 September 2011.
6 Top 10 risks in telecommunications 2012

9. Driven by such cost control measures, operating cash flow At the same time, global smartphone shipments continue to
metrics are forecast to improve for global operators. Investors escalate at impressive rates, with wireless data growth set to
are positive on North American telcos due to early investment in remain strong across all regions — although minutes of use (MoU)
4G and high smartphone penetration, while high valuation are flattening in mature markets such as the US.
multiples in Asia reflect confidence in continued revenue growth.
This improving picture, highlighted in Figure 2, both reflects and … but clouds are gathering
reinforces the current assessment by investors and analysts that Against this generally improving outlook, there are conflicting
the global telecommunications sector can weather any financial perspectives on how the sector will evolve. As Figure 4 shows,
storms that may be ahead. data is projected to rise from 20% of global mobile revenues in
A bright growth outlook … 2008 to 36% in 2015, threatening major disruption to revenue
models. Investors are also concerned about the massive capex
As these trends play out, the sector is already outpacing recent that will be needed to support this growth, and about whether
assumptions of its growth rate (see Figure 3). Mobile connections over-the-top players might once again beat the operators in
are forecast to surpass the overall human population in 2014, as the race to secure new revenue streams, as they did with
the “long tail” of users in emerging markets get connected, and mobile apps.
as trends escalate such as multiple SIMs and devices per person,
embedded SIMs and machine-to-machine (M2M) connectivity. As a result, investors’ view of the telecoms sector remains
fundamentally ambivalent, reflecting the difficulty reconciling its
Figure 3. Global mobile device and subscriber penetration3 structural weaknesses — such as heavy regulation of higher-
margin activities — with specific opportunities for rapid growth,
Global population and mobile connections (m)
such as mobile data. There is also concern over the trade-off
8,000,000 between the cost and value of new growth areas, given the
uncertain capex commitments as mobile traffic growth and
6,000,000
mobile data revenue growth diverge.
Against this background, focusing on dividend yields tends to
4,000,000 encourage a short-term view of the sector’s performance. Yet
this is a sector where the models for long-term value creation
2,000,000 need to be addressed — and soon.
4
Figure 4. Global mobile voice and data revenues
0
2008 2009 2010 2011 2012 2013 2014 2015 Revenue (US$m)
Population Mobile connections 1,200,000
1,000,000
800,000
Annual smartphone shipments (m)
600,000
600 400,000
500 200,000
0
400 2009 2010 2011 2012 2013 2014 2015
300 Mobile voice revenue Mobile data revenue
200
100
0
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011E
FY 2012E
3Ovum, UNFPA, 2008 Population Revision Database, Ernst & Young analysis; Deutsche Bank,
“Global Telecommunications,” 25 July 2011.
4Ovum Mobile Voice and Data Forecast 2011-2016, January 2012; Cisco Visual Networking Index.
7 Top 10 risks in telecommunications 2012

10. Executive summary
The top 10 business risks for telecoms
operators
The top 10 Aggregating our interview responses worldwide, here is a summary of
each of the top 10 business risks for telecoms operators.
1 Failure to shift the business
model from minutes to bytes 1 Failure to shift the business model from minutes to bytes
2 Disengagement from the As value shifts from minutes of usage to volumes of data, operators need to move away
changing customer mindset from their legacy strategies focused on customer retention, which have had the effect
of commoditizing the value of minutes and bandwidth in customers’ eyes. Instead of
3 Lack of confidence in return on concentrating on fighting churn, operators need to target revenues from new services
investment that tap into rising demand and master a wider array of charging models to monetize
these services.
4 Insufficient information to turn
demand into value
2 Disengagement from the changing customer mindset
5 Lack of regulatory certainty on
new market structures With global technology brands now top of mind for consumers, and technology cycles
quickening, operators need to understand and respond to fast-changing customer
6 Failure to capitalize on new
expectations and behaviors if they are to fight off the competitive threat from over-the-
types of connectivity top providers. This will require operators to communicate clearly the underlying value
of the network and the sources of added value that differentiate their offerings in new
7 Poorly formulated M&A and service areas. Innovation in the service model could also be used to build brand loyalty
partnership strategy in the same way technology players have done.
8 Failure to define new business
metrics 3 Lack of confidence in return on investment
9 Privacy, security and resilience
While operators have proved adept at managing capital investment and balancing it
10 Lack of organizational flexibility flexibly with free cash flow and dividends, it is increasingly clear that tight capex control
can limit their ability to grow new services quickly. So they need to maintain their
commitment to investing in growth opportunities, while tracking technology and
consumer developments closely to ensure they target their financial investments
at the right areas at the right time.
4 Insufficient information to turn demand into value
To drive profitable customer propositions and improve their time-to-market for new
services, operators need accurate, timely and comprehensive business intelligence and
customer analytics, underpinned by aligned and integrated operational support and
billing systems. These elements pave the way for efficient growth by enabling operators
to produce better business intelligence for decision-making, helping them understand
customer changes before their competitors, and allowing them to reuse network data in
collaborative partnerships. Better information can also help operators reduce
operational costs and ensure regulatory compliance.
8 Top 10 risks in telecommunications 2012

11. 5 Lack of regulatory certainty on new 8 Failure to define new business metrics
market structures
Uncertainty over regulators’ approaches to new market The metrics and key performance indicators (KPIs) that
structures is undermining operators’ willingness to invest. It is operators use to manage their operations internally and
increasingly crucial for governments and regulators to adopt communicate their performance and prospects externally have
pro-investment policies to sustain the sector’s momentum and not kept pace with the shift in business models from minutes to
for operators to form workable stances on a range of issues, bytes. Many internal metrics are still service- and network-
including the increasing relationship between fixed and mobile oriented, and do not provide enough granularity to improve the
policies. At the same time, all these groups must work together customer experience. Also, commonly used external metrics
to achieve greater clarity over regulatory approaches. such as average revenue per user (ARPU) fail to give investors a
full picture. Operators urgently need to define a new and
different set of metrics that puts the customer first and leads to
6 Failure to capitalize on new types of improved financial performance.
connectivity
New types of connectivity such as machine-to-machine (M2M) Privacy, security and resilience
9
are redefining the concept of connectivity, requiring operators to
adopt new strategies. Instead of continuing to think of
connections in human terms, operators need to develop new Customers place more trust in operators than in social networks,
understandings of connectivity and target new growth areas. regarding operators as security guarantors across a range of
This will mean identifying core competencies for use in services. Yet they still hold operators responsible for threats
composite value chains and delineating clearly between the need from third parties  even for mobile malware attacks and rogue
to build capability and the need to partner or outsource. apps. Operators should work closely with governments to clarify
their responsibilities in areas such as anti-terrorism and content
for children, and collaborate with suppliers and partners to
7 Poorly formulated M&A and partnership tackle privacy and security issues in new service areas such as
strategy cloud security and mobile apps.
Though M&A activity has accelerated recently, its nature and
risks have changed. Footprint control increasingly takes
10 Lack of organizational flexibility
precedence over footprint growth, and political, macroeconomic
and regulatory risks are increasing. But acquisitions and
partnerships are essential for success in emerging market With their organizational structures subject to forces such as the
segments such as mobile advertising and cloud computing. shift to data services, the rise of partnering and the rising
Operators need to clearly discriminate between when they imperative for speed-to-market, operators have already made
should acquire and when they should partner. The ability to significant changes to their organizations. But more are needed.
sustain partnerships will emerge as a strategic differentiator. Operators now need to align their business units to maximize the
Effective management and implementation of M&A and economies of scale and scope in their geographic footprints
partnerships offers significant operational upside to telecom while reconciling the competing forces of geographic sensitivity
players. and global strength.
9 Top 10 risks in telecommunications 2012

12. The top 10 business risks
Figure 5. Global mobile data revenue and traffic growth5
1 Failure to shift the business model from
minutes to bytes Revenue
Traffic
(PB per
(US$m) month)
“Losing ownership of the client” was ranked as the telecoms
450,000 6,000
sector’s top business risk in 2008 and 2010. Our analysis shows 400,000
5,000
that this risk has now been overtaken by the urgent need to 350,000
develop and deliver new data-enabled services that will generate 300,000 4,000
250,000
fresh revenues from users. And the customer-focused risk of 200,000
3,000
“disengagement from the changing customer mindset” has 150,000 2,000
slipped to number two, as the ongoing fragmentation of the 100,000
1,000
sector value chain makes it increasingly clear that no single 50,000
0 0
participant can ever truly “own” the customer. 2010 2011 2012 2013 2014 2015
The risk of failing to shift from minutes to bytes reflects the new Mobile data revenue Mobile data traffic
challenges now facing operators around the world, as a result of
Adapting to a wider ecosystem …
aggressive moves by competitors entering from other sectors
and rapid change in telecoms’ established value chains. Pivotal to In response, operators need to adapt their business models to a
these changes is the migration of value from charging for wider ecosystem and make firm decisions about which revenue
minutes of usage to carrying rising volumes of data across sources they are going to target within that broader
networks. environment. As Figure 6 shows, the current split of revenues is
roughly 50% in the consumer segment, with the rest divided
Focusing on retention stifles value between business and wholesale.
As operators respond to this seismic shift, they need to move Depending on the chosen strategy, this split could evolve by
away from legacy strategies that have focused on retaining 2020 into a “smart” operator with revenues dominated by
customers’ loyalty rather than monetizing demand. The focus on customers or a “lean” model rebalanced toward wholesale
preventing and minimizing customer churn has had the effect of service provision. In general, telecoms revenue mix forecasts
commoditizing the value of minutes and bandwidth in customers’ point to an increasing shift toward wholesale. Operators face the
eyes. challenge of identifying new types of wholesale customers in the
The direct impacts of this commoditization are clear in offerings context of a shifting value chain.
such as free upgrades for fixed broadband, flat-rate mobile data Figure 6. Operator revenue mixes — 2020 scenarios6
services and discounted multi-play packages. These underline
the fact that user-loyalty considerations are now actually stifling
value creation. Current 50% 30% 20%
Pursuing new service areas Smart operator
60% 25% 15%
Instead of concentrating on fighting churn, we believe that 2020
operators should now raise their sights to target revenues from
new services that tap into rising demand. As Figure 5 shows, Lean operator
20% 30% 50%
2020
data traffic is expected to grow exponentially in future years.
As demand increases, new consumer service areas are being 0% 20% 40% 60% 80% 100%
exploited by players with new business models, such as Consumer Business Wholesale
“freemium” music and data hosting/file transfer services, and
advertising-supported apps. Even operator-provided products  … while seizing the enterprise opportunity
such as SMS  that were previously insulated from new offerings
are under growing pressure from new free services, such as In light of developments such as the rapidly intensifying
mobile instant messaging. competition for consumers’ spending, the revenue growth
potential in the enterprise segment remains high in comparison
to the consumer market. To exploit this potential, business
models for enterprise customers have to embrace new
approaches to provisioning — such as cloud computing —
alongside collaborative approaches to service development
5Ovum Mobile Voice and Data Forecast 2011-2016, January 2012; and delivery.
Cisco Visual Networking Index.
6Ovum, “Telecoms in 2020: Executive Summary,” December 2009.
10 Top 10 risks in telecommunications 2012

13. Operators are embracing this message, as demonstrated by a Quickening technology cycles reshape brand
raft of announcements in late 2011 of cloud-based unified affinities
communications and collaborations services for businesses,
often supported by new data center investments. Small and This dominance by the technology players reflects the extent to
medium-sized businesses are expected to act as early adopters which quickening technology cycles across both the consumer
for these cloud-based services, an area where operators are and enterprise segments are impacting consumers’ everyday
continuing to make good headway. working habits and lifestyles, and reshaping their brand affinities.
As Figure 8 indicates, multiple devices per user is increasingly
In parallel with these initiatives, operators should seek to master the norm. And the time taken for new technologies to reach 50%
a wider array of charging models, ranging from flat-rate to penetration is shortening rapidly  down from 15 years for mobile
per-event and ad-supported. And cross-sector growth strategies phones to 4—5 years for smartphones and tablets.
will require vertical market business models, tailored to the
particular sectors — a need well served by the low costs and high Figure 8. Take-up of consumer electronics devices8
scalability and configurability of cloud services. All of these
changes, in turn, require changes to IT and charging systems. UK device penetration
Q1 2011 (%)
2 Disengagement from the changing 100 98 93 85
customer mindset 80 60
55 54
As we previously noted, there is now very little prospect of any 60 33
individual participant in the value chain fully owning — rather 40 27
than sharing — the customer. So, as well as slipping to second 20 4 4 2 2
place behind the need to migrate from minutes to bytes, our 0
number one risk in 2010 of losing customer ownership has
Landline phone
Mobile phone
Games console
HDTV receiver
TV set
HD-ready TV
Smartphone
Laptop
e-Reader
Netbook
3DTV
Tablet
evolved into the risk of becoming disengaged from the
customer’s changing mindset.
This risk is underlined by the extent to which technology brands
are now top of mind with customers. As Figure 7 shows, today’s
top four global brands are all technology players, with the One of the reasons for this acceleration is that operators’ fixed
top-ranked operator brand coming in at number six. and mobile networks are now a platform for access to a wide
Figure 7. Top 10 global brands 20117 number of sectors and services, such as television, retail and
banking. As this explosion in online/mobile applications gathers
Rank Rank Rank Brand Industry group
pace, disruptive players are leveraging their rising brand values
2011 2010 2009
to extend their service propositions. At the same time, devices
1 2 5 Google Technology
are playing a pivotal role in shaping the mobile customer
2 20 27 Apple Technology experience.
3 5 4 Microsoft Technology
4 4 3 IBM Technology
5 1 1 Walmart Retail
6 7 8 Vodafone Telecoms
7 6 6 GE Diversified
8 10 10 Toyota Automotive
9 11 14 AT&T Telecoms
10 8 7 HSBC Financial services
7Brand Finance, “Global 100,” September 2011.
8Ofcom, “Communications market report: UK,” 4 August 2011.
11 Top 10 risks in telecommunications 2012

14. Adapting to the new customer mindset Ambivalent outcomes
As these changes in customers’ mindset — and behavior continue However, tight capex control has ambivalent outcomes — and
 and seemingly accelerate — operators have an absolute need to increasingly risks sidelining operators from future growth.
adapt their service offerings and customer experience to reflect External forces such as regulation and customer demand mean
these shifts in order to sustain and build customer engagement. operators remain cautious about investing in infrastructure.
These responses should be supported by clear communication These same considerations — together with uncertainty over new
with customers on the value of the network and on the effort and market structures — are also contributing to persistent doubts
investment required to provide high-quality services. over the revenue potential of new services.
Network quality is often taken as a given, but it shouldn’t be. As Figure 9 shows, levels of capital intensity remain largely
Service quality is not just about the device or application; it is stable worldwide and are now relatively consistent in all regions.
also about the network infrastructure without which these Growth-driven capex in emerging markets is falling back from its
elements would never work. If operators worldwide can get this previous highs, and the release of new spectrum is lagging in
message across to customers, then they will be able to improve some developed markets. Nevertheless, there is a risk that tight
perceptions of added value — including price, quality and capex control can undermine service quality, competitiveness
convenience — and to work the proven levers of brand strength in and the growth prospects of new services.
telecommunications, including high trust and credibility. Figure 9. Telecoms capital intensity by region 2008–Q2 20119
The scalability, flexibility and low costs of cloud computing not
Fixed and mobile
only help operators address the number one risk of failing to capex/sales (%)
shift the business model from minutes to bytes — they can also 30
help operators better engage with the customer mindset. As a 25
host of players from the technology and telecoms sectors seek to 20
deliver new services — either individually or via partnerships — 15
the need to differentiate is paramount. With this imperative in 10
mind, operators should clearly define and communicate their
5
core added value in areas of new service provision — such as
0
their security credentials in network-based enterprise services; 2008 2009 2010 Q1 2011 Q2 2011
their ability to deliver new types of bundle packages for
North America Europe Asia Pacific MEA
consumers; and their role as a trusted provider of new and
emerging services, such as m-payments.
The importance of timing
3 Lack of confidence in return on With the number of high-speed mobile connections globally
investment continuing to grow rapidly (see Figure 10), getting the timing of
new investments right is critical for achieving the targeted
In our 2010 report, the risk of ineffective infrastructure returns. To do this, operators need to understand clearly how
investment was ranked in fourth place. This year, the risks infrastructure upgrades relate to customer demand, competitor
around investment have risen to third, while also evolving into a actions and government industrial policies. This can be
lack of confidence about the level of returns. supported through better leveraging and optimization of legacy
In the past two years, operators have been quite successful in networks to complement network/service availability.
tackling the challenge of the data deluge on their networks,
thanks to a combination of smart investment and growing use of
alternatives such as WiFi and offloading to backhaul. These
factors, together with operators’ readiness to flex capex to
maintain free cash flows and dividends, have underlined their
strong capex control and reinforced their defensive status. There
is also a trend toward moving capex spend into opex through
outsourcing, in order to smooth capex spend over time.
9Ovum, “Network infrastructure report,” 19 September 2011.
12 Top 10 risks in telecommunications 2012

15. Figure 10. Global high-speed mobile connections10 Not having all these elements in place threatens operators’
efforts to increase time-to-market and build customer-centricity.
Connections split by technology (000) It can also undermine the potential returns on their ongoing
4,500,000 investments. This risk relates to the “inappropriate systems and
4,000,000 processes” that ranked eighth on our list in 2010. However, the
3,500,000 issue now is both more holistic and more pressing.
3,000,000 Added urgency
2,500,000
The requirement to ensure the right systems and processes are
2,000,000
in place is being given added urgency by a widening gap between
1,500,000 what operators know they need to do and what they are
1,000,000 achieving. As Figure 11 shows, they agree that time-to-market is
500,000 increasingly important. Yet operators’ time-to-market for new
0 services has not improved in the last two years, and the
2009 2010 2011 2012 2013 2014 2015 2016 percentage of operators that can bring products to market
quickly has actually fallen since 2008.
WCDMA TD-SCDMA (incl. TD-HSPA)
As technology and product life cycles shorten, this represents a
HSPA LTE CDMA 1XEV-DO growing risk — especially since disruptive market entrants are
repurposing customer data dynamically for new services. In
This is a complex task. It requires confronting challenges such as contrast, operators are struggling to repurpose their information
uncertainties in supply and demand amid factors such as assets, due largely to patchworks of legacy systems that hold
spectrum releases, soaring usage of high-bandwidth applications fragmented customer and network information, and a lack of
and shifting market structures as network sharing and real-time analytics to build a single view of the customer across
consolidation continue to gain ground. Also, many operators multiple devices and territories.
have multi-technology strategies and fail to fully understand the
complementarities and optimization factors between them. Figure 11. Time-to-market — telco perceptions and performance11
Operators need to tackle all these challenges while continuing to % service providers that say time-to-market is very important to
remaining competitive
invest in network infrastructure. All too often, their capex
planning is driven by a focus on protecting cash flow or by
pressure to build out greater bandwidth capacity even though
2011 70
the business case remains ambiguous, thus limiting the future
revenue and margin potential of new services.
These drivers for capex planning should change, for several
reasons. For example, industrial policies in many markets will 2008 59
require substantial increases in super-fast broadband coverage
over the years to 2020. Also, customers in all segments and
markets are increasingly concerned about network quality. 50 55 60 65 70 75
4 Insufficient information to turn demand % service providers that can bring a product to market within
6 months
into value
As operators undertake the shift from minutes to bytes and seek
2011 65
to justify continued investment in new infrastructure and
services, information becomes increasingly vital to their ability to
create value. To drive profitable customer propositions,
companies need accurate, timely and comprehensive business
intelligence and customer analytics, underpinned by the right 2008 67
operational support and billing systems.
50 55 60 65 70 75
10Ovum, “Mobile Regional and Country Forecast: 2011–16,” July 2011.
11Amdocs, “Amdocs survey: time to market grows in importance,” 14 April 2011
(125 senior sector executives).
13 Top 10 risks in telecommunications 2012

16. Realizing the power and value of information Lack of regulatory certainty on new
5
Operators are collecting more information about the customer market structures
than ever before. Those who overcome the barriers we’ve As new market structures emerge, the regulatory approach to
highlighted and leverage their information assets as successfully these evolving sector ecosystems remains unclear. Consequently,
as the over-the-top providers stand to reap significant benefits policy challenges are undermining operators’ willingness to
(see Figure 12). Repurposing customer data in new ways can invest. This means that 2010’s third-placed risk of “rising
enable operators to improve their market positioning, through regulatory pressure” has now narrowed into this year’s more
advantages such as better business intelligence — for example, specific risk factor — and that it is increasingly crucial for
anticipating market and customer changes before competitors governments and regulators to adopt pro-investment policies to
— and reusing network data for collaborative partners and sector sustain the sector’s momentum.
verticals.
Shifting standpoints
Operators that upgrade their capabilities in understanding and
applying customer data also open up opportunities to reduce The challenges and uncertainties around the policy approaches
operational costs, while simultaneously improving the speed of to new market structures include shifting regulatory standpoints
delivery of new data services and making it easier and cheaper on wholesale broadband access pricing, and the trend toward
to ensure regulatory compliance. Furthermore, the value of imposing network separation as a pro-competition tool in
customer and network data extends beyond the organization super-fast broadband. Going forward, new spectrum releases will
itself and will continue to rise as the sector becomes increasingly shape 4G market structures — and the rules vary from market to
partnership- and data-centric. market in areas such as spectrum caps and trading. In new and
emerging areas such as mobile money, regulatory jurisdictions
Figure 12. Advantages of repurposing data inside the business and policies continue to lag behind the technology — a challenge
compounded by the “broadband as a human right” lobby.
Dynamic charging Improved Better distribution On top of these uncertainties, there is continued regulatory
capability time-to-market of network load pressure on legacy parts of the business, such as MTRs and
roaming. In combination, these issues have pushed regulatory
Deeper relationships with frameworks to the top of the list of challenges facing ISPs (see
Better targeted marketing Figure 13). And in tough fiscal conditions, operators know that
third parties and partner
initiatives telecoms can be a rich source of government taxation as well as
ecosystems
a focus for government investment.
Figure 13. Survey: challenges facing ISPs12
Improved monetization of new customer demands
Q. What is the key issue facing ISPs over the next five years?
Regulatory frameworks 41
Return on investment 24
Launching new services 20
Access to capital 15
0 20 40 60
%
respondents
12Ernst & Young/ITU Telecom World poll, November 2011
(85 online respondents).
14 Top 10 risks in telecommunications 2012

17. Seeking certainty Failure to capitalize on new forms of
6
These factors are creating an urgent need for greater regulatory connectivity
certainty — and, alongside greater clarity and consistency from This new risk, which has come straight into our top 10, springs
regulators, achieving this will require operators to engage with a from the fact that new types of connectivity — notably M2M links
wider set of stakeholders. Consolidation in markets worldwide — require new types of strategies. As M2M takes off in various
will continue to impact pricing and investment, and the need to vertical markets (see Figure 15), the very concept of
fund next generation access and spectrum releases (see Figure
connectivity is rapidly being fundamentally redefined.
14 for European examples) will require broad market consensus
on the regulatory position. And overarching questions remain From human- to machine-based
about the impact of the net neutrality agenda across the whole
of the technology, media and telecoms ecosystem. While operators continue to think of connections in primarily
human terms, sector growth increasingly relies on new
To engage effectively on these areas of uncertainty, operators understandings of connectivity. There is clear value in the
need to form workable sector stances on a range of issues. “interconnectedness” of devices, through technologies and links
These include the increasing relationship between fixed and including not just M2M but also NFC and multi-screen content.
mobile policies — for example, in the regulatory approaches in The business models for monetizing connectivity are also
adjacent markets (e.g., financial services) — traffic management proliferating, spreading across the spectrum of B2B, B2C and
of data services and the drive to increase broadband coverage in B2B2C.
rural areas.
The new connectivity-based services now emerging promise
Figure 14. European 800 MHz spectrum auctions13 increased efficiency, higher customer centricity and value-
enhancing repurposing of existing infrastructure. But operators’
Date Country MHz Total Price/ Notes moves into emerging market segments such as mobile money
price MHz/ are often defensive and piecemeal  they also raise various
(€m) pop
challenges that include high upfront costs, lower ARPU per SIM
Sep 11 Italy 60 2,962 0.82 Spectrum won by two of card in the M2M environment, and exposure to new regulatory
three existing network
and reputational risks.
owners; simultaneous
1800MHz and 2600MHz 14
Figure 15. Global M2M connections in 2020 by vertical
auction
Jul 11 Spain 60 1,205 0.47 900/1800/2600MHz M2M connections (billions)
auctions also took place in
0.07, 3% 0.03, 1% Utilities
mid-2011; further 900MHz
spectrum to be released in 0.28, 13%
Q4 2012E Security
Mar 11 Sweden 60 228 0.42 All three network owners
won spectrum; 1800MHz Automotive and transport
auction took place in Oct Global M2M
11 — two of three network connections: Health care
owners won spectrum in 2.1 billion
first round
Government, retail and
May 10 Germany 60 3,600 0.73 Three of four network
0.45, 21% financial services
owners won spectrum;
1800/2600MHz spectrum 1.32, 62%
awarded at same time to all
network owners (total price
€445m)
13Ernst & Young research.
14Analysys Mason, “Imagine an M2M world with 2.1 billion connected things,”
January 2011.
15 Top 10 risks in telecommunications 2012

18. Unlocking incremental revenues Poorly formulated M&A and partnership
7
As companies seek to tackle these challenges, new strategies strategy
can unlock incremental revenues. To realize these, operators
Across the global telecoms sector, the rationale for consolidation
need to work out how best to align themselves to new growth
remains strong  and partnership structures are gaining ground
areas. This will generally mean deciding on their core
by offering new routes to growth. At the same time, the role and
competencies for use in increasingly composite value chains, and
dynamics of M&A are changing, and operators are adapting their
delineating clearly between the need to build capability and the
strategies to reflect these shifts. These developments have seen
need to partner or outsource, in light of their existing network
and customer footprints. this risk rise two places from ninth in 2010.
By way of example, Figure 16 shows various operators’ Joining forces in an uncertain world
approaches to the M2M opportunity. Experience shows that There was actually a pickup in M&A deal activity in 2010–11
majoring on specific industries can help to differentiate compared to 2008–09 (see Figure 17). However, plenty of risks
propositions and that the current stage of service maturity remain, including high levels of political risk in the Middle East/
varies widely between different vertical markets. So, to avoid North Africa, acute macroeconomic risks in Southern Europe
placing the wrong bets, operators should take great care in and uncertainty over shifting regulatory attitudes toward
evaluating emerging use cases. competition. With operators eager to tap into the growth
Local and market-specific factors such as regulation, the vertical potential in emerging Asia, competition and ownership issues
industry landscape and existing network coverage will play have emerged as hot topics in the region, notably Vietnam and
a pivotal role in emerging service areas. Issues around Indonesia.
technological complexity must be assessed on a continual basis
Figure 17. Quarterly global telecoms M&A 2008–1016
if multi-operator and cross-sector partnerships are to succeed in
overcoming the current technological fragmentation.
US$m # of deals
Figure 16. Selected operator approaches to M2M15 14,000 80
Operator M2M organization Service delivery Target 12,000 70
platform segments 10,000 60
AT&T Emerging Devices Jasper-powered Control Utilities, fleet 50
Org as dedicated BU. Center — provides management, 8,000
B2B M2M is part of analytics reports, security, health 40
6,000
Advanced Mobility automated provisioning care, consumer 30
Solutions Group electronics 4,000 20
Deutsche International M2M M2M service portal Home security,
2,000 10
Telekom competence center since 2010 — can resource
in Bonn; US M2M be integrated into management, 0 0
outsourced to RACO customer environment smart metering
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
Wireless via API and grid,
telematics,
logistics, retail
Deal value # of deals
Vodafone Dedicated M2M Automated SIM Environmental
organization launched pre- and post-paid monitoring,
in 2010 provisioning; policy remote
management; API maintenance
integration with and control,
customer systems tracking, health
care, metering,
automotive
telematics
and fleet
management
15Ernst & Young research.
16Ovum, 14 November 2011.
16 Top 10 risks in telecommunications 2012

19. The changing risk landscape creates increasing uncertainty over Partnering abilities come to the fore
deal valuations and prompts greater board scrutiny and
stakeholder caution (see Figure 18). Meanwhile, the changing To capitalize on such opportunities, operators need to
nature of M&A deals reflects the fact that footprint control is discriminate clearly between situations that call for
now more important than footprint growth for some players. acquisitions and those more suited to partnering. Going
Also, shifts in the value chain are heralding new M&A trends, forward, the ability to create and sustain partnerships will
such as the creation of joint tower management entities. emerge as a strategic differentiator, as their scope and
usage widen due to a number of factors. These factors
Under these circumstances, acquisitions and partnerships in include a continued focus on realizing cost efficiencies
emerging market segments remain important. In the cloud through approaches such as network and procurement
space, 2011 saw the launch of a raft of new services supported joint ventures, and a growing reliance on cross-sector
and enabled by a diverse range of acquisitions, partnerships and collaboration for new product development.
investments.
In combination, these trends make it important that
Figure 18. Deal factors in telecoms17 operators build the ability to work with new types of
partner — application developers, power utilities,
Q. Which of the following factors have increased/decreased over
the last six months?
technology companies and more — and continually
reassess their relationships with partners outside the
Price expectation gaps -7% 39% sector. However, issues over revenue shares within
partnerships remain a stumbling block.
Valuation uncertainty/complexity -3% 69%
Regulatory pressures -4% 46%
Board/audit committee scrutiny -4% 61%
Competition for assets -7% 45%
Stakeholder caution -7% 46%
Decreased Increased
17Ernst & Young Capital Confidence Barometer survey, November 2011
(interviews with 31 senior telecoms executives).
17 Top 10 risks in telecommunications 2012