The document discusses the opportunities and challenges for Telefonica in providing IPTV services. It notes that Telefonica has already launched IPTV trials and services in several countries. However, IPTV represents new challenges as Telefonica transitions from a connectivity provider to a provider of entertainment services. These challenges include upgrading network infrastructure, integrating different elements, and ensuring high quality of experience for customers. The document advocates an approach of continually innovating, ensuring excellent operations, and focusing on usability to provide the best customer experience for IPTV.

1. Challenges in IPTV Telefonica IPTV Competence Centre Date: 30/10/2008

2. ... that has consistently shown strong growth , which has accelerated in the last years ... ... which is reflected in its track record of solid financial results … ... consolidating its outstanding position in the global enterprise rankings Telefónica has a rich heritage spanning more than 80 years... Telefónica is today one of the world’s leading companies

3. About 63,000 professionals About 250,000 professionals Staff Services Finance Revenues: € 3.2 bn Assets: € 12.9 bn Market Cap: € 2.5 bn Integrated ICT solutions for all customer segments Clients About 10 million subscribers About 230 million customers Basic telephone and data services 1987 2007 Spain Operations in 25 countries Geographies Revenues: € 56.4 bn Assets: € 105.9 bn Market Cap: € 106 .1 bn Our evolution has been particularly evident over the past 20 years …

4. … and has accelerated over the last three years, mainly due to the progress towards and integrated management model TELEFÓNICA ESPAÑA (fixed) TELEFÓNICA LATAM (fixed) TELEFÓNICA MÓVILES (Spain+Latam) CESKY TELECOM (fixed and mobile) O2 (mobile) TELEFÓNICA at the end of 2005 (operations in 19 countries) TELEFÓNICA ESPAÑA (fixed and mobile) TELEFÓNICA LATAM (fixed and mobile) TELEFÓNICA EUROPE (fixed and mobile) TELEFÓNICA today (operations in 25 countries) INTERNATIONAL ALLIANCES Telefónica has evolved from a global business lines structure into a lean, focused and highly efficient organisation across its integrated geographical operations

5. Argentina : 20.0 million Brazil : 56.1 million Central America : 5.9 million Colombia : 12.1 million Chile : 9.7 million Ecuador : 2.9 million México : 14.7 million Peru : 13.5 million Uruguay : 1.3 million Venezuela : 11.1 million 2 1 1 2 2 1 1 1 2 2 1 1 1 2 2 Notes: - Central America includes Guatemala, Panama, El Salvador and Nicaragua - Total accesses figure includes narrowband ISP of Terra Brasil and Terra Colombia, and broadband ISP of Terra Brasil, Telefónica de Argentina, Terra Guatemala and Terra México. Data as of June ‘08 Total Accesses (as of June ‘08) 147.9 million Telefónica is a leader in the Latin American Telco market … Wireline market rank Mobile market rank

6. Spain: 47.0 million UK: 18.9 million Germany : 14.6 million Ireland : 1.7 million Czech Republic : 8.1 million Slovakia : 0.4 million 1 4 2 Wireline market rank Mobile market rank 3 Data as of June ‘08 ... enjoys a significant footprint in Europe … Total Accesses (as of June ’08) 90.8 million 1 1 1 1

7. 0.4 The global digital world is transforming our business, offering significant new opportunities … More powerful devices full of features available as never before We shall have the possibility to store everything Digital contents continue to increase The network will assume a role far more relevant Users are adopting new habits in a quick and easy manner Many new services will show up

8. Competitive alliances Competitive alliances Internet players Telco operators Competitive alliances Services Access/ connectivity Terminals Contents/ aplications Consumer electronic devices suppliers … at the same time that the competitive landscape is turning complex

9. Innovation to grow Turning customers into fans Becoming a more innovative company, with third parties collaboration A common operating model for an excellent and efficient delivery People engagement Evolving our culture to make Telefonica the best ICT place to work Transforming our Operating model we have defined four main strategic initiatives to implement it Best-in-class customer experience

10. Previously, on Television… Limited bandwidth towards consumer Broadcast model:linear consumption and experience Limited number of channels Broadcasters decided what people “should like” TV personalities were stars (even dogs) Prime time access to media between 19h00 and 22h30 Eyeballs drove advertisement Advertisement drove content producers & broadcasters Compelling content drove again more eyeballs Standalone solution Not connected to other devices inside home Not connected to other services in backbone Television was only on the television, and on the television was only television Offered by providers that only provided television “ Television was a passive experience”

11. To change this, telecom operators begin to play a new match, the “IPTV match”…. But we are finding a new and unknown playground with… … a new broadband network infrastructure … new players, the content providers … new terminals, called “set top boxes” … clients with a complete different behavior, even telephoning call centers at 12 pm!!! … a new type of network signal over the networks, video signal, that can not support 10 -9 error rates … and new technical terms such as “pixelization”, “freezing”…. “ it´s critical for telcos to deeply explore, understand and get experience in this first half”

12. There are few telcos who have already played the first half time, and Telefónica is one of them Brasil Chile Argentina Spain Czech Rep . 600.000 customers >100.000 customers Next commercial launch in December 2008 Trials on going Communications Entertainment Home digital management Home Networking With a broad portfolio of services (broadcast TV, PPV, True CoD, interactive services over the TV, ...)

13. Now that the referee has called for half time, it´s time to think over and prepared ourselves for second half… where we have understood that, in the second-half… … we need to evolve and innovate quickly. Therefore we decided to industrialize our IPTV platform with a market leader … we must deal with these subjects in a global form within Telefónica … And that we need to be even more aggressive to win the match ...This is why we have selected Alcatel-Lucent as partner ...This is why we have created the Telefónica IPTV Competence Center ...and this is why we made a strategic analysis that will turn into defined actions

14. ALBA project: rationale and implications For maximizing synergies Telefonica Group should deploy the same technologies in all local IPTV services operations  it’s necessary to industrialize the Imagenio IPTV platform For this purpose Alba proyect is arranged with Alcatel-Lucent in order to assure availability of a best-in-class platform for all markets where Telefonica commercialize IPTV services IPTV CC

15. Staying ahead of the competition requires the strongest team, all the time… 1 st Half 2nd Half Developing an innovative services roadmap to increase differentiation Commercial Bundles Enhanced Services Personalized and Blended Services Blended Services Stovepipe Services Increasing Differentiation Increasing Innovation for end-user convenience and QoE

16. Some challenges you should face From a connectivity/communication company, implies a renewal of infrastructure equipment and data centers: TV Head end, Video Servers,… Adjusting your organization structure to face new challenges Design of the access network to provide QoS and convergence services Beware of the puzzle of actual solutions, integration of different elements in the echo system use to be a nightmare Avoid Cable habits to use dozens of Set Top Boxes In xDSL access interference/impulse noise issues should be considered Monitoring and Probes deployment is a secure investment to enable visibility of the service and its maintenance

17. Three pillars for the service Excellency in IPTV operations Quality Usability Extensibility Maintaining Previous Experience In terms of Availability And quality of Image Transforming Customers Aptitude from Lean-back to Lean-Forward Being able to enrich the Service with third party Applications enhancing The openness of the solution

18. Meeting Customer Expectations is Key VoIP QoE Expectation: Moderate/High Fault Tolerance: Moderate Consumer experience is established. While high quality and low latency are expected, there is generally some tolerance for dropped calls. IPTV/Video QoE Expectation: Very High Fault Tolerance: Very Low Expectations are very well established, with very low fault tolerance. HSI QoE Expectation: Low/Moderate Fault Tolerance: High Individual Consumer experience/history with broadband is relatively short. General quality expectations are low/moderate

19. Enhancing Quality through... Interleaving Network Protection in xDSL access Forward Error Correction mechanisms Retransmission Technologies Fully Redundant Network interconnections Isolating different types of traffics with QoS High Availability Solutions Backup Centers In distributed environments: redundancy between Areas Extensive use of Probes integrated in monitoring tools KPIs reports for QoE evaluation In the Network In the Platform

20. Expanding IPTV echo system Source: Yankee Group, The Degrees of Open Access, “Case Closed: IPTV Not Likely to Be an Open Environment for Foreseeable Future”, June 2008 Closed System Getting Video Running Off-Deck Closed Garden (VoD, HD, Caller ID) PC Apps Walled Garden Personalization Web 2.0, consumerization of smart Phones Third Party applications Bring-your-own Device (BYOD) Approved devices Bring-your-own device –to-any-network (BYODAN) Network-neutral BYOD play 2007 2008 2009 2010 2011- 2012 20?? Customization 10 30 40 70 140 160 180

21. Usability Once customer has subscribed to service, its usability is one of the factors which determines his continuity Learning stage is critic! TV is a massive market Intuitive use is key Quick navigation and zapping Analog syndrome Quality in the video Protecting the stream Subjective Picture Quality

22. There’s some expectation in user experience from PC to TV, mobile, PDA… Adjusting service to terminal facilities Performance, formats, human-machine interface…. Customization Real Value of service = Perceived Value of service Less technological profiles implies Simplicity Reduction in equipment cost Advanced and technological profiles More options and shortcuts are expected Value perceived in advanced functionalities like home networking: DLNA, UPnP User Experience

23. New Remote Control Mobile Phone could helps in customization And providing one additional screen Gesture interfaces Vocal interfaces Gyroscopic controls Seizing each specific terminal characteristics One example could be UGC PC for management and configuration Mobile/PC for production and storage TV as a receiver User Experience

24. Future: Convergence Mobile and fixed networks integration Lack of standards in a world-wide approach for an e2e solution Standardization initiatives DVB. Europe and Asia Technologies, applications and protocols ETSI TISPAN. Europe E2e vision but limited ATIS IIF. North America E2e approach ITU FG, SG13. Global Not very active Open IPTV Forum. Global E2e approach. Very active

25. Open IPTV Forum Multiple player: Service Providers, CE manufacturers, SW Suppliers, DRM manufacturers… Convergence to maximum Managed and un-managed networks Service Provider and Platform provider independent environments Future: Convergence

26. Interactivity: Rich Media applications Your personal TV viewing experience 3D User interface and contents Future: User Experience

27. Business models evolving Massive TV market actually being financed through advertisement (75%) Digital Advertisement will grow with higher rates than traditional Towards an interactive and customized advertising Knowing the customer: multidevice, consumption profile, time dependant habits.. Synchronized with services Normalized and secure “ Feedback” of impacts to advertiser Real time capabilities can introduce advertising auctions Future: Interactive advertising Global Advertising Expenditure

28. Customized in each terminal of the costumer Contextualized with content, time … A more efficient approach than actual advertisement , specially considering time shifted content consumption “ Shift TV” PVR Future: Interactive advertising

29. Converging networks and services Socializing entertainment and leisure in the TV out of the home Presence capabilities enhanced with activity taking place Possibilities of knowing what my family and friends Future: Social Networks Communicating through instant messaging, videoconference … Content Recommendations Sharing my own experience

30. User Generated Content Quality content became more accessible Sharing means dealing with: Security and rights (DRM) A multidevice approach enabled through: Scalable video: MPEG 4 SVC Transcoding “ Streaming” experience Future: Social Networks

31. Hundreds of channels and thousand of on demand titles: How do you find what’s interesting for you? Enriching content description through intelligent metadata: Automatic classification of content: Extracting visual descriptors Statistical recognition of patrons Semantic reports generation Digital fingerprints Search and recommendation engines Explicit preferences Consumption profile Semantic characterization Up to customized virtual canal for each one Future: Search & Recommendations

32. Where customer wants Porting terminal status To one or several terminals at home Different access networks: from TV to mobile Different media of the same service to different terminals Video in the TV and sound in the mobile Accessing to mobile services through wire line connectivity WiFi Bluetooth Femto cells Management in one terminal and enjoyment in other Purchase in the mobile and watching in TV Scheduling local PVR through mobile Independent Service Provider of Access Provider “ Roaming” of Access Networks Access through other terminal in other network Future: Nomadic & Ubiquity

33. Convergence increase complexity issues in security Authentication of user and terminal Access Network Services Mechanism defined in IMS from 3GSM Rights protection are now dependant of terminal and business model: DRM Conditional Access in Digital TV Platforms Only in distribution services and “always on” WDRM, Fairplay in PC OMA, PlayReady, Marlin in mobile Marlin: A promising technology in a convergence world Future: Security & Content protection

34. What & When through CoD Streaming vs Download Important Business Models Towards a business created from thousands of niche business Hierarchic architectures of content servers Optimizing Bandwidth in access Concurrency Intelligent dynamic distribution Control Layer Future: Long Tail

35. Evolution from HSI to customized TV Network Service Value ADSL Internet Access New Incomings ADSL2+ QoS, Mcast IPTV, CoD Triple Play New Incomings Churn ↓ Massive Deployment Opening to 3 rd parties Contents ↑ Customers Growth VDSL2 FTTH High Definition “ Multiroom” PVR Customers Growth ARPU ↑ IMS Presenece Comm. Integrated Multimedia Comms New oportunities ARPU ↑ 4 Play Convergence Customized TV What, When Where, How New opportunities ARPU ↑ Churn ↓ OPEX ↓ Initial Step IPTV roll out Growing HD Multiroom Comms Integrated Convergenced Customized TV Future: Trends and steps

36. Main Conclusions 1 IPTV services will provide a completely new TV experience Introducing the new habits and expectations of customers 2 But even each technology employed is well tested, there’s no standardized solution … yet 3 Deploying TV services means a shift in technologies and organizations 4 Convergence approach: from IPTV to IPEntertainment? 5 Provide enough operational tools to support the service with the lowest levels of claims 6 Don’t forget usability, it’s our customer entrance