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

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”

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

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

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

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