The telecom industry faces significant challenges including decreasing revenues and EBITDA. CEO strategies show similarities around data monetization, partnerships, and vertical expansion. However, operators are constrained by their ability to invest and monetize networks. This has led to a fragmented value chain and the need to rethink business models through options like diversification, changing business models, cost cutting, consolidation, or shareholders stepping down. The online media industry winners have leveraged search, social networks, hardware/software integration, while losers faced challenges in business models and product dependence.

1. Key trends in the telecom industry
- need for a change
April 25th 2012
Presentation to Telco-Forum/
Moscow
Contact Person:
Arthur D. Little Austria
Dr. Karim Taga
Managing Partner
1

2. Agenda
1 CEO strategies
2 Need for a change
3 Options
2

3. 1 CEO strategies
CEO statements converge drastically
Selected quotes from European telecommunication player 2012
Orange CEO Stèphane Richard: Deutsche Telekom CEO Rène
Obermann:
“The data demand explosion will
continue, it is our task to drive the data “We see significant growth potential from
monetization“ cloud computing”
“Co-opetition means optimization of “And cloud computing is also one driver
asset base with telcos’s, alliances & of our intelligent network solutions in
partnerships with OTT’s, and strategic the areas of healthcare, mobility, and
partnerships with device manufacturers energy.”
and content providers.”
“We require a modern regulatory
„Now is the time to invest. It is not the approach (...) that is not constantly just
time to regulate.“ cutting prices.”
Télefonica CEO César Alierta: Vodafone CEO Vittorio Colao:
“Active cooperation among ICT “Industry collaboration is needed to
players key to address industry create new services and business models”
challenges”
”Data traffic is booming and new “Cloud services are steadily gaining
technological developments will allow this importance.”
growth.”
"Regulators should allow operators to "We really need to stop this auto-pilot
recover the costs of network regulation mentality.“
investment.“
Source: Company pages; Arthur D. Little, press research
3

4. 1 CEO strategies
The strategies of European telco‘s show significant similarities in their approaches
Strategy approaches of the big telco’s
 Collaboration to  Cooperation  Co-opetition  Cooperation
create business among ICT (e.g with OTT’s, with partner
models/ services players device manufactures) companies
 Accelerating mobile data  Profitable mobile data  Task to drive data  Growth in mobile
growth opportunity growth monetization monetization internet and consumer
services
 Verticals (M2M etc.)  Verticals (e.g. eHealth,  Verticals as new growth  Growth in verticals
M2M devices) areas
 Customer experience  Customer engagement  Customer concentration  Customer satisfaction
 Deliver value and  Maximize efficiency  Striving for operational  Increase operational
efficiency from scale efficiency efficiency
 Expanding growth  Development of new  New growth segment  Growth from dynamic
segments and new applications & services cloud computing & cloud computing &
service intelligent networks Intelligent network
 Ensure data security  Focus on data security  Safety, security & privacy  Services that work reliably
and privacy in services and securely
All big telco’s show significant similarities in their future strategy approaches, mainly in data
monetization, industry co- opetition, verticals, cloud computing and customer experience
Source: Arthur D. Little analysis
4

5. 1 CEO strategies
The strategic direction of the European telecommunication player show significant similarities
Collaboration and
partnerships
Maximizing
- with OTT‘s, device
efficiency
manufactures and
content provider
Data monetization
- profitization of rapid
Customer
data growth
- tiered pricing
6 common areas of interest of the excellence/
largest telecommunication companies experience
schemes
Verticals New Services
- financial services - Cloud computing
M2M, eHealth - Intelligent networks
Source: Arthur D. Little
5

6. Agenda
1 CEO strategies
2 Need for a change
3 Options
6

7. 2 Need for a change
Out of the 55 Western European Operators there is an strong indication of decreasing
financial trends
Service Revenue and EBITDA, Western Europe,
CAPEX, Western Europe, 2007 - 2012
2007 – 2012
EUR bn -8.1% EUR bn
132.3 132.3 132.3 131.9
143.5 140.9 20
38.3% 38.4% 38.2% 38.1% -7.4%
150 37.1% 37.1%
15,9 15,7
14,7 14,8
15 13,6 13,7
100
10
50
5
53.3 52.3 50.6 50.8 50.5 50.2
0 0
2007A 2008A 2009A 2010A 2011E 2012E 2007A 2008A 2009A 2010A 2011E 2012E
EBITDA Margin Service Revenue EBITDA CAPEX (EUR bn)
Even though EBITDA margins show an increase, there is a significant reduction in service revenues and EBITDA
This leads to less cash for investment and therefore impacts CAPEX by a -7.4% decrease between 2007 and 2012
Source: Arthur D. Little Analysis, Merrill Lynch Global Wireless Matrix Q2-2011
7

8. 2 Need for a change
Operators are caught in a dilemma: They need to invest further into high speed networks to
meet exploding data demand, - but they are constraint in their ability to monetize it
End of Profit for Mobile Carriers?
North American Mobile Carriers Western European Mobile Carriers
Source: Tellabs 2011
8

9. 2 Need for a change – Value chain fragmentation
Operators tend to resort more & more to partners and focus on their core competency,
customer management
An increasing number of initiatives A more & more permeable value chain
1. Outsourcing & sharing of network
1 Tower Service
infrastructures – JV for new build/wholesale companies Access providers
OTT FVNOs
models vs
Utilities Media groups Media MVNOs
Service
Regulators CPE vendors
2. Detachment of network and services – drivers
2
for network based value creation 1 2 3 4 5
3. Service Delivery Platforms – stimulating
3
service development & partnership
Customer
Network Network
SDP manage- Commer-
infras- abstrac-
platforms ment cialization
4. Owning, building and secure the customer tructure tion
4 & billing
relation
5. Development of proactive multi-branding / 3rd
5 Operators focus ?
party brand management
9

10. 2 Need for a change – Implications value chain shift
Telcos have to re-think their position along the value chain and focus more …
Implications
 Consider network sharing or managed services if under cost pressure and reduce
Outsourcing & shared or uncertainty from traffic growth (e.g. mob BB) and network complexity
1  Monitor new opportunities for “joint network” deployment and wholesale offer to
jointly operated networks
reduce capex spending and optimize opex
 Capitalize on your network assets (presence, location based, traffic mgt. etc.)
2 Network abstraction  Participate in the market place by cross selling 3rd party developed applications
 Differentiate your services per targeted segment and applications e.g. QoS
 Move away from silos to reduce costs and accelerate time to market
 Provide integrated and mashed-up services
3 Service Delivery Platforms  Anticipate disintermediation from non-Telco competitors
 Reduce risks of managing services via revenue sharing models with suppliers
 Manage content aggregation timely – take advantage of the “cloud”
4 Customer relation  Manage partnership as first mover advantage to differentiation from competition
 Build customer relations via mashed services (own and 3rd parties)
 Capitalize on your network capacity
3rd party brand management  Acquire “new” channels via commercial partnerships to address untapped
5 segments – consider the “self liquidated sponsorship” effect
MVNOs/LCC*
 Cherry pick and manage price war
Source: Arthur D. Little LCC: Low Cost Carrier
10

11. 2 Need for a change – Rethink the value chain
… but we have to re-think the value chain framework
The new Telco-media value chain Role Examples
Point of
 On / off-line advertising
Contact
Retail &  On / Off-line retail shops
Services  Internet Services
User
Content  Music Company
Player  TV Program Producing Company
Telecom  Telecommunication Company
Player  Cable Company
 Device Manufacturing Company
System
 S/W Development Company
: Point-of-contact Player
 H/W Development Company
Source: Arthur D. Little
11

12. 2 Need for a change – Case Study
The new Telco-Media Ecosystem is useful for strategic positioning analysis, else Google
wouldn’t be understood
Usage and Usefulness of Telco-Media Ecosystem: Google’s Case
Business Portfolio: Value Chain Model Business Portfolio: Media Ecosystem
Focusing on Service Integrator area & formulating Ecosystem
Origi- Aggre- Service Trans- User
through partnership with players in other areas
nation gation Provision mission Contact
YouTube Viacom
Partnership Vodafone
CBS Partnership
Partnership Service
Portal
Content Enabler Access
Portal
Blog
Player Player
Blog Universal BSkyB
Partnership YouTube Partnership
Earth
Picasa Warner User
Partnership SF WiFi
Picasa Partnership
Map
Map Sony BMG Street
Partnership
Earth
DELL
System Device Direct Investment
Street Player Partnership
“Difficult to say that Google has a sound service portfolio “Shows that Google has a sound service portfolio with
because it has multiple services in aggregation related area, multiple services in Service Integrator area,
merely one of four areas.” where close relationship with user is highly required”
Source: Arthur D. Little
12

13. Agenda
1 CEO strategies
2 Need for a change
3 Options
13

14. 3 Options
According to interviews conducted for the latest ADL-Exane report, Telco executives expect
stagnation or decline, and plan their activity accordingly
Revenue outlook in the telecom sector
Interview quotes
(per interviewees)
“Increasingly difficult market situation. Can’t see
anything that can turn around the negative trend”
“Negative in the short term and stable in the mid
term if we are lucky”
“The future revenue growth will to a large extent
depend on how the carriers act going forward.”
“Within Europe, growth is only possible if offering
services beyond core telecoms. Without those
services, at best revenues will be flat.”
Source: 2012 Arthur D. Little – Exane report interview notes
14

15. 3 Options
To face current difficulties, Operators are exploring 5 options to rethink their business
1 2 Change of the 3 4 Consolidation /
Diversification Cost cutting
Business Model mergers
Do you believe Telecom operators Different options Examples in France: Examples:
can effectively diversify outside of
their core segments? explored:
 Orange: 1Bn€ savings  2010: complete merger
 Online Centric planned in France in of Orange UK and T-
 Premium: service and 2015, mainly in network Mobile (Everything
innovation excellence customer care (Chrysalid Everywhere)
program)
 One-Stop-Shop:  2011: similar deal
services aggregator  Bouygues Telecom: between Orange and T-
 Mastering “Internet of 300M€ savings Mobile in Poland
Things”: powering planned on external
M2Mapplications charges (including
network), offers
 Bit-Pipe: economies of
(subsidies), and
scale, wholesale…
distribution
=> no Telco found the => all concrete options  network mutualisation is an
solution yet boil down to cost cutting effective cost cutting lever
5  Orange was sold in Switzerland and Austria
Shareholders
 Several rumors ongoing… => resignation
step-down
15

16. 3 Options
The five top 5 winners and looser in the online advertising and media industry
Top five winner and looser in the online advertising and media industry
 Revenue  29.32 bn. (+24%)  34.2 bn. (+39%)  1.8 bn. (+257%)  65.2 bn. (+52%)  0.15 bn.
 Profit/ loss  8.51 bn. (+30%)  1.15 bn. (+28%)  0.5 bn. (+250%)  14 bn. (+70%)  0.03 bn.
 Employees  24.000  33.700  2.400  49.400  600
 Most import-  Google search  E-Reader Kindle  Social network  Iphone and Ipad (in  Short message service
ant product media sector) Twitter
+  Strengths  Dominating search
based advertising
 Growing revenue
(+ 43%)
 Dominating network,
targeted advertising
 Hard- ,+Software+ digital
media from one hand
 Global brand, among
most visited websites
 Weaknesses  Dependent on search  Too wide, too many  Very depended on online  Extreme dependent on  Unclear business model
based advertising competitors banner advertising end-user
 Outlook  Chances in local search  Chances with hardware  Leading position in  Most popular end-user  Important communication
based advertising + media from one hand banner advertising devices tool, take-over candidate
 Revenue  6.32 bn. (-2%)  2.42 bn. (-26%)  2.5 bn. (+4%)  1.1 bn. (-36%)  0.76. bn. (-7%)
 Profit/ loss  1.23 (+ 105%)  - 0.78 bn.  - 2.5 bn.  - 0.61 bn.  - 0.23 bn.
 Employees  13.600  5.860  90.000  51.000  149.000
 Most import-  Email, digital sport-  Email, internet access  Search engine Bing,  IGN Entertainment, Wall  Games provider Playdom
- ant product
 Strengths
and finance news
 Most visited news
 Global brand, own
media
Hotmail
 Global brand
Street Journal online
 Second largest media
and Penguin
 World largest media
portal  Very dependent on company after Disney, company, content, brand
 Weaknesses  Very dependent on sales of internet  Billion deficit in internet Content  Deficits in online business
banner advertising access business  No social network  Missing digital distribution
 Outlook  Is loosing attractivity  Revenue is growing  Shareholder force sale  Missing digital channels channels
slower than costs of of Bing of distribution
production
Source: Wirtschaftswoche 48, change YoY Sept ‘11
16

17. 3 Options
On the way to 2020, telcos have a need to rethink drastically their business models as
business as usual won’t work
Comparable
Key success Financials
Description Focus business
models factors (EBITDA)
1
 Best practice network operator’s  Lean Telco  American tower  Economies of  20-25 %
 GTL scale
Bit-pipe  Network developer (network as a  Network mgnt.
 Ericsson  Technology mgnt.
service...)  Alcatel Lucent
 Finance/ capital
2
 Service on demand: Cloud/ Web 2.0  B2C/B2B2C  Amazon  IT/ cloud technolog.  35-45 %
Telco 2.0  On-line distribution & customer care  Platform  Online retail
 Portfolio portfolio
3  Self-service process
 Service and content aggregator  B2C/B2B2C  Google  Apps/services  40-45 %
 Customer and service interface  Broad portfolio innovation
Service excellence  Customer
 Apple
 Partnership
interface  Customer Exp.
4
 Universal service provider- from IT  “Me too”  Utilities  Limit complexity  10-20 %
to telecom to energy to  Cost  Best-buy  Scale single
One-stop-shop entertainment... effectiveness servicefp
5
 M2M/ Internet of things  B2B  Geek Squad  Partnership  5-15 %
 B2B2C  BTGS  Recruitment in
Mastering IoT  Vertical champion - the engine and
 Vertical enabler
backbone for other industries  OBS adjacent markets
 Home assistance.
 T-systems  End2End platform
Source: Arthur D. Little M2M: Machine to Machine OBS: Orange Business Services BTGS: BT Global Services
IoT: Internet of Things B2C: Business to Customer
IT: Information Technology B2B: Business to Business
17

18. Smart Home has become a hot topic again and players from various industries are now
placing their bets
Selected examples
Devices / Service
1 2 IT equipment players 3
appliances providers
manufacturers
6 Over-The-Top Assistance specialists 4
5 Smart Home pure players
Source: ADL
18

19. Verizon and AT&T have recently made significant moves towards Home System
Management
Launched a pilot to develop a Verizon home Acquisition of Xanboo, home system
systems management solution management solution specialist
(Jan 2011) (Dec 2010)
 Energy management: energy Energy Healthcare
reader, smart appliance
switches and thermostats,
 Security : smart door and
window locks
 Video-camera : in-door, out-
door
+
 Anytime/anywhere value
proposition
 Remote control via: Security / video Lighting
– Smartphone
– PC
– FiOS TV product
In Jan 2010, Verizon Wireless and 4Home* announced
partnership to develop Home control applications
Source: Public information, Verizon, AT&T, Arthur D. Little analysis Home Automation specialist
19

20. Telecom operators are also active in the Smart Home field with initiatives around CPE or large
alliances, mainly to response to OTT closed and integrated ecosystem
Example of move around CPE Example of move around alliance
Freebox Revolution Telefonica alliance “Beywatch”
Gaming
Internet on TV
Gyro remote control
Other players involved
DLNA media server Apps store NAS storage server
Source: ADL
20

21. Multiple Ecosystems will be significantly affected from smart technologies - forming “The
Internet of Things”
Energy
“Smart Metering & Smart Grid”
Mobile Building
devices automation
Internet of things
Ecosystems
Medical & health Moving objects
Industrial Retail
processes Vending Machi-
nes & POS
Source: ADL
21

22. The value chain consists of a wide area of services and eco-system players that need to be
aligned in order to establish a sustainable solution
The Internet application value chain
The vertical of Things value chain
Module / Reseller
Smart Network Service System Service
modem (Bus. Customer
object operator enabler integrator provider
supply cust.)
 SIM cards  Vending  Network  Platform  Interfaces  Packaging /  Uses  Buys
 Sensors machines  Connectivit  Enabling  Solution Bundling service service
 Actors  PNDs y capabilities build-up  Service  Resells  Uses
 Cars  Availability (e.g. QoS)  Hardware Provisionin services Service
 Aggregators
 Application g
 Transponde  Cameras  Quality  Backend
s  CRM
r  Computer
 Billing
Average Value Share Distribution
5 – 10% 15 – 20% 30 – 40% 15– 20% 10– 20%
Value highly distributed across the Value Chain – fuelling the need to extend own service offerings
towards service enablement & provisioning
Source: ADL
22

23. Interesting future …
…high impact …
high uncertainty
23

24. 4 Mobile Voice Market
Although the average price level of mobile voice services is already beneath the lowest in
Europe, the year-on-year decline was by far the highest – increasing the price gap to 200%
Monthly mobile service fee (average user) Comments
(2009)
Price, in €  The Austrian mobile
40 38,8 telecommunication market is
36,6 34,6
32,1 31,5 x3 extremely competitive – this leads to
30 29,3 27,6 one of the lowest price levels in
22,2 Europe
20 15,7 13,5
13,3 13,0 11,5  Nevertheless, prices are still falling
10 very fast – the decline in the average
price level was more than two times
0 higher than the average decline
 This led to a further increase of the
-10 inter-European price gap, that
amounted to nearly 200% in 2009
Austria
Spain
UK
Portugal
France
Italy
Ireland
Demark
Netherlands
Switzerland
Belgium
Germany
Sweden
-20
 In other words, the average mobile
-30 telecommunication customer in
Switzerland had to pay three times
-40 the amount, that the average
Austrian customer had to
-50
-48,1 %
YoY 08-09, %
Source: Finnish Communications Regulatory Authority (FICORA); Arthur D. Little Analysis
24

25. The Austrian telecommunication market
Comparison of the key data from fixed mobile communications operators shows a relatively
stable market
Market Share Revenue EBITDA*
Market share per A1 Telekom Revenue per EBITDA per operator in
operator in % T-Mobile operator in mio. € mio.
Orange
3G
42 43 42 1.668 600 585
1.574
32 31
30 1.367
1.085 1.038 983
20 20 19 285 283 283
592 569 548 187 182 185
8 8
6 196 207
174
2008 2009 2010 2008 2009 2010 2008 2009 2010
The market share and EBITDA of the Austrian mobile operators remain stable from 2008-2010; revenue is
slightly decreasing
Source: Arthur D. Little, Press releases, Company Information, RTR.*) not separately published from 3G for Austria, **) only consolidated account available
(fixed+ mobile line)
25