Telco 2015, Five telling years, four future scenarios

1. IBV Institute for Business Value
Telco 2015
Five telling years, four
future scenarios
Rob van den Dam, Global Telecommunications Sector Leader IBV
© 2010 IBM Corporation

2. Agenda
A decade of structural change in telecoms
Scenario Planning for 2015
4 contrasting scenarios
Scenario outcomes
Critical success attributes
© 2010 IBM Corporation

3. Telcos’ revenue is no longer growing in any significant way in most
mature markets
Fixed and mobile market revenue growth in 2009
40%
37% EU27: -2.1% overall (-3.2% fixed / -1.1% mobile)
35%
33% Japan: -2.8% overall (-2.2% fixed / -1.1% mobile)
30% US: +0.7% overall (-1.6% fixed / +3.3% mobile)
S.Korea: +1.9% overall (-0.7% fixed / +3,5% mobile)
25%
21%
20%
15% 13% MiddleEast & Africa
14%
11% Latin America (excl. Brazil) Telecom
10% 11%
8% Brazil, Russia, India, China (BRIC) Services
5% 5%
5%
Asia Pacific (excl. India & Japan) Revenue
4%
2% North America Growth
1%
0%
Europe (excl. Russia) 2005 - 2009
2005 2006 2007 2008 2009
-3%
Japan
-5%
-10%
Revenue growth rates fell under 2 digits almost everywhere
Source : IDATE, in "World Telecom Service Market", 2008 Edition - January 2009, revision in July 2009; © 2010 IBM Corporation
IBM Institute for Business Value (IBV) Analysis

4. The sector’s annual growth worldwide (+2%) is now being sustained
almost singlehandedly by emerging countries and BRIC
Toward a new hierarchy Top 10 mobile markets worldwide
France;
France; 46 46 (M subs)
UK; 68
UK; 68
1. Regional consolidation: Italy; 71
Italy; 71
China; 375
± 100 telcos in Europe China; 375
2005 India; 75
India; 75
versus
AT&T and Verizon in US Germany; 79
Germany; 79
Mobile
Brasil; 86
Brazil; 86
markets
2. The growing role of the increasingly
emerging markets Japan; 90
Japan; 90 USA; 208
USA; 208
being driven
by emerging Russia; 126126
Russia;
– The emergence of new countries
giants: China Mobile, UK; 76
Mexico; 65
UK; 76 Mexico; 65
Bharti, Vimpelcom, Italy; 83
Italy; 83
Germany; 87
Etisalat, ... Germany; 87
2010 Japan; 123
Japan; 123
China; 770
– ...and the know how to China; 770
Brazil; 143
make profit with ARPU < Brasil; 143
USD 5
Russia; 215
Russia; 215
USA; 207
USA; 270 India; 376
India; 376
Source: IDATE, IBM Institute for Business Value (IBV)
© 2010 IBM Corporation

5. While overall communication have increased, much of the growth has
been over-the-top with share of traditional unchanged
FRANCE TOTAL COMMUNICATIONS MARKET
(billions of call minutes and equivalents¹)
1200
1000
800
Increased share of
600 communication services by
Internet Communication
400 services providers
200
Stable use of traditional
0 communications services
2005 2006 2007 2008 2009 2010
Wireline Mobile SMS/MMS E-mail(excl. spam) IM P2P VoIP
Source: Idate: Telco’s views of
Notes: (1) An SMS/MMS or e-mail is considered as a 30 second call. Openess, Digiworld Summit 2009
Source: Ronald Montagne “Telcos’ views of openness”, IDATE, October 2009 © 2010 IBM Corporation

6. Telecom revenues do not track the increases in network traffic
anymore
Traffic
Traffic
Volume / Voice
Revenue Dominant Network Cost
(existing
technologies)
Ecosystem Revenue
Value
Opportunity
Telecom Revenue
Network Cost
(future
technologies)
Data Dominant
Time
© 2010 IBM Corporation
Source: Nokia-Siemens; IBM Institute for Business Value (IBV) Analysis

7. After a decade of massive change what is the future of telecom?
Likely but uncertain trends 1 Telecom industry revenue and
with potentially high profitability outlook for each
impact and multiple scenario by region and access
outcomes (fixed/mobile) for 2015
QU OD
Revenues
AB L
2
S
RI CA
Determining Trends
LE
AN EL
M
5
VA ITI
TIT ING
3
Underlying trends in the evolution of the
CR
AT
communications industry for which
SCENARIO 2008 S rvivo
u r
C so tio
on lida n
Market
Sh ut
akeo
Clashof G ts
ian G ne
e rative
Ba r
zaa
IVE
there is very high degree of
SYNOPSIS &
certainty and consensus Free Cash Flow
OUTCOME (EBITDA - Capex)
Provide backdrop for the future of
telecommunications in 2015
REALIZATION 2008 Surviv or
Co nsoli dati on
Market
Sh akeou t
Cla sh o f Gi ants Ge neratie v
Ba za ar
PATH
Major economic, competitive
and technological events that
4
trigger each scenario
© 2010 IBM Corporation

8. Telco 2015 – five telling years, four future scenarios
Scenario Envisioning
Challenges & Trends Scenarios & Outcomes Implications
Primary Research
Consumer Survey Telco Provider
(9 countries) Interviews (±60)
Strategic Imperatives
1,541 CEO interviews from Global
CEO Study; ~80 from CSPs CLASH OF GENERATIVE Critical attributes for
GIANTS BAZAAR success
Potential capability gaps
Telco
Industry Trends Telco by Operator
2015
2015
SURVIVOR Scenario-specific
MARKET
Forces Shaping Telecom CONSOLI-
SHAKEOUT recommendations
DATION
Uncertainties Cross-scenario
recommendations
Scenario Revenues and Profitability
Macro Industry Data/ Revenues
Economic Analysis
Trends (IDATE)
2008 S rvivo
u r Market Clashof G ts
ian Ge rative
ne
C so tio
on lida n Sh ut
akeo Ba r
zaa
Secondary Research Free Cash
Flow
(EBITDA - Capex)
2008 Surviv or Market Cla sh o f Gi ants Ge neratie v
IBM Institute for Business Value Analysis Co nsoli dati on Sh akeou t Ba za ar
© 2010 IBM Corporation

9. There are a number of Forces shaping the future of telecommunications
into 2015
USAGE/
SERVICES
PSTN decline accelerates
VOIP (incl. mobile VOIP) grow
INDUSTRY Ubiquitous and seamless access
STRUCTURE ACCESS
High digital content consumption
New infrastructure competition Broadband pervasive as TV
from government, municipality Multiple communication tools
Mobile broadband favors LTE
Net Neutrality remains
Ultra low-cost devices grow
Mobile and fixed termination BUSINESS
converge One in three devices is
MODEL
smartphone, MID, or Netbook
Pure plays disappear Voice monetized as a feature of
connectivity
Green Telecom revenues
3rd – party connectivity revenues
© 2010 IBM Corporation
Source: IBM Institute for Business Value (IBV) Analysis

10. Communications remain fragmented across multiple services from traditional
telecom and over-the-top (OTT) providers
Communication usage and growth (Under 25s) Under
Use Several
2009-2015 25s
Times a day
(74%) Mobile
Instant Voice
Text/SMS Email
Messaging (73%)
Landline/ (46%) (64%)
Social
Fixed Voice
Networking
(40%) (43%)
Size of Bubble: % of respondents
Frequency of use
Postal
Service who use service every day
(10%)
MMS VOIP
(11)%
Video
(9%) Mobile email (on
Calls
Smartphone)
Voice VOD
(12%)
Conferencing (7%)
(5%)
Never % of consumers expecting to increase/decrease use of service
-15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%
Source: IBM Institute for Business Value Global Telecom Consumer Survey, 2009; N= 7722
© 2010 IBM Corporation

11. A new round of investment in FTTx, while the race for mobile
broadband appears to have been decided in favour of LTE
9. Which of the following access technologies are going to be critically
important to the success of your business over the next 5 -10 years? World’s top 8 FTTx operators
Critical to Success Neither Not Critical to Success
FTTx 71% 27% 2%
4G/ LTE 67% 33%
3G 44% 48% 7%
xDSL 43% 48% 9%
CATV 27% 39% 34% LTE developments
2G 20% 42% 38%
WiMAX 8% 38% 54%
0% 20% 40% 60% 80% 100%
“WiMAX only relevant if 3G/4G spectrum lacking”
Head of Product-IT Development, European CSP
Source: If applicable, describe source origin
© 2010 IBM Corporation
2009 IBM Institute for Business Value Telecom Industry Survey N=61

12. Infrastructure sharing will become increasingly important as part of overall
cost re-structuring
14. (B) Which of the following changes to your cost structure will be critical to improve your
competitiveness and agility over the next 5-10 years?
Network infrastructure sharing (incl. with competitors)
80% Evolve IT infrastructure through cloud and dynamic infrastructure
75% Leverage global delivery skills/capabilities for IT and back-office
Phase out and re-farm GSM/2G spectrum to offer 3G services
70% Outsource access network
St Create separate services customer management business
ra Outsource data center operations
60% te
g ic Outsource core network
50% co 47%
st
40% st
40%
ru
35% ct
ur 32% 32% 32%
e
30% pr
25% io
20%
rit 21%
20%
i es 16%
10%
10%
0%
High Performance Operator Low Performance Operator
© 2010 IBM Corporation

13. In addition to these trends there are a number of potentially high-
impact variables that are, as yet, uncertain
• New Vericals: eHealth,
• The Future of voice Services Smart Grids, …
• OTT versus Network optimized content Usage • Premium connectivity
• Siloed versus unified communication
Industry Forces • Ultra-Fast Broadband
structure shaping availability
Access
and the • Open Versus Closed
regulation future Devices.
• ServCo/NetCo versus Vertical
• Integration Network sharing
versus Outsourcing • User-funded versus third-party Funded
• Regulation: ex ante versus • Pricing model: flate rate, tiered pricing
Business based on speed, bytes, quality, bundled
ex post, from asymetric
regulation to symetric regulation, model service, …
the future of Net neutrality, … • M2M impact
© 2010 IBM Corporation
Source: IBM Institute for Business Value (IBV) Analysis

14. These variables are gathered in tw major deimensions - addressable
market growth and the competition/integration structure
Future
The Future of OTT vs. Network
Voice optimized content
Silo vs. unified Expansion into Scenario C
communications Adjacent Verticals Addressable
Ultra-fast Broad- Market Growth Scenario D
band Availability
Premium
Connectivity Present Scenario A
Service Pricing Scenario B
Model
M2M com-
munications
Open vs. Vertical vs. Hori-
closed devices zontal Integration
Network sharing vs. User vs. 3rd Party /
Competition/ Integration
Outsourcing ad funded Structure
Regulation
© 2010 IBM Corporation

15. The interplay of these critical variables / uncertainties produces four
distinct future industry scenarios
Expanding
CLASH OF GIANTS GENERATIVE BAZAAR
Spectrum Spectrum
Passive
Infrastructure
Passive
Infrastructure
Enabling the two-sided business
Active Active Device Aplication Media Telecom Electric Banking & SERVICE
OTT/
Device Aplication Media Telecom Electric Health Care Banking &
Network Network Manufacturers Developers Organizations Retail Utilities Health Care Finance
Finance PROVIDERS
Addressable Market Growth
Manufacturers Developers Organizations Retail Utilities
Support Support $
Telco Infrastructure
Retail
Infrastructure
Retail
OEM $ NET CO-OP
OPEN
ACCESS
Channels Channels NET CO-OP Telco
Devices Devices $
CONSUMERS
CONSUMERS / BUSINESS
Customer Customer
SURVIVOR CONSOLIDATION MARKET SHAKEOUT
Spectrum
Passive Passive Active
Infrastructure Spectrum Infrastructure Network
Active
Few large
Declining/ Stagnant
Network Support Retail
Devices Channels
Support Infrastructure
players Infrastructure
Retail
Channels
dominate Devices
Brand Brand
Market Customer
Customer
Customer
Many players - Fragmented
Competition/Integration Structure
Concentrated / Vertical Fragmented /Horizontal
© 2010 IBM Corporation

16. .....with contrasting characteristics
•Carrier cooperation and •Netco/Serco split with dominant
alliances lead to global
Net-Coop and myriad of asset-light
consolidation
service providers
•Face-off with either global •Open access provided by Net co-
application and content provider
op through new funding models
or OEMs/NEPs
•Mega carriers expand into •Virtuous cycle of open innova-tion
CLASH OF GENERATIVE
selected vertical markets(e- GIANTS BAZAAR for apps, content & devices
health, grid)
SURVIVOR MARKET
•Carrier assets disaggregated –
•Reduced spending by CONSOLIDATION SHAKEOUT
financial re-engineering – among
consumers service providers, NEPs, Device
OEM, IT Providers, new investors
•Revenue erosion/stagnation
•Capex reduction •Lack of infrastructure investment
triggers municipality involvement
•Triggers defensive •Multiple brands compete for
consolidation
customer attention
© 2010 IBM Corporation

17. Scenario outcomes for selected critical variables:
Ultra broadband availability
•Operators infrastructure •Open access on a Net Co-
sharing to deploy NGA op owned infrastructure
•Sharing can be based on •The Net Co-op will be
commercial agreements or owned by private & public
NRA driven CLASH OF GENERATIVE players achieving high Ultra
GIANTS BAZAAR
•No more than 3-4 players in BB coverage
the market
SURVIVOR MARKET
CONSOLIDATION SHAKEOUT
•Due to financial and •Government and
regulatory constraints, municipalities step in to
Ultra BB are deployed in take UltraBB to “grey”
densely populated “black” areas
areas only
•Access to municipal
•New services cannot networks will be open
unfold their full potential
© 2010 IBM Corporation

18. Scenario outcomes for selected critical variables:
Open vs closed devices
•Closed comms-centric •Largely open devices:
devices in low-end segment users will choose devices
•Strong competition for open that fits their needs best
devices in high-end segment •Carriers & OEM might
•Strategic partnerships with CLASH OF
GIANTS
GENERATIVE
BAZAAR
team up to provide
OEMs optimised handsets for
distinct services
SURVIVOR MARKET
CONSOLIDATION SHAKEOUT
•Cheap closed devices •Open devices prevail
continue to dominate
market Linux
•Handset subsidies will
Android Palm
disappear
•Handset subsiduation RIM
continues
Apple •SIM-only dominant model
Symbian
for carriers
Windows
Mobile
© 2010 IBM Corporation

19. Scenario outcomes for selected critical variables:
Regulation
•Light-touch regulation on •Open access is the norm
infrastructure to encourage
infrastructure competition •Evolution of Internet-style
model with light-touch
•No endorsement of strong regulation for Telcos
net neutrality positions CLASH OF GENERATIVE
GIANTS BAZAAR
•Level playing field in
services
SURVIVOR MARKET
CONSOLIDATION SHAKEOUT
•As is, withy ongoing •Strong access obligations on
regulatory uncertainty infra and strong net
neutrality stance undermine
•As a consequence NGA investment initiatives
investment is stifled
•Telcos focus more on whole-
•Competition intensity is ale backbone business as
limited well as ICT services
© 2010 IBM Corporation

20. Communications-connectivity substitution will increase over the next 5
years regardless but dominates revenue mix in Generative Bazaar …
2008 – 2015 Changes to Segment Revenue Mix by Scenario
35%
49%
Advanced 69% 64%
Markets
2015 Revenue
Mix Scenarios 60%
49%
31%
30%
Communications
75%
1% 2% 5% 5%
Connectivity
Survivor Market Shakeout Clash of Giants Generative
Content Consolidation Bazaar
Emerging 63%
Markets 85% 80% 82%
24% 2015
Revenue Mix
1% Scenarios
34%
2008
14% 20% 18%
Communications: PSTN Voice, VoIP/ VoBB, Mobile Voice, SMS revenues
1% 0% 1% 3%
Connectivity: Fixed Broadband, dial-up internet, legacy corporate data service,
3G/Mobile Broadband and Machine-to-Machine revenues Survivor Market Shakeout Clash of Giants Generative
Content: IPTV and Mobile Content (music, video, mobile TV, games, advertising) Consolidation Bazaar
© 2010 IBM Corporation
Source: IBM Institute for Business Value (IBV) and IDATE Consulting & Research Analysis

21. …and represents the most optimistic outlook for telecoms, relative to
the IMF’s global GDP forecast for 2010 - 2014
7%
Global GDP vs.. Telecom Services Growth Scenarios
2009 – 2015 Telecom Growth Scenarios (
6%
Global Telecom
Generative Bazaar 5.3%
5%
4.5%
Global GDP
Growth
4%
Clash of Giants 3.3%
3%
2% Market Shakeout 1.8%
1%
Survivor Consolidation 0.2%
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-1%
Source: International Monetary Fund (IMF), World Economic Outlook Database, October 2009; http://imf.org/external/pubs/ft/weo/2009/01/weodata/index.aspx, IBM
Institute for Business Value (IBV) and IDATE Analysis, 2004 - 2009 growth forecasts are based on IDATE "World Telecom Service Market", 2008 Edition - © 2010 IBM Corporation
January 2009, revision in July 2009. 2010 -2015 are IBM Telecom 2015 scenario forecasts

22. Telcos need common and scenario-specific attributes for success
CLASH OF GIANTS GENERATIVE BAZAAR
Collaborative inter/intra-industry Structural separation of network and
1 1
alliances services operations
2 Innovative and differentiated network- 2 Pervasive open network access
optimized experiences infrastructure
Common
3 Enhanced service provider roles in 3 Third party applications / services
vertical markets
Critical Success
innovation
Attributes
Efficient and competitive Cost-effective ultra-fast broadband Dynamic business design
4 4
infrastructure deployment strategy
Achieve scale across regions and Network / customer insights to Leverage advanced customer
5 5
access (fixed, mobile, Internet) enhance experience & optimize cost and network analytics
SURVIVOR CONSOLIDATION Culture of collaboration
MARKET SHAKEOUT
1 Achieve Scale Clear & distinctive role(s) in
1
Agile, flexible and reconfigurable disaggregated value chain
processes and infrastructure
2 Reduced cost-to-serve 2 Powerful brand / reputation
Cost containment
3 Viable premium connectivity
Contain voice ARPU erosion 3
propositions for 3rd party providers
Secure significant share of ultra-fast Agile, flexible and reconfigurable
4 4
broadband in densely populated areas processes and infrastructure
5 Increased share of high value Ubiquitous and cost-effective
5
customers broadband access
© 2010 IBM Corporation
Source: IBM Institute for Business Value (IBV)

23. Summary and Conclusions
A return to strong growth requires the industry to act collectively to create the
necessary conditions for the emergence of more profitable scenarios
Overall, the financial model suggests Generative Bazaar is potentially the most
profitable, with the highest revenue and growth prospects but is so the most
challenging scenario
A return to strong growth requires the telecom industry to act collectively to
create the conditions for the emergence of profitable scenarios, Clash of Giants
/ Generative Bazaar:
– Global industry collaboration on common capabilities ,enablers and platforms
– Enhancing the role of the service provider in adjacent vertical markets
– Pervasive and open access connectivity for any person, object and device
– Value propositions for third-party application providers
– Harnessing information and business insights new business models.
© 2010 IBM Corporation

24. Key contacts
http://www-
935.ibm.com/services/us/gbs/bus/html/ibv-
telco2015.html?cntxt=a1000065
Thank you!
www.ibm.com/iibv
http://www-
935.ibm.com/services/us/gbs/bus/html/gbs-
telcos-socialnetworking.html?cntxt=a1000065
Rob van den Dam Nick Gurney Ekow Nelson
Global Telecom Industry Lead, Global Telecom Industry Leader Global Telecommunications
IBM Institute for Business Value Global Business Services Industry, IBM Corporation
rob_vandendam@nl.ibm.com nick@au1.ibm.com ekow.nelson@uk.ibm.com
© 2010 IBM Corporation