2014 06 12 ICT Value Chain Insights - Excomm

7/13/2019 2014 06 12 ICT Value Chain Insights - Excomm

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DISCOVER. DISRUPT. DELIVER

Corporate Strategy

12.06.2014

ICT Value Chain insights and TEF read across


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1. TSR performance and peer group analysis -profitable revenue growth is the critical driver

2. ICT value chain size, disruptive trends and the

ecosystem war focus on sustainability

3. Market insights - key levers to achieveprofitable and sustainable growth

4. Conclusions and read-across for Telefnica

2


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TSR supported by sustainability and cash flow discipline butturnaround in revenue and margin is our top priority

3 1. Rev 1Y FWD, EBIT margin 1Y FWD; 2. EV / EBIT 1Y FWD

FUNDAMENTALS CASH FLOW USE TSRSUSTAINABILITY

TEF historic TSR disaggregation (1Y FWD estimates) YTD up to June 5th2014

F S CF

+ + =


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Financial mgmt

drives TSR in spite

of negative

fundamentals +sustainability

4

Among 26 companies, 10 operators have best 3Y TSR due toimproved Fundamentals and Sustainability

TSR < 0

TSR > 0

Fundamentals +Sustainability +

5

21

Fundamentals +

Sustainability

contribute

positively to TSR

3

18

Fundamentals Sustainability +

7

0

All

analyzed

companies

26

Fundamentals +Sustainability

TSR 3Y

CFF S+ + >0

F S+ >0

F S+


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DISCOVER. DISRUPT. DELIVER5

Sustainability drivers - TEFs earnings yield gap (inverse PEvs. Spanish 10yr yield) is back to pre-crisis levels

Earnings yield vs. 10yr Spanish bond yield up to June 6th2014

4.6 p.p.


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and it is now in the middle of the pack relative to our

direct peer group (AMX, BT, DT, ORA, TI, VOD)

Earnings yield vs. respective 10yr National Bond yield up to June 6th2014

4.9 p.p.

4.7 p.p.

4.6 p.p.

3.6 p.p.3.7 p.p.

1.2 p.p.

5.7 p.p. ORA

TI

BT

TEF

DT AMX

VOD


7/62DISCOVER. DISRUPT. DELIVER

1. TSR performance and peer group analysis:profitable revenue growth is the critical driver





7



+ $217 bn

ICT value chain near $3trn1in retail revenues andMoores Law driving the consumerization of IT

8

NETWORK EQUIPMENT CONNECTIVITY

CHIPS

DEVICES

APPLICATIONSAND CONTENTDISTRIBUTION

INFORMATIONTECHNOLOGY

CONTENT

PRODUCTION

CUSTOMER EXPERIENCE

$878 bn

$328 bn

$1,100 bn

$1,547 bn

$533 bn

+3.3% CAGR

+ $210 bn+8.6% CAGR

+ $112 bn

+3.1% CAGR

Variation

2012-2016ERevenues ($bn)

1. Money from final customers. Sources: IDC, Strategy Analytics, Gartner, PWC (2012 data)


9/62DISCOVER. DISRUPT. DELIVER9

as Technology-intensive elements are subject to pricedeflation, driving innovation and consumer adoption

Computing power Storage

Connectable devicesBandwidth

Source: KPCB Internet Trends, Code Conference (May 2014)



Top 25 global brands ICT dominates with over 50% share

14 out of the Top 25global brands (>50%)operate in the ICTValue Chain

In terms of brandvalue, these 14 ICTbrands concentrate

$986bn:

61% totalvalue of Top25 brands

Connectivityshares a

relevant contribution(14.1ppout of 61),but lag behindInternet(21pp) andIT Solutions(14.5pp)

ICT

Source: Millward Brown and team analysis



Disruptive trends impact the entire chain, not onlytelecoms, and pace of innovation keeps accelerating

INCUMBENTS ATTACKERS DISRUPTIONS

CONNECTIVITY

DEVICES


Telecom operators Access Service (e.g. SMS) Cable

ULL

MVNOs

IT providers

Apps (e.g.WhatsApp)

Pay TV distribution platforms used toprovide FBB

Resellers leveraging regulation

IT players reselling connectivity

Communication offered through apps

B2C Internet

B2B IT

Media

Mobile advertising shifting to SocialNetworks

Mobile ecosystem leaders leveragingmobile ID for e-commerce

From product (SW license) toservice (cloud)

Content distribution offered throughapps

From product (downloads) to service(subscriptions)

From product to service: low margindevices cross-subsidized by othercore services (e.g. advertising, e-commerce)



The Big 3technology players competein all segmentsof the value chain with similar products but

121. An invitation for device unveiling event has beenmade by Amazon for June 18thin Seattle

Developers are key: >9mdevelopers (+50% yoy !!!) inApples ecosystem havecreated ~1m apps at no costfor Apple (which actuallyretains part of the

generated revenues)

Established ecosystemsexpanding to new markets:Apple focus on Health(HealthKit), Home(HomeKit) and Car (CarPlay)

Asian players starting to

build new ecosystems:Alibaba, Tencent, Baidu,Xiaomi? (initially focused onChina but now expandinginternationally)



13

sustainability is a concern, even for the most powerfulplayer in the internet ecosystem at the moment

EV /EBITDA

7x$45.6Bn

+12%

x%

+23% +19%

YoY rev growth

x% EBITDA %

32%1

32%2

iPhone revenues alone are larger than the entire revenues ofAmazon or Google and over 10x Facebooks

Apples valuation multiples discount a material reduction iniPhone pricing and much lower future profitability

Revenues calendar Q1 2014 ($Bn)

5%2

EV /EBITDA

20x

EV /EBITDA

12x

EV /OpFCF

8x

EV /OpFCF

53x

EV /OpFCF

16x

+72%

49%2

EV /EBITDA

18x

EV /OpFCF

25x

1. FY2013A (Sept 2013), 2. FY2013A (Dec 2013)



14

Fundamentals- revenue growth and margin comparison

EBIT Margin

Revenueg

rowth

Revenue growth vs. EBIT Margin

TELCOS + ICTTWTR*

*Twitter: 53% Revenue growth; 5% EBIT MarginFB: 29% Revenue growth; 50% EBIT Margin

FB*



15

Sustainabilityimplied long term growth rates vs. capitalstructure suggest higher long term "safety" in telcos

Implied growth rates vs. capital structures

Net Debt / EBITDA

EBIT/E

V

Low implied growth

High implied growth

TELCOS + ICT

AverageWACC

*Twitter: -8.3x Net Debt/EBITDA; 0.5% EBIT/EV

TWTR*



16

Leading telcos have the opportunity to exploit the centralrole of connectivityin the digital customer experience

CONNECTIVITY

DEVICES


CUSTOMER EXPERIENCE As a capital-intensive business, connectivity

has significant barriers of entry(moresustainable vs. other value chain agents)

In the digital world, connectivity is at thecenter of customer experience, as the linkbetween devices and services in the cloud

So we have the opportunity to protect /

reinforceour position, investing in:

The best access network...

with a best-in-class approach tocustomersand customer care

and becoming the partner of choicefor the best digital products / apps

We must transition to a subscription basedrevenue model and a more agile resourceallocation(i.e. reduce legacy OpEx/CapEx tofocus on growth and transformation CapEx)








17



18

Key levers and opportunities to achieve sustainable growth

Telecom becominga data business,and data isincreasingly usedin mobility

Retail channeltransformation

Stronger customer insightsleveraging mobile data devices

Connecting the remaining un-connected to data networks

Smartphones and LTE driving ARPU increase in some markets

Bundlesenabling telecoms to become total providers of ubiquitousconnectivity plus video, ICT and selected services

Evolution to data-only operations. Opportunity to combinecostreductions with growth stimulation

Access network modernization (Mobile and Fixed)

Increased network intelligence and operational flexibility.Virtualizationa key driver

IMPROVING PROFITABLE DATA MONETIZATION

SIMPLIFYING THE OPERATIONS & MANAGING LEGACY ASSETS

SPEEDING-UP NETWORK MODERNIZATION


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Data monetization: insights from across value chain


CHIPS

DEVICES



CONTENTPRODUCTION

What are other operatorsdoing? What has changed

recently?

What are the bestopportunities to

build bundleswith telecom?(B2C, B2B)

Where are themost attractivepartners?

Can we leveragetrends in devices toconnect the

unconnected?

Can device evolutionaffect our growthoptions?

What are thebest technologyoptions toimprove our

customerinsights?

A

B

C

D


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Monetization: Main takeaways

CONNECTIVITY

Back to growth in someEuropean mobile markets(Nordic Countries)?

Signals of lower growth inthe most advanced LTE

markets (Korea)?

Opportunity to monetizeinternational roamingmobile data usage

Fixed-only playersaggressively enteringMobile

Mobile payments gettinghot in emerging markets

Mobile + Satellite TVbundles as a newopportunity to explore?

A APPS & CONTENTB DEVICESC

ITD

What has changed in 1Q14? Premium devices looking fordifferentiation through increasinglypowerful ecosystems, potential risk

Cheap, powerful devices may help usboost MBB adoption: connect un-connected customers

IT vendors investing heavily todifferentiate in customer insight &

experience management

IT & Professional Services providersrushing to scale enterprise mobilitypractices

OTT video is slowly becoming aPay-TV substitute

Big 3 Internet players andNetflix are strongest in OTT

Telecoms entering video chainto create bundles and increase

customer life time value

Operators can successfullybundle 3rd party Internetservices with connectivity

In B2B, operators lag otherplayers in terms of Digital ICTinvestment

A pure catch-up strategy inDigital ICT is not enough

(CenturyLink case study)


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Bundlingleads to increased customer life time value

5, 6, P

+ Private cloud Public cloud

Security,

Storage Back up Monitoring

Personal cloud

Content

Communications

Security / privacy

Social apps,

B2B

B2C

ARPU

(/month)

Churn(annualized)

Average customerlife

(years)

Life time revenues(000 )

1P 2P* 3P** 4P***

23.141.4

61.776.4

23.8%

43.2%27.6% 14.4% 10.8% -3.6 p.p

TEF SPAIN example5, 6, P

3P

2.33.6

6.99.3

33.3%

6421,800

5,142

8,489

65.1%

4P vs. 3P* BAF + ATF

** BAF + ATF+ VC

*** BAF + ATF+ VC+TV


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Simplification: insights from across value chain


recently?

Can we leverage trends in the vendorindustry to improve procurement savings?

What solutions are vendors offering tomanage legacy technologies?


CHIPS

DEVICES



CONTENT

PRODUCTION

A

C

B

What can welearn from the

IT industry forprocesssimplification?


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Simplification / Managing legacy: Main takeaways

CONNECTIVITYA ITC

Telecom ITshifting topre-made, integratedpackages that reducecomplexity

As Chinese network vendorshave reached acomfortable market

share, we may need to lookat new entrants to enableadditional procurementefficiencies

NETWORK EQUIPMENTB

Industry trade-offs: someoperators stop doing somethings, to increase focus onthe core

Many operators are placingSimplification amongtop strategic priorities,and launching operationaltransformation programs

Migration to All-IP

perceived as a keyopportunity to simplifyoperations and reducelegacy costs


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Network modernization: insights from across value chain


recently?

What are the key technology roadmapsthat can affect our access & core /transport network modernization?


CHIPS

DEVICES



CONTENT

PRODUCTION

AB


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Network modernization: Main takeaways

CONNECTIVITY

LTE keeps advancing. Some operatorswill launch VoLTE immediately

Significant activity in the videoplatform space: what is the future ofIPTV?

A NETWORK EQUIPMENTB

Mobile access vendors accelerating LTErollouts and developing new features toboost performance

Small cell demand has not yet exploded,but analysts remain optimistic and vendorscontinue upgrading portfolio

Fiber leads fixed access shipments butcable and copper-based solutions also willplay a relevant role

Network Virtualization opens the game toIT suppliers but network vendors are racingto build their own solutions

What has changed?


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26

Global trends but local economics main EV drivers are


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Global trends but local economics main EV drivers aremarket size and growth, revenue share and OpFCF margin

2014B Market size (bubbles) relative to TEF revenue share and OpFCF margin

(Ex ARG and VZ)

SPA 21bn

PER 3.8bn

GER 38.7bn

UK 35.3bn BR 34.1bn

CHL 5.5bn

COL 7.8bn

MEX 13.2bn

0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35% 40%

RevenueMarketShare

OpFCF/Revenues

TEF Group 29%

Source: TEF Planning & Control (SP 2013-16)* IMPORTANT - Market size in TEF Footprint (current )


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Conclusionsdynamic industry and valuable insights

To achieve sustainable and superior TSRs, we need to grow revenues profitably:revenue and EBIT margin growth lead to higher multiples, driving up TSR performance

Industry analysis reveals that data monetization strategies and selective bundlingofdigital services with the best network connectivity are the main tools, together with

operational simplification, to achieve profitable revenue growth

The digital services value chain is highly dynamicand we need to closely monitormarket trends to identify the best opportunities for bundles(partner of choicestrategy for third parties) and offer the best digital experiences toour customers

Corporate Strategy team is dedicated to support Telefnicasglobal and operating unitsto help identify opportunities, accelerate growth and drive superior TSRs


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APPENDIX / BACK-UP

29

Back to growth in some European mobile markets (Nordic


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Back to growth in some European mobile markets (NordicCountries)?

NORDIC MARKETS ARE OUTPERFORMING THE REST OF EUROPE

Mobile service revenue growth (yoy)1

1. Source: Nomura. Europe includes 15 countries; 2. Prices shownfor the option with 1,000 voice minutes /month and 1,000 SMSmessages / month (many other combinations are possible)

Market effects: Price wars over in Sweden,three-player market structure in Norway

Advanced markets in customer experiencemanagement tools

Strong demand for mobile data: migration to

bundled offers, significant upselling opportunity

Innovationin the offer: E.g. tiered-pricingbased on speed ( la Swisscom) in Elisa Finland

2 Mbit/s (3G)

21 Mbit/s (4G)

50 Mbit/s (4G)

Unlimiteddata2

MBB Plans with unlimited data + bundled calls + SMS2

Contract ARPU evolution in Nordic marketsis clearly outperformingthe rest of Europes

23.80 / month

27.80 / month

33.70 / month

Sweden

Norway

-7.5%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

Finland+1.3%

+1.8%+2.3%
https://www.google.es/url?q=http://blogtelecomarketing.wordpress.com/tag/finland/&sa=U&ei=9FuMU9WSFaPR0QWg8YHoCw&ved=0CCUQ9QEwAQ&usg=AFQjCNGfB0TmaZBvztl1Q405jJaxZAt3oQ


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Signals of growth slowing in most advanced LTE markets

31

RECENT MARKET DYNAMICS IN KOREA

Growth in LTE Penetration (pp)

20

1411

8

14 1311

8

3-9/2012 9/2012-3/2013 3-9/2013 9/2013-3/2014

9%

21%

10%

8%

-3%

4%

6%

5%

-5%

8%

6%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

ARPU growth (yoy)

ARPU growthlinked to LTEupgrades

As LTEpenetrationsaturates,ARPU growthdecelerates

Competitionshifting to offer

Unlimiteddata plans

Bundles withotherservicesbeyondconnectivity

Unlimited LTE data plans (Since April 2014)

As technology-only differentiation saturates, customer insights becoming more relevant

There is an opportunity to monetize international roaming


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Current Opportunity 2020F

There is an opportunity to monetize international roamingmobile data usage

32

SIGNIFICANT LATENT DEMAND AND MANY OPERATORS LAUNCHING INITIATIVES

Total demand=x25roamingtraffic in 2014

2014

2014Current

Roaming days

% turning on for data

Usage per user(relative to at home)

Annual internationaldata traffic

2020F

2.7bn 5.5bn

50% ~100%

750PB

WiFiUnmet

2x travelers

Consumingabroad asat home

125x

Growth

Latent annual traffic demand for mobile data in

roaming (2014 2020 Forecast)

~6 PB

~150 PB

~750 PB

Total demand=x125roamingtraffic in 2014

Operators offering data roaming packages

Offer to take home tariffabroadfor 3/day

Available in 15 Europeanmarkets with 14m customers

Strong growth in data roaming

The usage of data goesup immensely

International plan included inSimple Choice postpaid plans

Roaming customers: +53% sincelaunch, 250k/month on average

Plan drives increased usage

Fixed-only players aggressively entering Mobile (and


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Fixed-only players aggressively entering Mobile (andchanging wireless markets drastically)

TELENET HAS CHANGED BELGIAN MOBILE

MARKET

BT: A REVOLUTION IN UK WIRELESS IN

2014/15?

Leveraging own assets: fiber network, Wi-Fi (atFBB homes + hotspots), 4G spectrum assets

Launching Fixed + Mobile offers this year

B2B: 2Q14

B2C: April 2015

Belgium MNOs service revenue growth (yoy)

Telenet relaunch

-3.1%

-6.0%

3.5%

-6.2%

-0.6%

-16.2%

3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

Belgium wireless market shares

39% 42%

26% 25%

33% 27%

2%

6%

2Q12 4Q13

Sources: Citigroup, BofAML

Operators driven Mobile Payments becoming hot in some
https://www.google.es/url?q=http://typophile.com/node/48483&sa=U&ei=gK6FU8nfFamc0AXGpICYBw&ved=0CEYQ9QEwDDg8&usg=AFQjCNELBAtnNtESdBfiTnN8qMKoqf_Axwhttps://www.google.es/url?q=http://en.wikipedia.org/wiki/File:KPN_logo.svg&sa=U&ei=mq6FU7bmKNKa1AXUuYCgAg&ved=0CC4Q9QEwAA&usg=AFQjCNFNF1hHcQZJNVs2_HsQnOgVF5WlBghttps://www.google.es/url?q=http://blog.intotheminds.com/let%E2%80%99s-fight-against-mobistar-6-six-months-warranty-guarantee-accessories-law-1-september-2004/mobistar-logo/&sa=U&ei=r66FU_rvDqSb0AWYoYHQCg&ved=0CDAQ9QEwAA&usg=AFQjCNFN5YOOXvXe1AO2Uws3t7QDX2wNsAhttps://www.google.es/url?q=http://en.wikipedia.org/wiki/File:KPN_logo.svg&sa=U&ei=mq6FU7bmKNKa1AXUuYCgAg&ved=0CC4Q9QEwAA&usg=AFQjCNFNF1hHcQZJNVs2_HsQnOgVF5WlBghttps://www.google.es/url?q=http://typophile.com/node/48483&sa=U&ei=gK6FU8nfFamc0AXGpICYBw&ved=0CEYQ9QEwDDg8&usg=AFQjCNELBAtnNtESdBfiTnN8qMKoqf_Axw


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Operators driven Mobile Payments becoming hot in someemerging markets

Money transfers (P2Pand international),

bill and wages

payments, financial

services (savings,

credits)

Money transfer and

micro-financing

service

23%New revenues for Safaricomin 2013/14 came from M-Pesa

KENYA

12m FY14 active users (+15.4% YoY)

6.69.9

1Q13 1Q14

Customer base (m)

21%

% of mobile basewith OrangeMoney in 4Q14(where launched)

19%% of total service revenues(14% in 2013)

5.9m FY14 active users (+21.6% YoY)50% of total customer base

TANZANIA

Mobile wallet (incl.

smartphone app),

payments, money

transfers (P2P and

international)

INDIA AFRICA1

+25%

1.7m

+26%

3.5m1Q14 Active users(+30% QoQ)

1Q14 increase oftransactions (QoQ)

1Q14 Active users(+28% QoQ)

1Q14 increase oftransactions (QoQ)

1 All 17 countries where Airtel has operations; 2. Currently 2%Vodafones AMAP revenues, expected to grow up to 10% in 2018

+48%

PAYMENTS BECOMING A (VERY) RELEVANT SERVICE FOR MOBILE OPERATORS IN SOME EMERGING MARKETS

More global revenue (today) for Vodafone than M2M (FY2013/14)2


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Mobile + Video bundles - potential opportunity?

Agreement to bundle Netflix with 4G plansincluding mobile video as a key claim

you can now get access to our ultrafastnetwork and use it to stream your favouriteshows and films on the move3

1. Source: WSJ; 2. Source: at&t (Nov 2012);3. Source: Vodafone (May 2014)

Demo of LTE-Broadcasttechnology at Indianapolis500 race (May 2014 - ~250K attendees)

Wireless streams of ABCs live race broadcast +video from cars, to mobile devices

LTE-Broadcast could also be used for other services(e.g. massive downloads of specific content)

MOBILE + SATELLITE TV

Potential Mobile + Satellite TV bundles out of U-Verse footprint?

~40% DirecTV customers out of U-Verse footprint1

at&t could connect Satellite boxes to the LTE for

interactivity and other services (e.g.OTT video)

Is this feasible? (Pros & Cons)

MBB capacity increasing (technology, spectrum,densification): videoas a key driver

New technologies (e.g. LTE Broadcast) enablevideo to mobile devices with low capacity usage

Mobile has limited operational synergies withSatellite (but also with Fixed)

Potential marketing complexity? (fitting Pay TVbundles with U-Verse vs. bundles with mobile)

MOBILE + OTT

MOBILE + LTEBROADCAST

In the US market OTT video starting as a complement is


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In the US market, OTT video, starting as a complement, isslowlybecoming a Pay-TV substitute

40

60

80

100

120

140

2008 2009 2010 2011 2012 2013

Cable TV Satellite Telco Netflix

Pay-TV subscribers evolution (m HH)1

Today, traditional Pay-TV is expected to grow mainly due to emerging countries, however trends clearly indicate that inmature markets TV will shift to OTT and in 10 years OTT will be the preferred way of consuming video world-wide

1Source MoffetNathanson2Source Harris Interactive

OTT used as a complement rather than asubstitute of current traditional Pay TV:

1. OTT restricted to low-value content windows

2. No live content (sports, realities, news, etc.)

3. Still a lot of inertiato consume traditionalTV, especially among older (+36 yrs) segment

However, this trend may change soon:

1. Some OTTs already producing own content,so they can differentiate vs. traditional Pay-TV

2. Some have shown interest to acquire sportsrights in US and UK markets (Total Worldsports rights estimated value of ~$30bn)

3. Higher OTT penetration vs. traditional PayTV in younger segments (18-36)

% Americans who subscribe to Pay TV per age group2

0%10%

20%

30%

40%

50%

60%

70%

18-36 37-48 49-67 68+

Cable TV Satellite TV Netflix Amazon Prime Hulu Plus

Main OTT video threat coming from the Big 3 Internet


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Main OTT video threatcoming from the Big 3Internetplayers and Netflix

Consumer ElectronicsOTT

Media Networks OTT

Stand-alone OTT

Trad. Pay TV OTT

Big 3 OTT

DEFINITION

Content producers and aggregatorsthat distribute some premium channelsdirectly over the top, either linearly orSVOD

OTT players that base their business inaggregating no-linear low-value

content and monetize it through SVODand TVOD at low price points

Traditional Pay TV operators thatcomplement their business with pureOTT product offers (either stand-aloneor complementary)

Big Internet companies that try tostrengthen and expand their corebusiness (non-media) by controlling theliving room of its customer base

Consumer electronics manufacturersthat are already present in most of theliving rooms (consoles and TVs) andwant take its share in the Pay TVdistribution business

THREAT

LOW

LOW

HIGH

MEDIUM

HIGH

NETFLIX

OTHERS

MEDIUM

Not well positioned to competeWell positioned to compete

Untapped opportunity TEFs footprint covers a pay TV


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Untapped opportunity TEF s footprint covers a pay TVmarket of 105mn subs but offer video services in 35mn

Pay TV subscriber market in TEF footprint

105m of households

Germany 24.5m

UK 16.8m

Mxico 14.9m

Argentina 8.8m

Centroamrica 4.6m

Brazil 18.1m

Colombia 4.7m

Venezuela 4m

Spain 3.8mChile 2.6mPer 1.4m

NON-ADD

RESSED

ADDRESSED

Total addressable Pay TV subscriber market by TEF

35m of households

Brazil12%1

TE

F-DTH

&

IPTV

Net

Servicos-Cable

Sky-DTH

Embratel-DTH

O

i-DTH&

IPTV

Others

Colombia6%1

TEF-DTH&

IPTV

Telmex - CableEPM - Cable &

IPTV

DirectTV-

DTH

Others

Venezuela5%1

TEF-

DTH

DirectTV - DTH

Interca

ble-

Cab

le

Superc

able

-Cable

Others

Spain-2%1

TEF - IPTV Sogecable - DTH Ono - Cable

Euskaltel-

Cable

Others

Chile8%1 TEF - DTH/IPTV VTR - Cable

Claro -DTH/Cable

DirectTV -DTH

Others

Per9%1 TEF - Cable/DTH

DirectTV -DTH

Claro -DTH/Cable

Others

1 Expected 5 year compound annual growth rate by PyramidResearch

Become the partner of choice - offer bundles of best local


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Become the partner of choice offer bundles of best localconnectivity with best in class B2C Internet services

Bundling strategiesgenerate highercustomer life time value

Internet servicesencourage use of data

Partnering anddistribution better thaninternal development

39

B2C services drive smartphone adoption and data consumption

Bundling of Internet and data services reinforces the effect

B2C Internet is highly competitive: Big 3 ecosystemsattract thousands of

competitors. Apples ecosystem has >9m developers who have created ~1m apps atno cost for Apple (in fact it actually keeps around 30% of app revenues)

Building requires elements not present on Telco: Internet mindset, talent,agility, no exclusive revenue-focus, global scale, knowledge of highly specific areas

Telecoms around the world are bundling selected Internet servicesandconnectivity with success (retaining customers and higher ARPU)

Becoming the partner of choice: Telecom bundling is a way for apps to reach massmarket. Telecoms can be the preferred choice for innovative services providers(power to shape the industry/ balance players power)

In B2B operators lag behind other players in Digital ICT


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In B2B operators lag behind other players in Digital ICTM&A investments

Sources: IDC July 2012, Yankee June 2012, Company Data, PwC, KPMG, TEF Enterprise , Team analysisNotes: (*) Addressable market CAGR components slightly differ with Telefonicas classification () Other

companies Digital ICT Investment figures estimated from public info and M&A transaction valueestimations. TEF investment estimated from ACENS acquisition. Actual figures may differ.

64%

27%

~14B

10%Machine to Machine

Cloud Computing Big Data Security Mobile Apps

Digital ICT

Unified Comms. Managed Mobility VPN & LAN Wifi Fixed & Mobile Data Datacenter

Core

SMS / MMS PABX Fixed/Mobile Voice Leased lines Voice lines

Legacy

24%

-3%

5%

If TEF wants to capture growth in the B2B segment, we need to prioritize B2B Digital ICT

Addressable MktCAGR (2013-17)*

TelefnicasB2B Revenue Mix (2013)

TEF has a delicate revenue mix that dependsheavily on traditional Telco services

and is behind other major players in terms of M&Ainvestments in Digital ICT services

Selected Players Cumulative M&A investment in Digital ICT vs Revenues Ratio (2011-2014)

0% 5% 10% 15% 20% 25%

Telefonica

TelstraAmazon

Verizon

Microsoft

NTT

SingTel

Google

Rack Space

IBM

Century Link

VM Ware

EMC

Oracle

Salesforce

40

Implementing only a catch-up strategy in Digital ICT


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Implementing only a catch up strategyin Digital ICTwill not be enough to succeed

Sources: John Hagel, Deloitte, IBM institute.

Many B2B players have a considerable head-start vs.telecoms in terms of investment in Digital ICT

E.g. Cloud: huge scale economies already built, relevantplayers massively lowering prices in recent years

Thus, mirroring services from large scale IT providers & OTTs(e.g. IBM, Amazon) will not work (as competition shifts toprice and scalewill win)

Telecoms can build differential services using unique assets:

Network, QoS / SLAs, security and trust, integration andoperations expertise, commercial capabilities (local

presence and customer care)

E.g: Bundling cloud with connectivity and providingimproved QoS, enhanced latency, integration expertise,better customer support and SLAs

Cloud prices becoming commoditized quickly

THE BEST WAY TO COMPETE IN DIGITAL ICT IS THROUGH

DIFFERENTIAL SERVICES LEVERAGING TELCO ASSETS

18%

20%

22%

26%

31%

31%

37%

39%

56%

Lack of continuous availability

Poor service quality

Lack of interoperability

Loss of control over IT

Regularoty compliance

Absence of cost savings

Integration complexity

Inmaturity of technology

Concerns about security of data

Security, trust, integration complexity and poorservice quality are common cloud barriers

Good opportunityfor telecoms to

build differentialservices thataddress these

issues

$1,000

$100

$10

$1

$0.1

$0.01

1992 20021997 2007 2012

$569Global Storage Cost Trend ($ per GB)

(y-axis in logarithmic scale)

IBM Institute: Cloud adoption barriers Survey (% of respondents)

Leveraging telecom assets with IT capabilities may be


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Leveraging telecom assets with IT capabilities may bestarting to pay-off (CenturyLink case study)

Revenues Business segment ($bn)

39% 41% 43%

StrategicB2B: IPconnectivityand cloud(hosting)

Legacy and CPE

1Q12 1Q13 1Q14

49% 52% 53%

1.82 1.841.91

51% 48% 47%

B2B /Total

Recent announcement to offer cheapercloud than Amazon Web Services:

cheaperin bandwidth(outbound)

cheaper in cloud(Computing andStorage)

Developing cloud skills

Acquisitions: Savvis ($3.2bn2in 2011);Tier3 and Appfog (2013)

Partnership with VMware

Doubled cloud capacity last year

50%

7%

AGGRESSIVELY INVESTING TOBUILD THE OFFER

AGGRESSIVE POSITIONING (vs. CLOUDLEADERS FROM IT WORLD)

GOOD RESULTS

CAN A TELECOM OPERATOR COMPETE WITH AMAZON IN CLOUD?

CenturyLinkseems to beexploiting astrong bet onCloud (e.g.Savvisacquisition)

Can operatorssucceeddeveloping Cloudcapabilitiesinternallyorshould there bean inorganic bet?

6.6%

CAGR 12-14

-1.4%

Premium devices looking for differentiation through
https://www.google.es/url?q=http://pspinfo.us/sponsors/century-link/&sa=U&ei=emuHU9vUFI7IsATQ6IGYBw&ved=0CCMQ9QEwAA&usg=AFQjCNEs3zTJDmrwa36GMl79xFVKkF7U7g


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Premium devices looking for differentiation throughincreasingly powerful ecosystems

iOS as the core ofcommunications,navigation andentertainment inthe car

iOS to manage boarding passes,movie tickets, gift cards, loyaltycards

iOS to stream content to the TVor external speakers

APPLE iPhone

Positioning iOS smart devices at the center of an ecosystem of

functionalities beyond these devices

On June 2, Apple announced new

ecosystems for healthand digitalhome

PRODUCT:

Upfrontpayment; no /very low feefor the service

SERVICE:

Monthly fee& subsidizeddevice(s)acquisition

Device-driven Telecom-drivenvs.

E.g. in digital home, operators willcompete with ecosystems frompremium device brands, withdifferent business models

Cheap, powerful devices may help us boost MBB adoption:


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p, p y p pconnect un-connected customers

In some markets,local smartphonevendors aregrabbing aremarkablemarket share

68%

40%

7% 6% 5%

China India Brazil Thailand France

Local smartphone vendors volume market share (2013)

% smartphones under $80 witha processor faster than 1GHz1

% smartphones under $80 witha screen larger than 4 inches

2012

42%

8%

2013

87%

38%

Global marketLocal vendors

are capturingshare throughincreasinglypowerful devicesat increasinglylow prices

Opportunity toconnect theun-connected:

Drive MBBadoption in

emergingprepaid &low-ARPUmarkets (e.g.LatAm)

Connectremaining un-connected indevelopedmarkets

LOCAL VENDORS IN FASTEST GROWING MARKETS SELL CHEAP, POWERFUL SMARTPHONES

1. As a reference, iPhone 4S includes a 1GHZ processor.Source: Strategy Analytics, IDC.

Local, low-cost Chinese chips are empowering cheap


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, p p g pChinese smartphone brands

52%

11%

33%

4%

Smartphone processor market share in China (2013)1

Chinese & Taiwanese chipmakersare exploiting low entry barriers toApplication Processor Market:

ARM Intellectual PropertyLicensing Model reduces R&Dspending and makes everyone

equal. (95% of smartphonesprocessors worldwide are basedon the ARM architecture)

These suppliers offer turnkey

solutions to handsetmanufacturers, reducing risks, cost

and time to market.What can Spreadtrum do in smartphones?

Bring performance of globally popular smartphones to$100 price segment

Enable ultra low end $50 smartphone

1. Source: DRAMeXchange, Jun 2013

IT vendors investing heavily to differentiate in customer


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g yinsight & experience management

Big Data & RealTime Analytics ischanging the ITvalue chain: focuson data vs.

hardware andmiddleware

Main IT playersaware of the shift:developing /acquiring skills inthis areais an

strategic imperative

DATA EXPLOSION DRIVEN BY: MOBILE, SOCIAL MEDIA, INTERNET OF THINGS

$100m in 10 labs to improve customer experience by aligning marketing, sales andservices capabilities

Developing curriculum for analytics with 1,000 universities

$24bn invested since 2005 in 30+acquisitions

$1bn to develop cognitive services andapplications

I.e. Influence Analysis, Life Event Detection,Psycholinguistics Analytics, Behavioral Pricing,

In 2012. invested $2.4bn in QuestSoftware: forecasting suite formidmarket companies.

In 2014, after going private, hasacquired StatSoft (terms undisclosed):predictive analytics software thatserves more than one million users.

Applications for offer, procurement,inventory and field forceoptimization.

$12bn invested since 2011 in three bigdata companies

In 2013, unified these big data assetsunder a common architecture: theHAVEn Platform.

Also OSS/BSS vendors are developing telco-specific


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p g pcustomer experience platforms

Successful players

would be those that

develop analyticalapplications with aholistic view able todiscover insightsandgeneraterecommendationswithin different

operator domains.

TELCO VENDORS LEVERAGE ON THE NETWORK IMPORTANCE AS A SOURCE OF CUSTOMER EXPERIENCE

CEM-related consultancy:

process re-engineering

Technology

implementation/migration

measuring business outcomes

and optimization

Cross-organizational mindset

change

IT & Professional Services providers are helping enterprises


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p p g pto become a mobile business

SHIFT IN CUSTOMER HABITS DRIVES CHANGE: NOW FIRST POINT OF CONTACT IS MOBILE

Usability Testing Labs Application Factory

Ready-to-go mobile solutions:

channel for customer engagement,sales force automation

Creative user interfaces resourcesto rapid prototyping

Remote testing services forcontent providers: high-qualitycontent and applications

2K+ client implementations 10 industry-specific ready apps that

can save up to 60% time and resources 18 MobileFirst Strategic Studios

Enterprises need to developan enterprise-wide mobilitystrategy covering:

Open mobile sales andmarketing channels

Drive revenue throughtransactions & engagement

on mobile devices

Improve fieldservice/customer service

To support this cross-organizational projectsprofessional servicesproviders are building strong

practices.

Customer Experience Managementinitiatives at some


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p goperators may be starting to pay-off

CASE STUDY: OPERATOR IN A NORDIC COUNTRY1

Introduced a CustomerExperience Managementsolution for Mobile BB in2010, with theseobjectives:

Decrease resolutiontime in customer calls

Monitor customerservice qualityperformance

(When needed) scaleto 2ndand 3rdlineswith complete andaccurate information

Increase of customersatisfaction

Financial benefits

2010 2011 2012 2013

2011 2012 2013

Consumer

Enterprise

Operator Market average

+[VALOR]

+[VALOR]

-5.2%

-5.0%

Customercare /NetworkManagementOpEx

Customerchurn

MBBRevenues

EBITDA

Annual impact 1Y post-launch

1. Source: Ericsson

Industry trade-offs: some operators stop doing things or


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y p p g gmake certain choices to increase focus on the core

OPERATOR WHAT THEY ARE NOT DOING WHY?

Fixed incumbents (NTT East /West) will stop commercializingFTTH connectivity

Announced May 2014

Regulation: enabling DoCoMo tocommercialize 4Play bundles (to competewith KDDI)

Focus (B2B / B2B2C): Value Partnerforcustomer to accelerate transformation ofcustomers business models

Not creating global OTT apps,seen as an external trend thatlocal connectivity operators needto embrace (as enablers)

Focus: offering good local products andservices, monetized through cleverpricing, leveraging best local networkassets

NON EXHAUSTIVE EXAMPLES

Not interested in local operatorsoutside USA (different strategy vs.at&t?)

Focus: local market (B2B+B2C) + globalB2B services based on IT layersbeyond raw connectivity(leveraginginternational cloud assets fromTerremark acquisition)

NTT shifting to a wholesale + B2B only strategy for FTTH


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NTT shifting to a wholesale + B2B-only strategy for FTTH

FROM B2C TO B2B2C

Current model

NTT East and NTT Westdirectly provide fiberaccess services to endusers

Carriers MVNOs, ISPsCompanies in

other industries

Wholesale fiber access service (Value Partner)

Transportation

TourismHealth Care

DistributionManufacturing

Environment

Sports /Entertainment

A variety of market players provide their own integratedservices to end users through the wholesale fiber accessservice of NTT East and NTT West

Hikari Collaboration model

Operational simplification: the case of Belgacom


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Operational simplification: the case of Belgacom

Accelerate simplification of networks todecrease operational costs

and employ new IT enablers to simplifyproducts & processes for better customer

service & higher efficiency

3.7M PSTN equivalent lines to migrate and

1k switches to be removed by 2018 100% ATM lines migration by 2015

Out-phasing and selling of 30 technical andoffice buildings

Reduce order introduction time with 50%

Increase automatic order handling with 25%

Reduce repair field interventions with 15%

NEW STRATEGIC PRIORITIES (01/14) AND SIMPLIFICATION TARGETS

DT have been very explicit on their targets for


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switching-off the PSTN

All IP migrationamong Top 5StrategicAchievements in 1Q14

100% Fixed linesmigrated to IP in2018

LTM1(1Q14): 21.4%FBB lines (+10.6pp)and 12.5% Fixed lines(+7.0pp)

Explicit targets for PSTNswitch-off in Germany:

1. Last twelve months

0.6

1.2

2.6

1Q12 1Q13 1Q14

Retail IP accesses (m)

5.5

12.59.8

21.4

1Q13 1Q14

% Retail IP accesses (%)

Fixed lines

FBB lines

DT - Germany

100%Fixed linesmigratedin 2018

Objective:

What new entrants in the network vendor space could we


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leverage to increase procurement efficiencies?

0%

10%

20%

30%

40%

50%

60%

70%

Market share of key vendor groups(% of total market share) +30,8% RAN revenues in 2012: KDDI,

LG U+, Korea Telecom, SK and Sprint.

2013: 3 (UK and Ireland) and TelefonicaChile, MTS and Reliance

Assigned Seoul in the firstLTE-Advanced deployment

Are Chinese vendors comfortable with the

market share gained till 2011 ?

IP Edge market identified in theirInvestors Day as key area of growth.

Till 3Q13, 78 contracts includingSoftbank, O2 (UK), Metro PCS, Mobily.

Which other players can perform the role of

challengers ?

Source: Ovum.

CHINESE VENDORS ARE NOT GAINING SHARE SO INTENSIVELY AS BEFORE

1Q06 3Q13 In 2013, Infinera growth 23% compared to

the total Optical Network market whichdeclined by 1%.

For processes that can be standardized, Telecom IT shifts


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to pre-made, integrated packages that reduce complexity

TELCO PROCESS STANDARDIZATION

Vendors standard-based suites are maturing

Increasing domain coverage

Investing in preintegration of components

PRE-INTEGRATED & STANDARDIZEDVENDOR SUITES

Less operational complexity

Lower integration costs Faster time to market Enhance customer experience Fewer bugs Expert support and training

Telcos demand evolving from proprietary software to standard / pre-integrated solutions

Main drivers: reduce cost, increase agility

TMForum drives collaboration betweencarriers and IT suppliers to define astandard framework of carriers

processes covering:

Infrastructure & Product life-cyclemanagement

Operations management

Corporate or business supportmanagement

LTE keeps advancing - some will launch VoLTE imminently


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LTE keeps advancing some will launch VoLTEimminently

4G ClearVoice launched in May 2014

Initially on Samsung Galaxy Note 3

No additional charges. Emphasis on quality,services(call forwarding, call waiting) and abilityto use voice and data simultaneously

Announced for late June 2014

Initially on 4 smartphone and 2 tablet models No additional charges. Emphasis on ability to

use voice and data (up to 150 Mbps)simultaneously

Video calling planned for 2015

HDVoice launched in May 2014

Initially on Samsung Galaxy S4 Mini, withcoverage in 4 local markets

Emphasis on qualityand ability to use voiceand data simultaneously

Launched in May 2014

Initially on Samsung Galaxy Note 3 Free upgrade. Voice and Video calls

Emphasis on faster call set ups, better voicequalityand ability to use voice and datasimultaneously

SEVERAL OPERATORS LAUNCHING / ANNOUNCING VOLTE IN THE LAST MONTH

What is the future of IPTV platforms?


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What is the future of IPTV platforms?

Migration of IPTV platform (Mediaroom) to a new OTTone (TV 2.0), starting by high value customers

Android-based,with specificmiddleware(developed bypartner i-Wedia)

In-housecustomization

Aim to unify TV experience across devices:

Cloud / Multi-device functions are differential vs.traditional IPTV solution

Sold only with premium bundles (Vivo M, L, XL),including FBB speeds >300Mbit/s

Phasing out TV 1.0 (IPTV) expected for 2017+

800K TV customers in Korea with Open PlatformStrategy on Android OS

Claim they arefirst operator

to converge

IPTV withGoogle TV

Open to GooglePlay apps

82661 789

4Q12 4Q13 1Q14

Fast growing customer base (~+130K / Q)

Mobile access vendors accelerating LTE rollouts and


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developing new features to boost performance

Total investment in mobile access will remainapproximately flat: -1% CAGR14-18

LTE shipments are forecasted to surpassdecreasing 2G/3G shipments in mid 2015

This forecast could be accelerated if carriersleapfrog 3G and move straight to 4G

Vendors are implementing trials of LTE-Advancedwith new techniques that enable:

higher data speed and capacity.

better customer experience specially far fromthe antenna

Max Speed

LTE

2G/3G

Other 2-band 10+10Comm.Launch

TechniqueVendor OperatorEvent

150 Mbps

GlobalInvestment($bn)

MARKET OUTLOOK1 FUTURE DEVELOPMENTS

2012 2013 2014 2015 2016 2017 2018

20

30

40

3-band 20+10+10Trial 300 Mbps?

2-band 20+20Comm. 300 Mbps

CA+MIMO 4x4Trial 580 Mbps?

MIMO 4x2Deploy. -

FDD+TDD-bandTrial 540 Mbps10

1

Source: Ovum and Team Analysis.

Small cell demand has not yet exploded, but analysts


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DISCOVER. DISRUPT. DELIVER 59

remain optimistic and vendors continue upgrading portfolio

137K

100K 1M

32K 200K

300K900K

120K

Specific solutionsfor enterprise,indoor and outdoor

Macro vendors: capacity tooptimize macro/microcoordination

Femto vendors: longexperiencein the residentialfemto market

Wifi Vendor: advancing inintegration with carriers core:automatic logon, traffic steering.

All developing capabilities to offer3G&4G&WiFi integrated products:

Cisco acquisition of Ubiquisys

Ericsson acquisition of BelAir

Macrocells

Femtocells

Carrier Wifi More than 2 MM3of Carrier Wifi Access Points deployed

by Asia and US carriers

As of 1Q14, only 100K 3G/4G urban small cells deployedbut analysts forecast15 MM in 2018.

at&t: opportunistic deployment: up to 40K in 2015

1.Source: Mobile Experts LLC for the Small Cell Forum2.Residential femtos not considered in small cell market. Currently 7.7m deployed mainly for 3G coverage.3.Source: Ovum report

Small cells market has not yet exploded

LTE has reduced urgency (increasing capacity short-term) Exception: Carrier WiFi deployments

but macro, femto a wifi vendors continue upgradingtheir small cells portfolios

2014

2018

Outdoor Urban SC

Indoor Urban SC

2 MM 4 MM

Fiber leads fixed access shipments but cable and copper-b d l i l ill l l l


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based solutions also will play a relevant role

MARKET OUTLOOK1 FUTURE DEVELOPMENTS

Global current investment in fixed access is dominated byGPON solutions but with significant regional differences:

In Western Europe and North America VDSL2 capturessignificant attention.

In South America and US, cable represents around 50%of shipments

To extend copper life, new techniques are beingtested by fixed lead vendors:

2012

Vectoring (deployment): up to 100 Mbps in FTTN

G.Fast (trial): easy-to-install fiber to the door(remote power, avoid deploy fiber drop )

2013 2014

Next generation of fiber available but ahead ofresidential demands: considered for mobile/corporatebackhaul.

Cable evolution standard already defined: 10Gbpsdown/1Gbps up. Trials: end of 2014.

PON (fiber) CableVDSL2ADSL2+

1.Source: Ovum

Network Virtualization opens the game to IT suppliers butk d i b ild h i l i


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network vendors are racing to build their own solutions

Network Vendors

Major IT Vendors

Cloud Middleware Vendors

Vend. specific net. funct.

Creating internal units to manage the challenge.

Developing complete architectures and roadmaps.Examples:

Ericsson: plan to virtualize most major functions2014-2015

Huawei SoftCom: vision for whole virtualizednetwork.

Assuming different deployment scenarios: providingfull stack or working with layers of third-parties

Conducting major trials with leading operators: at&t,Telefonica and most recently NTT DoCoMo

Mobile Core (EPC), IMSand CPEfirst candidates tovirtualize. First commercial products expected end2014.

De-coupling software-hardware allows to increase the choice

of suppliers in every layer (e.g. non-traditional vendors)

Conscious about the risk, main Network Providers have

embraced the concept and try to lead the shift

OSS/BSS

Network Functions

Orchestration & Control

Servers, Storage

API API

API API

API

API


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Documents

2014 06 12 ICT Value Chain Insights - Excomm