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0

P r e s e n t a t i o n UFSIA, March 2, 2001

McKinsey&Company

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1

AGENDA

Migration from GSM to UMTS: What is UMTS, and what will really happen?

What will UMTS be used for?

UMTS Licenses: trick or treat?

How will it change the industry?

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2

153290

106

93

182

195

93

69

4940

98159

135

44

78

96

103

21

Source: 1999 OVUM Ltd. report

MOBILE MARKET SUBSCRIBER AND REVENUE GROWTH WILL BE SIGNIFICANT

17

20

28

18

CAGRPercent

CAGRPercent

13

7

20

5

1999 2003

W. Europe

Rest of Asia

South & Central AmericaNorth America

1999 2003

Japan

9

Total 428

842

300

43418 10

Almost twice

Almost 1.5 times

Total subscribersMillions; 1999-2003

Mobile revenuesUSD Billions; 1999-2003

The global mobile market will grow significantly (18% CAGR from 1999~2003 in terms of total subscribers), and Western Europe and Asia are likely hot spots in terms of subscriber and mobile revenue growth

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3

82 95

69

5073

73

3845

52

21

3

DATA WILL BE THE MAIN DRIVER OF GROWTHRevenue by service levelUSD Billions

Source: OVUM Ltd.

1999 2005

2

5

16

0

50

44

6

42

3

54

2

13

0 641

78

41

1999 2005

73

Total

55-4

Almost 10 times

CAGRPercent

CAGRPercent

Total subscribersMillions; 1999-2003

Mobile revenuesUSD Billions; 1999-2003

W. Europe

Rest of Asia

South & Central AmericaNorth America

Japan

273

325

161

44

17

Data will be the main driver of growth and increase ten times by 2005 from today’s levels

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4

* e.g. For i-mode, WAP

UMTS WILL BRING SIGNIFICANT CHANGES IN VARIOUS BUILDING BLOCKS

Allows access to internet-based content

SIMPLIFIED

ApplicationsMiddleware & gatewayCore networkRadio access

network

Legacy Network Management

Dedicated applications tailored for the mobile market

Historic permanent highly sensitive customer data

• Network Mgmt• Security

Web servers

Application servers

• Transcoding gateways*• Localization, etc.

• Billing• Customer data filters

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EVOLUTION IN RADIO ACCESS NETWORK TDMA to CDMA and New Spectrum

• 1x9.6/14.4 kbs• Circuit switched• TDMA• 900- 1800 Mhz

Practical data speedkbs

GSM

• Packet switched• Up to 8x14.4 kbs• TDMA• 900- 1800 Mhz

GPRS

• Up to 8x48 kbs• Packet switched• TDMA• 900- 1800 Mhz

EDGE

• CDMA• 1900-2200 Mhz• Up to 2Mbs• Packet switched

UMTS

• Up to 4x14.4 kbs• Circuit switched• TDMA• 900- 1800 Mhz

HSCSD

Today 2000-02 2001-03Availability

9.6

28.8

43.2

144

384

HSCD = High Speed Circuit Switched DataGPRS = General Packet Radio ServiceEDGE = Enhanced Data rates for GSM EvolutionUMTS = Universal Mobile Telephony System, also called IMT-2000 (International Mobile Telephony 2000)

• Different evolution path for 2G operators

• All operators go directly from GPRS to UMTS

• Possibility of green-field for new entrants

APSRAN C/N MW

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6

THE EUROPEAN OPERATORS WILL GO FROM GSM TO GPRS TO WCDMA

DiscontinuedHighLow

?

Market share by

technology Key implication

?GSM W-CDMA IP

2G 2.5G 3G 4G

Europe

U.S.

Asia

Japan

• Most European and Asian incumbent operators will transition from GSM to GPRS*, and then to W-CDMA

• The challenge is to meet their needs at each stage

?CDMA One?CDMA

?GSM

?GSM

?CDMA

?CDMA One

?D-AMPS

?PDC

?CDMA One

GPRS

EDGE

GPRS

EDGE

CDMA2000

W-CDMA

CDMA2000

W-CDMA

CDMA2000

W-CDMA

?

IP

IP

IP

IP

IPIP

?

?

?

* European operators will most likely not invest in Enhanced GPRS for GSM (EDGE), but transition instead toW-CDMA directly, due to high costs and limited timescales

Source: Operator interviews

?D-AMPS

APSRAN C/N MW

In order for vendors to be successful in 3G with incumbent operators, there is a need to master each step of the technology transition.

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7

Fast relayATM / circuit-switched

IP over SDH

Associated type of operator

THE CORE NETWORK WILL CHANGE FROM CIRCUIT TO PACKET SWITCHED

• Legacy operator with network optimized for voice

• Legacy operator with non-aggressive data strategy (e.g., Proximus , TIM)

• Attacker operator with aggressive data strategy (e.g., Infostrada, TIW)

• Legacy operator with aggressive data strategies (BT, Vodafone, Telefonica)

Pure IP

ATM+IP

Fast Relay /ATM

4

Voice

Data

4

Public telephone network

Internet/LAN

4

Voice

Data

4

Public telephone network

Internet/LAN

IP CORE

4

Voice/data

Public telephone network

Internet/LAN

Radio access network Core network

Source: Team analysis

GPRS/IP

APSRAN C/N MW

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FROM GSM TO GPRS : PHASE 1 GPRS nodes are key as a first step

* Private Local Managed NetworkSource: Team analysis

APSRAN C/N MW

Mobile core networkRAN

Signaling path

Key features of GPRS

Services • Point-to-point transfer

of data• Point-to-multi point

transfer• Call forwarding

Service levels• QOS with 3 priority

levels (H, M, L) which are billed accordingly

• Delay parameters are also defined for the mean and 95 percentile delay

The BSC is altered to route traffic to both the MSC and SGSN

MSC GMSC

SGSN GGSN

VLR HLR AUC EIRSMSMSC

GPRS-IPspecific

Single mode

MS

4

SIMGSM GPRS

BTS BSC

BSS

Global IP network

Open IP

PSTN/ISDN

PLMN*

Terminals

IN + applications

Data/voice data path

The SGSN switches data and performs charging and management functions. It also stores location data locally

A GPRS specific IP-based system allows the SGSN/GGSN node to set up interfaces with each other and perform layer 2 and 4 functions

The GGSN interfaces between GPRS backbone and external networks. It also converts from “GPRS IP”(GTP) to open IP or X.25

GSM data/voice

GPRS data

Key GRPS nodes

Old GSM 2G C/N domain

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9

Source: Team analysis

APSRAN C/N MWFROM GPRS TO 3G IP BASED CORE NETWORK : PHASE 2

IP core networkRAN

Key comments

Particularly for legacy operators, it is important at this stage to interwork and reuse as much of the 2G and 2.5G hardware as possible

Ideally, should be built on existing SGSN but with open IP rather than closed IP

Ideally all IP link and internal network

M-GGSN filters and interfaces to data networks

MSC GMSC

M-SGSN M-GGSN

VLR HLR AUC EIRSMSMSC

QOS openIP

Single mode

SIM

4

GSM GPRSBTS BSC

BSS

Global IP network

PSTN/ISDN

PLMN

Terminals

IN + applications

Dual mode

3G Handset

4

Gradually evolving to carrier – class to take advantage of QOS upon IP

Node-BRNC

Node-B

Signaling pathData/voice data path

Built on 2.5G nodes

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10

FROM 3G IP NETWORKS TO 3.5G AND 4G ALL IP CORE NETWORKS: PHASE 3

Source: Team analysis

APSRAN C/N MW

IP core networkRAN

Media gateways replace MSGSN/MGGSN (or evolve on top of them) to allow access to a unified IP backbone

Single mode

IPV6 address (?)

4

Global IP network

PSTN/ISDN

PLMN

Terminals

Node-BRNC

UTRANNode-B

Manage-ment Data

Media gateway

QoS IP backbone

Applications and services

Media gateway

Media gateway

Media gateway

Media gateway

Built on 3G nodes

Many of the core network decisions in UMTS will be the same as in the fixed line business. As a result, the discussion of

saving cost on CAPEX by addressing convergence emerges

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11

SEVERAL CHALLENGES UNDERLYING CAPABILITIES REQUIRED

Source: McKinsey anaylsis

Wireless network

Unified messaging

E-mail Paging Fax

Voicemail

Instant messaging

Surf StocksNews,

etc. IntranetData-bases Calendar

PersonalfinancialContacts

Public info Company info Private info

Op

erator cu

stom

er care and

billin

g

Content &

Apps

Gateway &

middleware

Network

equipment

Network

operators

End-user

devices

Location

Identify Share info

Data network management

Load balancing Roaming Quality of service Caching Commerce Security

Promos

Ads

Clearing

Credit

Device

Encryp -tion

Authentic-ation

VPN

Content re-purposing and re-formatting

Tiny HTML WML XML VoXMLHDML OFXOther ML

Device management

Identify Provision UpdatesInventory

Synch

Inter-device

Fixed -mobile

Wireless updates

Click streams

Prefer -ences

Rules

Affiliation

Profiles

Personalization

End-user devices/embedded browsers

Voice notification Voice portal

APSRAN C/N MW

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12

C-HTML

• Sub-set of HTML, used by I-mode in Japan• Similarity to HTML allows easy conversion of

existing web site

XML • Uses style sheets to adapt data to different devices• Microsoft pushes XML over WAP

Web clipping

• A format for delivering web based information to Palm devices

• Used on the Palm Network in the US

• Used for fixed web pages• A text-based protocol describing how web pages

should be displayed by web browser

HTML

WAP • Adaptations of fixed Internet standards, e.g.,HTTP, SSL, HTML, to work better with mobile devices

• Supported by major telecom players• Compatible with GSM, CDMA and TDMA

Fromfixed Internet

Tomobile Internet

WAP IS ONLY ONE OF SEVERAL PROTOCOLS FOR MOBILE INTERNET APSRAN C/N MW

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13

DON'T UNDERESTIMATE i-MODE PUSHING C-HTML

DoCoMo is planning to aggressively enter Europe with i-mode as an alternative to WAP

Direct investment

Indirect support

(Netherlands)

Hutchinson UK (UK)

Vivendi (SFR) or Bouygue, TelecomFrance

(Germany)

(Belgium)

Andala(Italy)

APSRAN C/N MW

Vendors need to adapt from being pure infrastructure suppliers and become total solution providers

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OUR VISION OF MOBILE HANDSET WILL CHANGE

Today

• Limited data transfer• Limited memory• Not convenient for

input• Small screen

New standard allowing• Efficient data

transfer• Growing memory

capacity• M-commerce

capabilities through Internet access

• … and telephony

UMTS equipment will be included in many types of devices

Laptop‘Nokia inside’Cars, e.g., positioning

Mobile phones

PDA

• Low penetration• Different

standards

Mobile handsets will become personal devices

Video phones MP3 playerPDA with camera

Tomorrow

APSRAN C/N MW

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15

VENDORS ARE FORCED TO ENTER OTHER AREAS IN THE VALUE CHAIN

• In the past, NTT DoCoMo and NEC had complementary and highly valuable business models

• Elsewhere a complex global value chain has emerged of which the DoCoMo model represents only a small part

DoCoMo-oriented value chain

Global m-commerce value chain

Termi-nal

Content and appli-cations

Gateway M/WInfra-struc-ture

O/S

System integration and maintenance

Mainte -nance

Opera-tions

Manufac-turing

R&D

R D

RF terminal+

What manufacturer must deliver

Network infrastructure

Total m-commerce solutions

Before

Now

2G

2.5G! 3G

APSRAN C/N MW

Vendors need to adapt from being pure infrastructure suppliers and become total solution providers

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SOME VENDORS WILL TRY TO TIE-IN ALL COMPONENTComponents sold at or below operating cost

• In the more mature 2Gmarketplace, different vendors could often sell separate parts of the infrastructure profitably due to high levels of standardization

Service and maintenance

RANMiddleware and C/N Terminals

Service and maintenance

System integration

RAN Terminals

Applications

Gateway

Middleware

C/N

ImplicationStrategy of leading edge venders

Standardized unbundled solutions

Proprietary bundled solutions

• In the current 3Gmarketplace, vendors are Selling components below cost which are technically or logically tied into high value parts of the infrastructure

Before

Now

2G

2.5G! 3G

APSRAN C/N MW

Some vendors are providing components below cost which are tied into high value service-based parts of the network

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17

HIGHEST REVENUE GROWTH WILL COME FROM MIDDLEWARE Mobile internet revenue growth by enabling technology

* Includes O/S sales** CAGR based on smallest to largest values within each range

Source: McKinsey

20032000

Estimated U.S. and European mobile data revenueUSD billions

4–6

11–20

<1

5–8

0

7–10

2

7–12

InfrastructureGateway and M/W

Application software

End user devices*

16–50%

46–64%

105–123% 37–57%

Products

Value-added

services

• This estimate shows a market growth in the U.S. and Europe of at least 34 bnUS$ by 2003

Security consulting

IT consulting and system integration

• Additional revenuecan be generated for players with local system integration and consulting resources

Key implications

CAGR**

Highest CAGRs

APSRAN C/N MW

The largest value to be captured lies in the middleware and application software. This can be supplemented and maximized through the provision of sales & maintenance and system integration

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18

AGENDA

Migration from GSM to UMTS: What is UMTS, and what will steadily happen?

What will UMTS be used for?

UMTS Licenses: trick or treat?

How will it change the industry?

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UMTS WILL INCREASE THE AVAILABLE CAPACITY, MAKING ROOM FOR MORE USERS AND MORE USAGE

Capacity availabilityMbps/cell

~12

2,3

0,7

0,7

0

100

200

300

400

0 50 100 150

Capacity/userKbps

Simultaneous users per base station

EDGE*

GPRS*GSM*

UMTS**

* Assuming 8 timeslots/TRX and 12TRX/BTS (high for GSM today, could be as high as 20TRX/BTS in the future), also assuming 14.4Kbpsper time slot for GPRS and 48Kbps for EDGE. EDGE is very sensit ive to the speed at which the user moves

** Assuming three directional cell with 3 times 4Mbps (12Mbps for one BTS)Source: GSM Association, ITU, Ericsson

GPRS

EDGE

UMTS

ESTIMATE

GSM

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20

80 s

17 s

4.2 s

56 min

39 h

926 h

18 s

3.8 s

1 s

8.7 h

206 h

2.1 s

0.4 s

0.1 s

59 min

23 h

* Assumed size of email = 5 KB, web page = 20 KB, picture = 100 KB, MP3 song = 4 MB, MTV video = 170 MB, Movie = 4 GB; 8 bits per byte** Assumed 9.6kbps*** Assumed 43.2kbps, but GPRS will only support “best effort” speed in the beginning meaning that users will not be guaranteed a certain speed

**** Assumed 384kbps, standard for walking speed

Live casting speed requiredKbps

1,000

28

128

4,000

500

Audio

Video conferencing

Video (high resolution)

GPRS 43kbps

EDGE 144kbps

UMTS384kbps

28

UMTS WILL ENHANCE MOBILE DATA SERVICES THROUGH ITS ACCESS SPEED

Reduction due to lower quality acceptable on mobile device – e.g., smaller screen

Acceptable on mobile device

Downloading time*

E-mail

MTV video

Movie

Audio song

Picture

Web page

GSM**

?

GPRS***

??

12.5 min

UMTS****

83 s

????

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… FOUR KEY CHARACTERISTICS WILL MAKE MOBILE DEVICES AN ESSENTIAL PART OF DAILY LIFE (1/4)

Reachability

• Get e-mails immediately and wherever you are

• Monitor stock price movements and trade online

Microsoft­ 5$

Microsoft­ 5$

Microsoft­ 5$

Microsoft­ 5$

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FOUR KEY CHARACTERISTICS WILL MAKE MOBILE DEVICES AN ESSENTIAL PART OF DAILY LIFE (2/4)

Reachability

• Buy while on the move

• Book return flight and rental car

• Compare prices when shopping

Mobility

Milan-StockholmSAS 1425 290200

13°° No delayLevis 501 at $30at wap.levis.com

Milan-StockholmSAS 1425 290200

13°° No delayLevis 501 at $30at wap .levis.com

Milan-StockholmSAS 1425 290200

13°° No delayLevis 501 at $30at wap .levis.com

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23

FOUR KEY CHARACTERISTICS WILL MAKE MOBILE DEVICES AN ESSENTIAL PART OF DAILY LIFE (3/4)

Reachability

• Find your friends

• Locate closest gas station, shop or pharmacy

• Pay your car insurance per mile, time and location

Mobility

Positioning

Closest gas station 5 Km ahead

McDonald’s on route 95 has promotion

Closest gas station 5 Km ahead

McDonald’s on route 95 has promotion

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FOUR KEY CHARACTERISTICS WILL MAKE MOBILE DEVICES AN ESSENTIAL PART OF DAILY LIFE (4/4)

Reachability

• Easily pay for Internet content

• Use as password or key card

• Replace cash or credit card

Mobility

Positioning

Identification

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25

Choose 1

Source: DoCoMo

M Y M E N U

1.Weather2.Gourmet Navi.

3.News Express

4.Mobile Banking

Push Content Delivered

Choose 3 Choose 1 Choose 4

Choose 1 Choose 2 Choose 1

Beep!

Setting by User Operation

EXAMPLE OF I -MODE SERVICE: WEATHER FORECAST

WELCOME toWeather news1.Today's Forecast2.Weekly Forecast3.Rainfall Alarm

Warn you when rainfall probabilitygoes over your setting percentage.1.Choose AREA2.Your AREA

Area Choice1.Saitama2.Ibaragi3.Chiba4.Tokyo5.Kanagawa

Area Choice1.Downtown2.East Tama3.West Tama4.Izu Islands North5.Izu Islands South

Thank you for paying for RainfallAlarm

1.OK, Next2.Cancel

Trigger Settings1.1 02.9 %3.8 %4.7 %5.6 %

1998/4/7 12:00pmRainfall Alarm

Rainfall Probabilityin Tokyo

OVER 60 %

PAY INFOYou’ll be chargedfor getting this Info.1.Cancel2.$3.00 per month

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MOBILE INTERNET IS HERE - AMAZON GOES WIRELESS!

Fixed

• Buy books through internet with amazon.Com

Mobile

• Act on a book or music tip immediately• Confirm the status of auction items• Order anything, anywhere, anytime!

EXAMPLE: US

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AGENDA

Migration from GSM to UMTS: What is UMTS, and what will steadily happen?

What will UMTS be used for?

UMTS Licenses: trick or treat?

How will it change the industry?

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NUMBER OF UMTS LICENSES IN SELECTED COUNTRIES

* Main terms already set** Plus over 200 local GSM operators

*** 2000 forecastsSource: ING Barings; Bear Steanus

Countries where licenses have been already issued

Country

FinlandFrance*UKSpain

Mobile penetration

70%40%50%48%

Number of GSM operators

3343

Number of licenses

4454

Awarded licenses formula

n + 1n + 1n + 1n + 1

BelgiumDenmarkGreecePortugal

32%52%50%48%

3433

4544

n + 1 n + 1 n + 1n + 1

SwedenSwitzerland TurkeySloveniaEgyptAustriaGermanyIrelandRussiaIsrael

57%43%18%35%***2%

52%43%37%11%60%

33322442

2**1

44433

5-66444

n + 1 n + 1 n + 1n + 1n + 1n + 1/ n + 2n + 2n + 2n + 2n + 3 (exception)

NetherlandsNorwayCzech Republic HungaryItaly

52%62%28%23%53%

53334

5333

4-5

n nnnn + 1

(national GSM licenses)

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LICENSE PRICES (EXPECTED AND ACTUAL) IN VARIOUS COUNTRIES ARE MAJOR

* Forecasts for 2000** Governments' forecasts

*** Based on reserve price per license (min. budget revenue)Source: Press releases; analysts' reports; team analysis

Country

Total budget revenueUSD mln

Price per licenseUSDmln

Price per capitaUSD

Price per subscriberUSD

Price per USD of ARPUUSD mln

Spain

Italy

UK

France

Finland

Netherlands

Germany

Austria

450

10,000***

32,000

18,000

2

2,250

45,000

2,000**

3,300*

110

2,000

6,400

4,500

0.5

450

7,600

400

660-825

10

180

540

320

0.4

140

560

250

85

20

330

1,090

790

0.6

280

1,290

490

500Poland

GDP per capitaUSD

Price /GDPPercent

16,068

22,698

24,980

27,029

27,939

28,074

28,451

28,944

4,100

1

17

49

23

0.004

4

69

n/a

9

0.1%

0.8%

2.2%

1.1%

0.001%

0.5%

1.9%

0.9%

2.1%

German license cost was 4 times the cost of the Euro tunnel

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AUCTIONS HAVE CAUSED MAJOR COST INCREASES FOR MOST OPERATORS

* Out of 72 operators, 13 (5 in U.K., 4 in Spain, 4 in Finland) have been selectedSource: McKinsey analysis

Number of operators bidding for 3G in EuropePercent

60

5

35

“Auction”

Undecided

“Beauty contest”

100% = 72*

500

22,000

Total license cost (U.K. example) GBP Millions

Originally expected

price

Final auctions

price

44 times higher

Typically used in scandinavian countries and Southern Europe; keeps value with the operators which allows investments to become a Pan-European player

Typically used in U.K., Germany, Belgium; gives value to the government and makes investments more difficult

Regulatory influence has caused licensing cost for UMTS to be much higher than originally expected

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HIGH LICENSE PRICING CAUSED DECLINE IN SHARE PRICES OF DT, BT AND KPN

Source: Team analysis

BT KPN

UK

Netherlands

Germany

5.90

0.40

7.70

14

DT

5.90

0.35

7.80

14

–

0.50

5.80

6

Amounts spent by BT, DT and KPN on licenses in the UK, Netherlands and GermanyUSD billion

40.0

60.0

80.0

100.0

120.0

140.0

160.0

03

/01

/20

00

10

/01

/20

00

17

/01

/20

00

24

/01

/20

00

31

/01

/20

00

07

/02

/20

00

14

/02

/20

00

21

/02

/20

00

28

/02

/20

00

06

/03

/20

00

13

/03

/20

00

20

/03

/20

00

27

/03

/20

00

03

/04

/20

00

10

/04

/20

00

17

/04

/20

00

24

/04

/20

00

01

/05

/20

00

08

/05

/20

00

15

/05

/20

00

22

/05

/20

00

29

/05

/20

00

05

/06

/20

00

12

/06

/20

00

19

/06

/20

00

26

/06

/20

00

03

/07

/20

00

10

/07

/20

00

17

/07

/20

00

24

/07

/20

00

31

/07

/20

00

07

/08

/20

00

14

/08

/20

00

21

/08

/20

00

28

/08

/20

00

DTKPN

BT

British auction begins

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32

* License already issuedSource: NEC, McKinsey analysis

LICENSING HAS FORCED COMMERCIALIZATION OF UMTS AS EARLY AS Q1, 2002

License issue

Most major countries will issue licenses by Q1, 2001 in western Europe, with Asia not far behind

Most of Western Europe and South Korea, Hong Kong will launch their

services around Q1, 2002

Commercial availability

There are 6 to 12 months because vendors tend to select before and after license issues

South KoreaHong KongTaiwanThailandSingaporeChina

03

Eu

rop

e A

sia

4321432143Q2

02012000

UKFranceGermanySpain*ItalyNetherlandsBelgium Finland*SwedenNorwaySwitzerland

?

Or

?

? ?

In addition, the early use of the spectrum (January 1, 2002) has become essential. Consequently, vendor selection in Europe has been brought forward to as early as Q2, 2000~ Q1, 2001. Asia’s expected vendor selection starts in earnest in Q1, 2001

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33

HOWEVER, THERE REMAIN MANY UNCERTAINTIES OVER THE ROLL OUT OF UMTS

Issue Impact on 3G

• Availability and price• 3G - 2.5G - 2G / saving

• Hold back market development• Provide 3G coverage only

Terminals

• Timing• Degree of standardization

• Delay infrastructure deployment• Increase equipment cost

Standards

• Coverage requirement• Roaming requirement• Licensing process

• Increase network investment• Impact competitiveness• Delay deployment and increase cost

Licenses

• Deployment of 2.5G• Availability of 3G equipment • Delay in need and resources for 3G

deployment

Networks

• Readiness for mobile data• Willingness to pay• Competing access

technologies

• Delay market take up• Reduce expected margins

Customer demand

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ALL THIS IN THE MIDDLE OF MANY MORE UNCERTAIN TECHNOLOGY CHOICES TO BE MADE BY OPERATORS

GatewaysServiceService

SwitchingSwitching

TransportTransport

PhysicalPhysical

Value-addedwholesale

Connectivity wholesale

Capacity wholesale

Infrastructure wholesale

Value-addedvoice / data

Leased lines

Not applicable

Backbone Edge Access

Radio

FTTC

PON

IP

MPLS

ATM

PSTN

VPN

IN

Caching

WDM

SDH

PDH

ADSL

LMDS

VDSL

UMTS

Offices

Fiber infrastructure

Local loop

Servers

CORBA

Frame relay

Connectivity retail / VPN

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250 120-150

120–180

490-580

NEVERTHELESS, INCREMENTAL COSTS OF UMTS WILL REMAIN HIGH DRIVEN BY THE NEED FOR NEW SPECTRUM, NEW NETWORK AND NEW HANDSETS

Average cost per UMTS subscriber*USD / year

Handset(only if terminal

subsidy)

Network cost (Capex and

Opex)

Licence cost (assumed as 6–

9b for U.K., probably upper

limit)

Total cost

* Assuming network investment of 2 billion USD depreciated over 8 years, license cost 6-9 billion USD and depreciated over 10 years and average 5 million subscribers per operator. Also assuming a handset price of 500 USD with a 2 year lifetime.

Source: Ovum; Radio Spectrum International Consulting Ltd.; press search; Mckinsey analysis

ESTIMATE

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AS A RESULT, UNDER CURRENT ASSUMPTIONS, HIGH LICENSE FEES COULD SIGNIFICANTLY INCREASE THE FINANCIAL RISKS

Source: RA 3G auction Web site; McKinsey analysis

Assumptions

• Licence fee: 7 billion USD

• Total capex over 10 years: 2.5 billion USD

• Average revenue/subscriber: 60 USD per month (currently ~40 USD)

• EBIT margin 30% at Year 10

• 90% of population within reach of service

PRELIMINARYESTIMATE

• Breakeven market penetration needed per licence 15-20%

• Marginal operators at risk under those assumptions

Need to consider other sources of value creation

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-15

-10

-5

0

5

10

15

2000 2005 2010 2015 2020

GERMAN UMTS MARKET: BREAK-EVEN "BACK OF THE ENVELOP"(ARPU= 49 EUR)

Years

Cumulated discounted cash-flow(b EUR)

30%

17%

10%

5%

Market share

Consolidation will be inevitable among mobile operators

EXAMPLE

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AGENDA

Migration from GSM to UMTS: What is UMTS, and what will steadily happen?

What will UMTS be used for?

UMTS Licences: trick or treat?

How will it change the telecom industry?

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Part of pan -European strategy

• Economies of scale • Drive to build scale in face of increasing

consolidation of operators

Important part of fixed-mobile substitution

strategy• Capacity needed to aggressively drive fixed

mobile substitution

Revenues from new sources and integration in

value chain

• Machine to machine• Fleet management (e.g., for trucks and taxis) • M-commerce

OTHER SOURCES OF VALUE CREATION NEED TO BE CONSIDERED BY THE BIDDERS

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ACCELERATING CONSOLIDATION AND BECOMING PAN -EUROPEAN IS THEREFORE A NATURAL CONSEQUENCE

North America

Verizon Wireless (U.S.,45%,1999)

Voicestream(U.S.,100%,2000)

Rogers CantelMobile (Canada,33%,99)

* Still subject to regulatory approval** Subsidiary of SK Telecom*** Under discussion

Source: Team analysis

UK

One to One(100%,99)

Orange(100%,00)

Hutchison 3G UK (20%,00)

Hutchison 3G UK (59%,00)

Germany France

Mannesman (99%,99)

Viag (45%,99)Cegetel (SFR)(26%,96)

Cegetel (SFR)(20%,94)

Mobicom(29%,00)

DeutcheTelekom

E–Plus (23%,99)

Support KPN/E Plus

Support a new*** operator with Vivendi

Others

Asia – Pacific

Japan Others

Omnitel (76%,Italy)Airtel (55%,Spain,00*) Libertel (70%, Nether -lands, 95) etc.

J-Phone (25%,99)

Vodafone(91%,Australia,96)Vodatone NZ (10%,NZ,98)Shinsegi** (12%,S.Korea,94) etc.

Blutel (21%,Italy,94)Telfort(100%,Nether -land,96)Airtel(45%,Spain,00*)***

SmarTone(20%,HongKong,99)LGTelecome(24%,S.Korea,98)Maxis (33%,Malaysia,98) etc.

Maxmobile(100%,Austria,95)Radio Mobile (61%,Czech,99)PTC (45%,Poland,00)

Dutchtone (50%,Netherlands,98)Wind (25%,Italy,98)Mobistar (51%,Belgium, 95) etc. BPL Mobil

(26%,India)

SK Telecom (15~20%,S.Korea,00)***Hutchison (19%,Hong Kong,99) etc.

KPN (15%,Netherlands, 00)

DoCoMo

DMT(46%,Denmark)

Hutchinson

Investment (% share, year of deal)

Support (no direct investment)

J-Phone (20%,94)BT

Vodafone

Europe

France Telecom

Bell South

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OTHER SOURCES OF VALUE CREATION NEED TO BE CONSIDERED BY THE BIDDERS

Part of pan -European strategy

• Economies of scale • Drive to build scale in face of increasing

consolidation of operators

Important part of fixed-mobile substitution

strategy• Capacity needed to aggressively drive

fixed mobile substitution

Revenues from new sources and integration in

value chain

• Machine to machine• Fleet management (e.g., for trucks and taxis) • M-commerce

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FIXED – MOBILE SUBSTITUTION POTENTIAL IS VERY HIGH IN TERMS OF TRAFFIC VOLUME...

Average outgoing traffic per user 1998, (European cellular market) Minutes

70

100100

170

Mobile Fixed Mobile + Fixed

Source: Clippings, Financial reports

EXAMPLE

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… AND IN TERMS OF VALUE

100

280

Value if migrating 50% of fixed traffic into mobile with current tariffs

Value with today’s traffic and tariffs

Source: Salomon Brothers, McKinsey analysis

Index (European cellular market)

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TRANSITION MANAGEMENT IS CRITICAL TO MAXIMIZE THE VALUE CAPTURE

Source: Salomon Brothers, McKinsey analysis

Index (European cellular market)

100

75

180

Prices drop 70%(price level equal to current fixed price)

Current market capitalization: prices drop 55% comparedto today’s level

Value if migrating 50% of fixed traffic into mobile

Value with today’s traffic and tariffs

280 Maximum value potential

Transition management critical to value capture• Brand and non- price elements of

value proposition• Focus on “cutting the wire” in

selected segments, e.g., youthand power users

• Careful price management

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Part of pan -European strategy

• Economies of scale • Drive to build scale in face of increasing

consolidation of operators

Important part of fixed-mobile substitution

strategy• Capacity needed to aggressively drive fixed

mobile substitution

Revenues from new sources and integration in

value chain

• Machine to machine• Fleet management (e.g., for trucks and taxis) • Mobile Portals

OTHER SOURCES OF VALUE CREATION NEED TO BE CONSIDERED BY THE BIDDERS

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ROLES IN THE MOBILE INTERNET SERVICES INDUSTRY

Creation Delivery

Content service provider Portal Transaction

platform

ISP/content adapter

Transport and access

End user

SIMPLIFIED

Role Provides• Standard

information services (news, weather, etc.)

• Interactive applications (messaging, entertainment, e.g., games etc.)

• Commercials and push information

Facilitates navigation• Search engine• Personali-

zation

• Makes it possible to bill customers for purchases

• Provides connection from mobile network to Internet

• Adapts fixed Internet content to mobile

• Provides the mobile network

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PLAYERS ARE FIGHTING TO CAPTURE NEW SOURCE OF REVENUE IN THE VALUE CHAIN

Media players

Internet portals

Content service provider Portal Transaction

platformISP/content adapter

Transport and access

Banks

Online retailers

Start-ups

Telecom operators

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THE BATTLE FOR CUSTOMER OWNERSHIP WILL INVOLVE THE FOLLOWING PLAYERS

Internet portalsTelecom operators

Media players Start-ups Online retailers and banks

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TELECOM OPERATORS WANT TO BE PORTALS

Starting position Examples of moves

Strengths

Weaknesses

• Established customer base

• Billing relationship• Customer knowledge• Control SIM card

settings• Location information

• Weak content skills• Limited in-house content• Slow organization• Difficult to use stock as

acquisition currency• Limited experience with

alliances

• ZED closed mobile portal and wireless payment applications

• MyDof open portal (No 1 mobile portal of Sweden)

• DJuice open WAP portal • Purchase cinema tickets with

regular phones

• ItiAchat is a payment system where the GSM is used as payment terminal

• Offers travel services, shopping, traffic information etc.

• Genie - Offers the latest news headlines, information on sport, updates on finance , reviews on films, plays and restaurants etc.

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INTERNET PORTALS WANT TO ENSURE ACCESS TO THE CUSTOMER

Starting position Example of moves

Strengths

Weaknesses

• Large content base• Established advertiser

base• Strong brands• Stock can be used for

acquisition• Large experience with

alliances• Fast-moving

organizations

• No billing relationship with customers

• Banner advertising may not work on small screen

• No location information

• Alliances to secure access to consumers in the mobile world– Device manufacturers, e.g.,

• Siemens• Motorola• Palm• Hewlett-Packard

– Operators, e.g.,• Telenor (Norway)• Sprint (US)• BellMobility (Canada)• D2 Mannesman (Germany)• Radiolinja (Finland)• Telecom Italia Mobile (Italy)• New World Mobility (Hong-Kong)

• Partnerships with Ericsson and Nokia to make a WAP portal

• Recently acquired Cellphone Warehouse (GEAB)

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CONTENT PROVIDERS WANT TO BECOME PORTALS

Starting position Examples of moves

• The Schibsted WAP portal with the latest news headlines, information on sport etc.

• CNN offers all kinds of news

• Financial Times offers financial news

• Strong brands• Large content base and

content relationships

• Slow, conservative organizations

• Difficult to use stock as acquisition currency

Strengths

Weaknesses

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START-UPS TRY TO ESTABLISH THEMSELVES AS CONTENT PROVIDERS OR PORTALS

Starting position Examples of moves

Strengths

Weaknesses

• No existing business models to cannibalize

• Specifically developed for mobile

• Lack of professional management talent

• Usually technology focused with limited content expertise

• Cash poor

• Room 33 – offers news, city guides, weather forecasts etc.

• Breathe (UK) – offers information about sport, lifestyle, journey, commerce and news

• iobox - offers ring tones and logos for Nokia phones

• 12snap - offers wireless online auctions through cell broadcast and SMS in Germany in cooperation with D2 and Nokia

• iwirelessgames.com - develops games for the mobile Internet

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ONLINE RETAILERS AND BANKS WANT TO ENSURE ACCESS TO THE CUSTOMER

Starting position Examples of moves

Strengths

Weaknesses

• Customer base• Strong relationship with

customers (especially banks)

• Financial resources

• Incumbents have slow organizations and face cannibalization issues

• Limited technology experience

• Limited in-house content

• Solo - electronic banking system

• Offers the possibility to buy books using an Internet-ready phone

• Customers can trade on eBay using Sprint Internet-ready mobile phones

• Barclays Bank – mobile banking on the Cellnet’s network since 1997. Special handset used. 150,000 loyal customers

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THE BATTLE HAS STARTED

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55

LIKELY WINNERS

Likely winner(s)

Rationale

Content service provider

Portal Transaction platform

ISP/content adapter

Transport and access

• Media players + startups

• Media players can relatively easy convert standard information from fixed Internet content

• However, truly innovative interactive applications are likely to come from startups

• Mobile operators control the SIM settings

• Internet portals are more nimble, have brands and can harmonize fixed and mobile interfaces

• With their current network infrastructures, mobile operators completely dominate transport and access

• Mobile operators + Internet portals

• Mobile operators

• Mobile operators

• Closely related to mobile network

• Mobile operators + banks

• Mobile operators can bill subscribers on behalf of third parties

• Banks have established relationships with transaction parties and are more secure

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BUSINESS PORTFOLIO OF AN INTEGRATED TELCO

High

Low

Low High

Growth

EBITDA Contribution

• Integrated telcos have a very balanced portfolio of businesses…

• The driver of the business is wireless telephony

• …but the big challenge is how to reinvent the traditional business of wireline telephony

Internet Wireless Telephony

Wireline Telephony

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DEBT LEVELS OF LEADING TELCOS HAVE INCREASED DRAMATICALLY…

4

70

13

33

60

2

50

22

24

2

18

64

AT&T

End 1998

End 2000*

France Telecom

Deutsche Telekom

BT

WorldCom

Vodafone

* ForecastSource: The Economist

US $ billions

• Costly expansion strategies will be difficult to finance

• Operators will have to reduce level of debt by all means

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S&P rating 01/2000

S&P rating 01/2001

Downgraded by

France Telecom AA A 3 notches British Telecom AA+ A 4 notches Sonera A+ A 1 notch Deutsche Telekom AA- A- 3 notches Vodafone A A - AT&T AA- A 2 notches KPN AA BBB+ 5 notches Wolrdcom A- A- - SBC AA AA- 1 notch Telefonica A+ A+ -

… AND ON TOP OF THAT LEADING TELCOS HAVE SEEN THEIR RATING DOWNGRADED

Rating downgrades reduces access to the bond market and pushes up borrowing costs (approximately 20 basis points increase for a downgrade by 1 notch). For these companies, this means additional interest charges of USD 1.8bn per annum.

Rating downgrades reduces access to the bond market and pushes up borrowing costs (approximately 20 basis points increase for a downgrade by 1 notch). For these companies, this means additional interest charges of USD 1.8bn per annum.

* FootnoteSource:Sources

Note: borrowing cost difference between AA and A is about 60-70 bp. Net debt is estimated to be 50% above December 99 level ie about USD 300bn.Source: McKinsey analysis .

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0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70Sales (1999)

Billions of USD

Source:Datastream/Bloomberg

Exodus

Vodafone

Level 3

Qwest

Global CrossingSonera

Equant

PT

T.Dan

KPNTelefónica TI

BT

FT

Verizon

DT

Worldcom SBC AT&T

Focused operators

Bellsouth

“Small” integrated operators “Large” integrated operators

Market value January 2000/Sales 1999

CHANGES IN THE STRATEGIC CONTROL MAPSituation as of January 1st, 2000

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* Sales as of 31/3/2000Source:Datastream/Bloomberg/Media General Financial Services

0

15

30

45

60

0 2 4 6 8 10 12 14 16 18

Larger players have held their positions, consolidating their growth expectations

Qwest

SalesBillions of USD

January 1st, 2000

September 30 th, 2000

Major corrections for smaller players due to doubts on their potential for growth and/or income

Exodus

Level 3

Global CrossingSonera

Vodafone*

Value/Sales

CHANGES IN THE STRATEGIC CONTROL MAPFocused operators: two groups emerging?

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0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8 9 10

STRATEGIC CONTROL MAPSmall integrated players

“Wait and see”

Efforts to gain focus unsuccessful (?) and penalized

Value/Sales

Source: Bloomberg

Portugal Telecom

Swisscom KPN

January 1st, 2000

September 30th, 2000

Tele Denmark

SalesBillions of USD

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0

1

2

3

4

5

6

7

8

9

10

0 10 20 30 4 0 50 60 70

Telefónica

* Sales as of 30/6/2000Source:Datastream/Bloomberg/Operator reports

FT*

TI

AT&T

BT

DT

Integrated operators“meeting expectations”

Integrated operators “under scrutiny”

Worldcom

Value/Sales

SalesBillions of USD

SBCVerizon

STRATEGIC CONTROL MAPLarge integrated players

January 1st, 2000

September 30 th, 2000

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END