Marco Troncone, Principal - Key4biz · Marco Troncone, Principal Extract ... A.T. Kearney/WirelessConference-EXTRACT/21.04.05 7 The Fixed broad-band access will be the success factor

Broadband market perspectives in the Italian scenario

Milan, 21 April 2005

Marco Troncone, Principal

Extract

© 2005

2A.T. Kearney/Wireless Conference - EXTRACT/21.04.05


n Expected evolution of the Italian broadband market

n The way forward: the 'x-play' challenge

© 2005


Overall Italian fixed market is expected to grow at about 4% driven by Internet & Data strong growth mainly in consumer segments

13,1 13,0 13,0 12,9 12,7 12,6

1,9 2,6 3,3 4,0 4,7 5,41,9 2,0 2,2 2,3 2,5 2,716,9 17,7 18,4 19,2 19,9 20,6

2004 2005 2006 2007 2008 2009

Voice (1)

Internet (2)

Data (3)

Overall Fixed Market by service,€ bln

(1) includes Fixed VAS (2) includes Internet content / entertainment services(3) includes Data Transmission and Web Services

Sources: IDC, Forrester, Ovum, A.T.Kearney Analysis

CAGR

4,1%

7,3%

22,6%

-0,7%

7,7 8,1 8,5 8,9 9,3 9,7

9,2 9,6 9,9 10,3 10,6 10,9

16,9 17,7 18,4 19,2 19,9 20,6

2004 2005 2006 2007 2008 2009

Consumer

Business

CAGR

4,1%

3,5%

4,8%

Overall Fixed Market by segment,€ bln

§ Voice market slightly declining due to substitution effect between fixed and mobile and continuous price competition§ Internet market showing strong growth rate sustained by broadband penetration and new video services§ Data growth explained in particular by the development of innovative IP-based data and web services market§ Consumer segment showing slightly higher contribution to overall growth

© 2005


Internet & Data Market growth will be mainly pushed by broadbandexpansion in consumer segment

0,6 0,6 0,5 0,4 0,3 0,3

1,21,9 2,5 3,1 3,6 4,1

0,10,1

0,30,5

0,81,0

1,9

2

2,2

2,3

2,5

2,7

3,8

4,75,4

6,3

7,2

8,1

2004 2005 2006 2007 2008 2009

1,3 1,7 2,22,8 3,3

3,92,5

2,93,2

3,53,8

4,2

3,8

4,75,4

6,3

7,2

8,1

2004 2005 2006 2007 2008 2009

Cons.

Bus.

Data

Internet BB

Internet & Data Market by service,€ bln

Internet & Data Market by segment,€ blnCAGR

16,1%

26,9%

-15,5%

7,3%

CAGR

16,1%

10,7%

24,5%

§ Consumer growth is driven by ADSL penetration, while traditional data continue to play an important role for the business segment with particular focus on IP VPN services (CAGR 2004-09: 18%) and ASP / Streaming (CAGR 2004-09: 25%)

§ Internet dial-up reducing over time due to progressive migration to broad-band accesses

§ Broadband market growth mainly fostered by low-entry barriers xDSL accesses and new content services, in particular by Pay-TV / VoD offerings

§ Data segment growing mainly due to web services and IP-VPN for business customers

Internet NB

Sources: IDC, Ovum, ATK Analysis

62,8%

(1) includes Internet entertainment services (PayTV, VoD and other content services)

Content (1)

© 2005


2,9 4,1 5,5 6,98,4 9,7

0,50,7

0,91,2

1,51,7

0,70,9

1,2

1,5

1,81,9

4,15,8

7,6

9,6

11,6

13,4

2004 2005 2006 2007 2008 2009

Broadband access market by segment,(mln connections)

CAGR

27%

27%

27%

23%

Broadband access market fast growth will be mostly rolled out through DSL and will be subject to significant price reduction at comparable bandwidth

§ BB penetration in the consumer segment growing significantly but limited by lower PC adoption compared to main EU peers (eg. 61% vs. 69% for Germany and UK, 73% for Netherlands)

§ Most broadband growth explained by xDSL accesses, through both wholesale and direct options

§ Limited growth of fiber also confirmed by Fastweb customer base evolution and projections (increasing ULL xDSL share from current 60%)

§ Market value growth only partially limited by price reduction, expected to decrease only by 4% / year due to increasing access performance (larger bandwidth availability)

Sources: IDC, Forrester, Ovum, ABN Amro, ATK Analysis* business connections intended as residential equivalent connections

3,85,4

7,29,1

11,112,7

0,40,4

0,4

0,5

0,60,6

4,1

13,4

11,69,6

7,65,8

2004 2005 2006 2007 2008 2009

CAGR

12%

28%

27%

DSL

Fiber

Broadband access market by technology(mln connections)

Resid.

SoHo

Busin.

© 2005



n Expected evolution of the Italian broadband market

n The way forward: the 'x-play' challenge

© 2005


The Fixed broad-band access will be the success factor both in the Residential market enabling 3-play offers and on Business segments with voice-data integration

2-play, 3-play offer Voice and Data integrated services

© 2005


Voice / SMS 9,6

> 2 Mbps

MMS

0 mFixed

WAN(National mobile)

4056

64

200

512

300

1024

Data(low)

→ 300 mLAN

→ 30 kmMAN

WAN(Regional mobile)

Wi-Fi

2048

Mobile

Wireless broad-band technologies occupy an intermediate mobility position between fixed and mobile, allowing more complex and faster applications

ConceptualTech evolution

GSM

GPRS

Fixed

Wireless

Satelite

RDIS

Analogue

Cale

ADSL

POTS

Source: A.T. Kearney analysis

WiMax

UMTS

Applications Speed (Kbps)

Mobility

Data(Corporate

Broad Band)

Data( Residential Broad Band)

© 2005


MobileFixed

Wireless

Speed (Kbps)Applications

Voice / SMS 9,6 Kbps

> 2 Mbps

WAN(Mobile national)

Data(Corporate

Broad Band)

0 mFixed

Fixed-Mobile substitution of scope

These new Wireless broad-band technologies contribute to the convergence between fixed/ mobile and data/voice through fixed network extension, VoIP substitution and as mobile complement

Complem

ent to MobileEx

tens

ion

of fi

xed

netw

ork

VoIP VoIPSu

bstit

utio

n

Source: A.T. Kearney analysis

Conceptual

Mobility

© 2005


Convergence at product/service level is becoming a reality, especially in corporate markets, as customers demand more integrated solutions

Evolution Stage

Importanceof

Convergence

§ Convergence concept not developed yet

§ Focus on competition in individual service area

§ No workable business model

§ Convergence not attractive to customers

§ Means of differentiation§ Convergence replaces

simple fixed/mobile coupled services

§ Basic requirement for competition (Qualifier)- No convergence

service offering, no M/S

MainService

§ No convergence services

§ Mobile-based services- Mobile VPN- Long Distance Calls

§ Fixed/Mobile convergence service- Fixed Mobile VPN- One Mailbox- One Number- One Phone

§ Broadband convergence service - Seamless broadband data

service through “One”device

KSF § Customer base, partnership§ Cost vs Service quality§ Network competitiveness § Differentiated service toward customer needs

Feature§ Strength in mobility§ Mostly voice services, no

competition between fixed and mobile

§ Leveraging mobility, mobile service begins to threaten fixed services

§ As mobile service secured economies of scale, it begins to replace fixed serviceusing low price

§ Mobile enters data market§ Price and response to

customer needs (competitive contents) in the Access market become critical

§ As convergence begins, hybrid services started to emerge

§ Combination of low price (fixed) and mobility (mobile)

§ Integrated device and applications are critical factors

§ Blurred boundary between fixed and mobile

§ Seamless (between communication and other industries) Access service - Convergence improves,

competition in all industries

Emergence ofMobile Service

Stage 1

Fixed vs Mobile

Stage 2

Fixed/MobileCooperation

Stage 3

ConvergenceCompletion

Stage 4

© 2005


The integration of VoIP offering, viable also for shared-access customers, will accelerate the growth of broad-band

Client in Shared Access

Client in Shared Access

ADSL line:• Internet• Voice over IP• Video

Traditional voice line

IPalternative operator

PSTN

Telecom client

Telecom client

Simplified VoIPcall path

§ The integration of VoIP offering on shared access will enable to make available 2P / 3P offerings also for non full-ULL customers

§ For example, Italian market has recently experienced the launch of ‘indirect VoIPofferings’ by France Telecom (parla.it), running over an existing ADSL line

§ The integration of VoIP offering on shared access will enable to make available 2P / 3P offerings also for non full-ULL customers

§ For example, Italian market has recently experienced the launch of ‘indirect VoIPofferings’ by France Telecom (parla.it), running over an existing ADSL line

VoIP on shared access could be a trigger for customers experiencing an alternative

operator on voice, and finally decide to leave the incumbent for cheaper alternative offers

VoIP

© 2005


The VoIP over ADSL will open the competition on Voice: Italian market has recently experienced the launch of a VoIPoffering by France Telecom (parla.it) running over an existing ADSL, similar to US Vonage

Plug & Play adaptor sent by Vonage to the client:• Conversion of voice into IP packets• Routing of IP packets into Vonage network

US Vonage example

‘parla.it’ ADSL modem sent to the client:

• Substitution of ADSL provider’s modem with new ‘parla.it’modem to be performed by the client

• Standard analog handsets to be plugged to ‘parla.it’ modem

• Parla.it modem therefore performing:

–conversion of voice into IP packets

– routing of IP packets into Parla.it network

Vonage

Data

VoIP

© 2005


Recent examples confirm that an appealing Video offer delivered on ADSL will sustain the increase of broadband market share…

FastWeb example

Strategy on Video services:

nVideo as an appealing integration of Voice+Internet offernContents re-selling, no

productionnCost-plus pricing,

keeping low margins notto dissuade customer

Video

© 2005


…as well as contribute to operator revenues

17 17 2158

91 102 109

806783 788 795 807 803 802

4Q2002 1Q2003 2Q 2003 3Q 2003 4Q 2003 1Q2004 2Q2004

ARPU of Residential customers (€/year) ARPU video clients (€/year)

816865

894 908 911

19,1 €/month

353

229

123

2Q2004

10,3 €/month

29,4 €/month

Pay-TVSky

VODFastwebVideo

Access

Launch offer Sky

Clientevideo

805800

Source: e-Biscom dati societari, analisi A.T.Kearney

Video

Strong ARPU growth of FastWeb customers due to the launch of SKY Pay-TV

FastWeb example

© 2005


The penetration of digital video services will grow, 1 out of 5 households will access video services over broad-band

Split by access-platform

13%15%

16%17% 18% 18%

5%

8%

9%10%

19%

13%

3%

11%

0%

3%

5%7%

2004 2005 2006 2007 2008 2009 2010

13%

19%

24%

29%

34%

39%

44%

2004 2005 2006 2007 2008 2009 2010

Digital satellite

Digital terrestrial

Video over BB

Video

Total Penetration

Digital video services penetration on HH ( % )

© 2005


Mobility

Key players different positioning on capability to deliver integra-ted Voice and Internet offering both in mobility and in-office

Fax

Client Site B

Internet

Intranet

FixedPSTN

PSTNGateway

PC withvoice/Fax

IP Phone

Switch

IPRouter

PC withvoice/Fax

IP Phone

WiFiVoice and

Data

Voice and Data

Voice

Data

Mobile NW

Phone

Voice and Data

Client Site A

IPRouter

PSTNGateway

IP Phone

Switch

PC withvoice/Fax

Voice and Data WiFi

Illustrative

Medium Enterprise Key players positioningOne-phone

© 2005


Convergent operators can instead leverage on distinctive value proposition through innovative convergence technology on services / handsets

Voice and Data offer

Indoor

Full mobility

WiFivia ADSL

Standard mobile telephony, mobile

tariff schemes

Same tariff scheme as ‘Fixed

phone’ (VoIP), free in-office calls and low-cost data

transmission

One-phone

Segmented tariff on preferred area

leveraging VoIPWiFihotspot

Preferred-cell

WI-MAX /

Full coverage convergent

players offer

© 2005


Conclusions

n Broadband growth pace will be maintained: Italy will not lag behind

n The access market pie will remain a game for few players

n Market complexity is increasing and boundaries are blurring: broadband access as the integrating platform for other innovative service layers

n Triple-play offers are paving the way for 4P propositions, the next frontier

n In the convergent arena, broadband players will have to play a role, not necessarily the leading one

Documents

Marco Troncone, Principal - Key4biz · Marco Troncone, Principal Extract ... A.T. Kearney/WirelessConference-EXTRACT/21.04.05 7 The Fixed broad-band access will be the success factor