Reviving the fixed line

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Reviving the fixed line

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Triple-play slows mobile substitution and pushes broadband market consolidation

A “light content” strategy can boost growth and create value for telcos

A light content strategy can boost growth and create value for telcos

Telcos have the opportunity to the TV of the future, in partnership with media and

software companies as well as equipment manufacturers

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However, individual country scenarios show huge differences

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0 Introduction

8th edition

Arthur D. Little

–

Exane BNP Paribas study

2005 2004 2003 2002 2003 2004 2005 2006 2007 2008 2009 2002 2006 2007 2008 2009 « Facing off on convergence » « More efforts required » « Leaders hit back» « Back on the

road but who’s got the map ? » «Slowly but surely : No ARPU growth before 2005 » « Caution -work ahead »

« In the eye of the telecom-media

storm »

«Telecom-Internet-Media : Reviving the

fixed line” 70 companies interviewed in Europe 80 companies interviewed in Europe 50 companies interviewed in Europe 40 companies interviewed in Europe 40 companies interviewed in Europe 40 companies interviewed in Europe 90 companies interviewed in Europe 95 interviews in more than 80 companies in Europe

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0 Introduction

Arthur D. Little study 2009 vs. 2008: what has changed?

2008: “In the eye of the Telecom-Media storm” 2009: “Reviving the fixed line”

 50% of European will have mobile broadband

by 2012 and operator’s efforts will lead to a fixed

and mobile network convergence

 Triple-play limits fixed-mobile broadband

substitution and increases consolidation. Telcos are also threatened by cable and satellite

Telecom and media players will move towards

competition

Content is a promising lead with a 4 Bn€ revenue

t it b 2015 f E i b t It

p y

content distribution thanks to the all-IP

development

opportunity by 2015 for European incumbents. It remains however insufficient and highly

challenged by internet, cable and system players

 Telecom operators will sustain a growing

pressure on the value chain, mainly from

Internet and system players

 The current economic context is a window of

opportunity for telecom operators to develop

content related services mainly through partnerships

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Agenda

1 Triple-play: a success story in a “gloomy” telecom media ecosystem

2 Content: promising niches but content alone is insufficient and challenged

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Fixed revenues are increasingly under pressure due to the threat of mobile broadband

substitution and mounting competition from alternative players (cable or satellite TV / ISP)

Mobile broadband market share Pay TV operators broadband market share

12 4% 15% % pop 2006 2007 2008e 70% 7 5% 12,4% 10% 60% 50% 60% 2 7% 7,5% 6,0% 3,4% 5% 40% 33% 33% 30% 40% 2,7% 1,8% 1,4% 1,7% 0,4% 0,8% 0%

Austria Norway Spain UK France

14% 7% _6% 10% 20% Unlimited 7,2Mbit/s Unlimited 7,2Mbit/s Unlimited 3Mbit/s 5GB 7,2Mbit/s 1GB 7,2Mbit/s Offers 0%

US Belgium UK Austria Spain Germany France

Broadband market share of Pay TV operators (cable or satellite)

Source: Exane BNP Paribas, Arthur D Little analysis

Note: Offer benchmark Nov. 2008; Fair use policy applies to unlimited offers

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Triple-play offers have helped incumbent players to reduce fixed lines loss

Austria: Telekom Austria Sweden: TeliaSonera

80 100 100 150 20 40 60 50 0 50 -40 -20 0 -150 -100 -50 -80 -60 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 -250 -200 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08

Access lines ADSL TV Access lines ADSL TV

Halving the rate of line losses over the 2008–15 period would increase an incumbent operator’s

l ti b 27%

Source: Exane BNP Paribas, Arthur D Little analysis Note: net adds in K clients

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In France, telecom operators managed to protect fixed revenues thanks to triple-play offers,

through ARPU stabilization and lower competitive pressure on the fixed-broadband market

Broadband ARPU Consolidation

€ / month Competitive pressure (fixed lines)

3 700 4 000 55 50 45 3 100 3 400 45 40 35 2 500 2 800 30 25 20 2 200 2005 2006 2 007 2 008 20 Q1 04 Q3 04 Q1 05 Q3 05 Q1 06 Q3 06 Q1 07 Q3 07 Q1 08 Q3 08

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Agenda

1 Triple-play: a success story in a “gloomy” telecom media ecosystem

2 Content: promising niches but content alone is insufficient and challenged

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2 Content: promising niches but content alone is insufficient & challenged

With media usage shifting towards the internet and IP-based services, telcos can capture a

significant part of this new audience and the value created

Media usage evolution

h/week/capita Internet 1,6 2,1 54 52 54 New TV Internet Penetration Usage Radio / Traditional 47,2 3 -1,2 1,3 48 50 52 Radio / Press Traditional TV 44 46 Traditional Media +0,1 New usages : TV + Internet +6,7 40 42 Total 2004 Total 2007

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Content and related-services represent an additional 40% to the European Telecom market

Video Games³

Recorded Music4 11,4 Bn€

2008 TIME ecosystem across Europe1

Content & services 126 Mds€ Software 239 Mds€ TV services2 79 Bn € 12,3Bn€ -5,8% Software & computer services 3,4% +20% (+2%) (+6%)

Telecom market

330 Bn €

Filmed entertainment5 23,4 Bn€ +3,6% computer services 239 Bn € +6 % -1,6% Consumer electronics 69 Bn € Computer h d Telecom +5,4 % hardware 108 Bn € +3 % equipment 57 Bn € 5,4 % +1,8 % Hardware 234 Mds€ (+3%)

¹ Europe includes Western Europe & Russia ² includes Advertising, Pay Tv & licences

3 _{includes Console, online, mobile, PC games & advertising} 4 _{includes physical & digital distribution (online & mobile)}

5 _{includes box office, home video sell through( physical & online), rentals (in store & online)} (+3%)

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Advertising

Pay TV

VoD

Direct Impact

The « Light premium » strategy, which allows for differentiation and ARPU generation with low

investment, seems to be the best approach for telcos

illustrative Description -Cost ARPU Direct benefits Impact NPV 2015

High premium Exhaustive offer of latest movies and exclusive _{rights for most premium sports}

600M€ per year +++ 30€/month

- 176M€

Light premium

Exclusive selection of content with program costs representing15-25% of the average

i t t i hi h i t t -100-150M€ ARPU ++

+316M€

investment in high premium content 100-150M€

per year 10€/month

ARPU

Distribution Distribution of an offer which has been conceived _{and packaged by a content player} =

ARPU + ~10% of the pack

+130M€

pack

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Advertising Pay TV

VoD

New media consumption patterns have emerged leading to the growth of the VoD market

Delinearization Interactivity Fragmentation A di l ti i F DVR t ti i E (% HH) 7,5% _{9,5%10,9%11,2%} 4,5% 8,5% 11,3%_11,5% 11,6% 1,1%2,3%5,9% 80% 100%

Audience evolution in France

14% 16% DVR penetration in Europe (% HH) 96%93%92%91%89%89%88%_86%83% 60% 80% 8% 10% 12% 88%86%83% 20% 40% 2% 4% 6% 0% 1999 200 0 200 1 200 2 200 3 200 4 200 5 200 6 200 7 DTT channels Others 0% 2000 2001 2002 2003 2004 2005 2006 2007 France Germany Italy UK

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Advertising Pay TV

VoD

VOD, an attractive market for telecom operators, but with high competitive pressure

V D l i th USA & E

VOD revenues in Europe VoD players in the USA & Europe

along their position in the media-telco value chain

M€ _Producti _Edition _Diffusion Equipme

nt 1650 1500 2000 200 on nt USA 200 2003 2008 1150 1000 1500 CAGR 07-11 +52% 2007 2007 2005 2005 2003 2008 2008 2001 470 770 500 CAGR 05-06 +89% Europe 2007 2001 aux US 2005 2002 110 215 470 60 0 2005 2006 2007 2008p 2009p 2010p 2011p +89% 2005 2007 2006 2007 2002 2007

2005 2006 2007 2008p 2009p 2010p 2011p

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Advertising

VoD

Pay TV

In terms of positioning along key success factors for the Pay TV and video market, telcos are

at par with internet and media players but cable operators have some advantages

*

TV / VoD key success factors Telco Cable Internet Media System

Price & offer simplicity

Depth & freshness of catalogues

Visioning Quality Visioning Quality

Ease of use

Directly on TV

User friendly search

Source: Financials reports, Nielsen Net Ratings, Interviews, Arthur D. Little analysis

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Telecom operator to preserve the value of their triple-play customer base and to capture

additional value from opportunities in content and related services

1,0

Threats and opportunities for incumbents fixed revenues by 2015

-0,5 0,0 0,5 - 1.6 + 1.0 -1.0 +1.0 -2,0 -1,5 -1,0

Threats from internet and system players Threat from cable and Opportunity from content and -0.6

• Threats from Internet players

• Their video offer could lead to a price pressure on operators tripleplay

• Investment in servers (ex Google’ Openedge • Pay-TV

Threats from internet and system players Threat from cable and satellite actors

Opportunity from content and related services

• Cable and satellite players

increaseing their fixed broadband market share

• Investment in servers (ex. Google Openedge projet)

• Threats from System players

• User friendly gaming consoles with services (VoD, games…)

• Connected TV (ex. YouTube available on

• VoD

• Local and targeted advertising

Source: ARCEP, DigiWorld 2008, PWC, JPMorgan, Arthur D Little analysis Connected TV (ex. YouTube available on

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By 2015, content and related services will represent a revenue opportunity of 4Md€ for

European incumbents, 65% of which are generated by Pay-TV

Revenue opportunity from content and services for a European incumbent

Pay-TV VoD Adver- Total tising

 Incumbent’s content revenue potential in Europe is

estimated at ~4 Mds€ in 2015

 A content strategy could result in an additional Revenue opportunity in 2015 in Europe (in Bn €) 2.6 0.9 0.5 4 tising

 A content strategy could result in an additional

CAGR of 1% over the period of 2008-2015

 The total value generated by content represents ~7%

of an incumbent’s 2008 revenue

€/month per 2008 fixed line

(in Bn €)

1,8 0,6 0,3 2,7

 Pay-TV alone represents 65% of the potential gain.

This opportunity varies between countries

 Th idl i b t d d V D d

Opportunity as a % of 2008e_revenue

(%)

4,8 1,6 0,8 7,2

 The rapidly growing but crowded VoD and

advertising markets represent a smaller share of this opportunity

Impact on

2008-2015 CAGR (%) 0,7 0,2 0,1 1,0

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Agenda

1 Triple-play: a success story in a “gloomy” telecom media ecosystem

2 Content: promising niches but content alone is insufficient and challenged

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3 Operators’ response: content related services namely through partnerships facilitated by the crisis

The economical crisis: an opportunity for telcos ?

Telcos with and expected revenue decline of 2 5% (fi d i b t ) i 2009 l

More time to react and forge partnerships as traditional competitors less aggressive

Advertising evolution: - 10% in 2009e 2,5% (fixed incumbents) in 2009 are less

affected by the economic crisis than other sectors thanks to recurring revenues and leeway in terms of opex & capex

t management

Advantages in relation to other sectors: • Internet players, strongly affected by

the drop in advertising revenues (-10% in 2009e_{) will have less money to invest}

in innovative services or engage in M&A

Handset sales evolution: - 15% in 2009e

• Systems player, impacted by shortfall

in demand (-15% in 2009e_{) are less}

likely to innovate

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Operators to invest in content and related services and defend and leverage their key assets

High Services Reinforce Develop terms of _venue Network (Innovation / Ease of use) Content

(Catalogue depth _{Control of the}

o rtance in otential re v Customer relation

(Cata ogue dept

and freshness) Control of the _{set-top box}

Imp o p Relative performance Low High Low Monitor Leverage Relative performance Source: Exane BNP Paribas, Arthur D Little analysis

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Partnerships - a potential solution for telecom operators to improve on content and related

services as proven by examples of other players

E

Vid i Expert

partner Examples

Video improvement levers

Partnership with Hardware manufacturer

…with a gaming console manufacturer …with TV screen manufacturers Internet & Systems players Simplicity / offer innovation (Samsung/Apple/Sony/Panasonic)

« Offer an intense and innovative entertainment experience»

« Propose new generation TV sets connected to the Internet» …with a gaming console manufacturer …with TV screen manufacturers

+ +

Cable / Satellite Catalogue depth and

Partnership with producers or TV channels

p sets connected to the Internet»

+ +

+ / Producers

freshness

Acquisition of Software companies

« Propose the richest VoD offer in the USA »

+

« Reach million music and movie fans with video content »

Software Ease of use

Acquisition of Software companies

DishTV (3rd Pay-TV operator in the US) & Sling Media (Software)

« Enhance the service and program +

Enhance the service and program consumption software solution »

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Content related services are multiplying on set-top boxes, mostly at the initiative of niche

players coming from the systems world

Innovative services developed on boxes by systems players

The DVR that skips or adapts advertising Your TV anywhere, on PC or on TV thanks to slingbox

• Set-top box launched in 1999 in the US, allowing to record and view content downloaded from the internet

• TV streaming device :

• To remotely view their home's cable satellite or • Hard disk storage

• Pause, rewind live TV (up to 30min) & commercial skip • Recordings transfer to/from a home computer & access

third-party applications

• To remotely view their home s cable, satellite, or personal video recorder (PVR) programming

• From an Internet-enabled computer from anywhere

in the world

p y pp

• As of November 2008, it is possible to buy a pizza via the video access, an example of adapted local advertising

• In Oct 2008, Sling Media launched the SlingCatcher: • Hardware device similar to a set top box

• Enable users to watch their television remotely,

without the need for a computer without the need for a computer

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Today, US operators are slightly more advanced than their European counterparts

Innovative services included in telcos and cable-operators in the USA & UK

Sky+HD 8% of clients launched in 2006, offers 31 HD channels Available 1000 programs at one

HD features

Set-top box Storage 150 Go 250 Go Allows a 40h TV storage

Catch-up

VOD > 10 000 titles 10 000 titles of which 400 HD VoD sky Anytime offered to Sky+ in March in 2007

Interactive advertising

EPG Advanced user interface

3 Advanced in March in 2007 User friendly EPG Internet navigation

Advanced user interface

Yellow pages, widgets

Advanced

Youtube, web navigation

Entertainment Simultaneous recording (x4) Games chat

User friendly

• DVR Sky+ 50% of clients in

2008 vs 35% in 2007 Entertainment Simultaneous recording (x4) Games, chat 2008 vs. 35% in 2007

• Multi-room 19% of clients Source: Exane BNP Paribas, Arthur D Little analysis

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Presentation in a nutshell

 Operators’ fixed revenues are threatened by: • Mobile broadband substitution

• Competition from alternative players (cable or satellite TV / ISP)

Triple play:

Competition from alternative players (cable or satellite TV / ISP)  Triple play offers have helped incumbent to:

• Reduce fixed lines loss pace • Maintain ARPU

a success story in a “gloomy” telecom media ecosystem

• Lower competitive pressure

 New media usage behavior offers the new opportunity for telcos to capture a share of the additional audience and the value created

 Th li ht i t t t t b t f t l

Content:

_{The « light premium » content strategy seems best for telcos}

Differentiating, ARPU generating but demanding a low investment only

 Telecom operators’ priority: preserve their triple-play customer base by responding to threats from internet and cable companies

 4Bn€ revenue opportunity in content and related services for European

Content:

promising niches but content alone is insufficient and challenged

pp y p

incumbents by 2015: 65% stemming from Pay-TV, 35% from VoD and

advertising

 The economic crisis is an opportunity for telcos

 Operators to invest in content and related services and to defend and leverage their key assets such as the network and the control of the box  Partnerships as a potential way for telecom to improve in services and

along key success factors: ease of use, offer innovation and depth and

freshness of catalogue

Operators’ response:

content related services namely

through partnerships facilitated by _{freshness of catalogue}

 Content-related services are multiplying on set-top boxes, US operators

more advanced than European ones

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Reviving the fixed line