March 2011

1. Info&Comms, a brave new world
Francisco Jariego, Telefónica I+D Technology Strategy Director
March 2011
Technology Strategy
Telefónica I+D

2. INTRODUCTION
Technology Strategy
Telefónica I+D

3. Telefonica I+D: Leading the Innovation at Telefonica
“Telefónica is the World Most Admired company in the Telco sector”
Fortune Magazine
Telefónica invested 4.814 Mill€ in Tech
Among the 40 biggest
Innovation in 2010
companies in Europe in
797 M€ in R&D R&D investment
94 M€ in Applied Research done by Telefónica I+D
Innovating in 25 countries
Telefónica I+D is an international network
of innovation centres
•5 offices in Spain: Madrid, Barcelona, Valladolid, Granada
1st Spanish Private
Business Center in
and Huesca R&D activity
•A center in Brazil funded by TID & TeleSP
•A center in UK formed by TID - O2 UK - Jajah
Telefónica I+D has a clear mission:
Technology Strategy 3
Telefónica I+D

4. A company with a highly qualified and international staff
RESEARCHERS
Telefónica I+D has a staff of
researchers, technologists,
developers and designers, from 18
nationalities. TELCO & SW ENGINEERS PRODUCT
MANAGERS
PSYCHOLOGISTS DESIGNERS
97% university graduates from 34
international universities PhDs, 10% of
the staff
1%
2% 12%
4% Telecommunications
Computer science
Physics 10+ years
52% Electronics
29%
Industrial engineering average industry
Others
experience
Technology Strategy 4
Telefónica I+D

5. Creating one of the largest European network of innovation
in the ICT sector
Telefónica I+D’s Open innovation model supports collaboration
with more than 1,000 organizations
150 of them are universities from 42 countries
180 projects promoted by Public Administration
Innovation Programmes Technology Platforms Cluster programmes to
promote cooperative R&D
Participating in
European initiatives
Innovation Programmes Technology Platforms Technology Platforms
Participating in (National) (Regional)
Spanish initiatives
Participating in
international forums
and bodies
Technology Strategy 5
Telefónica I+D

6. INFO & COMMS
a brave new world
Technology Strategy
Telefónica I+D

7. Let’s start with a set of numbers
235478542312475,000,0003457890679905
5637612782825,000,00024567986789
245633231,800,000,000589321890
34232421,802,000,0004566378
3425272,250,000,000800421
594134,000,000,0007859
12454,600,000,0009868
Technology Strategy 7
Telefónica I+D

8. People have always been well informed
475,000,000
Circulation of newspapers
Technology Strategy 8
Telefónica I+D

9. Many people in the world have a car …
825,000,000 registered cars
Technology Strategy 9
Telefónica I+D

10. … and use plastic money everyday
1,800,000,000 Unique credit card holders
Technology Strategy 10
Telefónica I+D

11. But nowadays, everybody wants to be connected
2,000,000,000 Internet users (PC, mobile, web)
Technology Strategy 11
Telefónica I+D

12. There are a lot of basic personal items
2,250,000,000 Tooth brushes in use
Technology Strategy 12
Telefónica I+D

13. And people like to hear music and the news
4,000,000,000
FM Radios
13
Technology Strategy 13
Telefónica I+D

14. But mobile phones are more common than personal cleanliness
5,000,000,000 Mobile phone subscriptions
Technology Strategy 14
Telefónica I+D

15. The Mobile Miracle
More than 5B Subscribers
Global ICT developments, 2000-2010*
100
Mobile cellular telephone subscriptions
90
Internet users
80
Fixed telephone lines
70
Per 100 inhabitants
Mobile broadband subscriptions
60
Fixed broadband subscriptions
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
*Estimates
Source: ITU World Telecommunication /ICT Indicators database
Technology Strategy 15
Telefónica I+D

16. Fixed and mobile broadband availability is creating a
content explosion on the Internet
90 Trillion Emails sent in 2009
234 Million Websites online (Dec 2009)
126 Million blogs on the Internet
27.3 Million Tweets per day at Twitter
260 Billion Page Views per Month
2.5 Billion photos uploaded to FaceBook monthly
1 Billion Videos are viewed per day
Technology Strategy 16
Telefónica I+D

17. The Digital Universe is expanding
In 2009, the Digital Universe grew by
62% to nearly 800,000 petabytes* (800
exabytes) X 44
In 2010 grew almost as fast to 1.2 million
petabytes, or 1.2 zettabytes
By 2020, our Digital Universe will be 2009
0,8 ZB
44 TIMES AS BIG as it was in
2009
*A petabyte is a million gigabytes (1015 Bytes) Source: IDC Digital Universe Study, sponsored by EMC, May 2010
Technology Strategy 17
Telefónica I+D

18. As the amount of information rises, managing costs are
decreasing and new gaps are appearing
THE DECREASING COST OF
THE EMERGING GAP
MANAGING INFORMATION
Source: IDC Digital Universe Study, sponsored by EMC, May 2010
Technology Strategy 18
Telefónica I+D

19. Smartphones, a new miracle?
iPhone + iTouch + iPad vs. NTT docomo i-mode vs AOL vs Netscape Users
Fisrt 20 Quarters Since Launch
120
~120MM+
Mobile Internet
100 iPhone + iTouch + iPad
Launched 6/07
Desktop Internet
80
S u b s c r ib e r s (M M )
Netscape*
Launched 12/94
60
Mobile Internet
~32MM NTT docomo i-mode
40
Launched 6/99
Desktop Internet
20 ~27MM
AOL*
v 2.0 Launched 9/94
~9MM
Q 1 Q 3 Q 5 Q 7 Q 9 Q 11 Q 13 Q 15 Q 17 Q 19
Quarters Since Launch
iPhone + iTouch NTT docomo i-mode AOL Netscape
Source: Morgan Stanley
Technology Strategy 19
Telefónica I+D

20. Mobile is revolutionising commerce
Location-BasedLocation-Based Services Transparent Pricing Deep DiscountsDeep Discounts Immediate Gratification
Location-Based Services Transparent Pricing
Location-Based Services Transparent Pricing
Services Transparent Pricing Deep Discounts
Deep DiscountsImmediate Gratification Gratification
Immediate Gratification
Immediate
Priceline.com iPhone App AppShopSavvy Android App App App App iPhoneGilt iPhone AppStore oniTunes on iPhone
Priceline.com iPhone
Priceline.com iPhone App App
Priceline.com iPhone ShopSavvy Android
ShopSavvyShopSavvy Android
Android Gilt iPhone App App App
Gilt Gilt iPhone iTunes iTunes Store Store on iPhone
iTunes Store on iPhone
iPhone
Finds hotel deals
Finds hotelhotel deals Comparison shoppingshopping Designer handbags handbags video / apps / /video / apps
Finds Finds hotel deals
deals Comparison shopping shopping Designer handbags
Comparison Designer handbags
Comparison Designer Music / Music Music apps
Music / video / apps
/ video
in youryour your area among online +among online + local storesto 70% 70%to 70% Offdelivered wirelessly wirelessly
in area area your area
in in among online + locallocal stores to 70% Off Off Off delivereddelivered wirelessly
among local stores
online + stores Up Up Up to Up wirelessly
delivered
What is the name of the game? SOLOMO (SOcial – LOcal - MObile)
ACCESS LONGER
MORE MORE EASIER TO FUN TO
FASTER NEARLY BATTERY
CONNECTED AFFORDABLE USE USE
EVERYTHIN LIFE
Wi-Fi nearly User Interface G
Real-time ubiquitous in Near-zero revolution +
many developed location Social / casual Music / video / Hours of
connectivity / latency for boot-
markets…for awareness gaming / reward- documents / continuous
24x7 / in palm up / search /
many / 3G tiered provide driven marketing ‘stuff’ in cloud usage
of hand connect / pay
pricing lowers something for
adoption barrier nearly everyone
Technology Strategy 20
Telefónica I+D

21. … and changing the rules of the game
Mobile-phone maker’s world handset market share, % … and their share of profits, % of total*
*Out of eight companies Source: Asymco
Technology Strategy 21
Telefónica I+D

22. … at a ferocious pace
Top Global 15 Publicly Traded Internet Companies by Market Value – 2010 vs. 2004
2010 2004
M a rk e t R evenue M a rk e t R evenue
R ank C om pany R e g io n V a lu e ($ B ) ($ M M ) R ank Com pany R e g io n V a lu e ($ B ) ($ M M )
1 A p p le USA $290 $ 4 6 ,7 0 9 1 eB ay USA $71 $ 3 ,2 7 1
2 G o o g le USA 197 2 3 ,6 1 2 2 G o o g le USA 50 3 ,1 8 9
3 A m a z o n .c o m USA 76 2 4 ,5 0 8 3 Yahoo! USA 52 3 ,5 7 5
4 Tencent CHN 41 1 ,8 2 2 4 IA C /In te r a c tiv e * USA 38 4 ,1 8 8
5 eBay USA 40 8 ,7 2 7 5 Yahoo! Japan JPN 33 1 ,1 0 1
6 B a id u CHN 40 641 6 A p p le USA 22 8 ,2 7 9
7 Yahoo! USA 22 6 ,4 6 0 7 A m a z o n .c o m USA 16 6 ,9 2 1
8 Yahoo! Japan JPN 21 2 ,9 4 1 8 R a k u te n JPN 9 445
9 P r ic e lin e .c o m USA 21 2 ,3 3 8 9 M o n s te r USA 3 846
10 S a le s fo r c e .c o m USA 15 1 ,2 4 1 10 W ebM D USA 2 134
11 R a k u te n JPN 10 3 ,2 0 4 11 Shanda CHN 3 157
12 A lib a b a .c o m CHN 10 568 12 N C S o ft KO R 2 280
13 Akam ai USA 9 860 13 In d e x JPN 2 357
14 N e tflix USA 9 1 ,6 7 0 14 NHN KO R 1 253
15 NHN KO R 8 1 ,0 6 2 15 F o r -s id e .c o m JPN 1 85
T o ta l $809B $126B T o ta l $304B $33B
Source: Morgan Stanley
Technology Strategy 22
Telefónica I+D

23. The gravity centres of innovation are changing
From Atlantic to Pacific
RUSSIA
USA INDUSTRIAL 60MM users, +31% Y/Y
240MM users, +4% Y/Y DESIGN 42% penetration
76% penetration
DEVICES & CONSUMER
RADIO SERVICES ELECTRONICS
TECHNOLOGIES
SOFTWARE & CHINA
SERVICES 384MM users, +29% Y/Y
29% penetration
INDIA
61MM users, +18% Y/Y DEVICES
5% penetration
BRAZIL
76MM users, +17% Y/Y
39% penetration
2000
2010
46% of Internet Users in 5 Countries
Technology Strategy 23
Telefónica I+D

24. The gravity centres of innovation are changing (II)
And from HW to SW
GLOBAL UNIT SHIPMENT SHARE OF SMARTPHONES BY OPERATING SYSTEM
Q1 2006 Operating system Q3 2010
0% iOS (Apple) 17%
0% Android (Google) 25%
62% Symbian (Nokia) 37%
7% BlackBerry (RIM) 15%
31% Others 6%
Technology Strategy 24
Telefónica I+D

25. And soon, beyond people and phones, we will be
connecting a lot more devices
Computer Growth Drivers Over Time, 1960 – 2020E
Machine to machine communications are just the beginning of the future
Internet of Things
Technology Strategy 25 Source: Morgan Stanley
Telefónica I+D

26. New devices generate more data …
Mobile data traffic will double every
year reaching 3.5 exabytes per
month by 2014
X 39
between 2009 and 2014
66%
of the world’s mobile
data traffic will be
VIDEO by 2014
*Monthly Basic Mobile Phone Data Traffic
Source: Cisco VNI Mobile, 2010
Technology Strategy 26
Telefónica I+D

27. Video Content (and Real Time) is gaining market share
North America Downstream Fixed-Access Peak North America Mobile Peak Hour* Traffic Share
Hour* Traffic Share by Application 9/10 by Application 9/10 vs. 1/10
100%
N o r m a liz e d A g g r e g a t e P e a k T r a f f ic P r o f ile
10% 10%
6% 8%
O t h e r T r a f f ic 26% 4%
80% 3%
6%
18%
HTTP 23%
60%
N e t f lix 21% 41%
27%
YouTube 10% 40%
Streaming Video
B itT o r r e n t 8% 20% 36% 32%
F la s h V id e o 6%
Other Web Traffic
0%
RTM P 6% Jan 2010 Sep 2010
0% 5% 10% 15% 20% 25% 30% W e b B r o w s in g R e a l- T im e E n t e r t a in m e n t
D o w n s tr e a m T r a ffic S h a r e d u r in g P e a k H o u r s , b y A p p lic a tio n (9 /1 0 ) P 2 P F ile s h a r in g S e c u r e T u n n e lin g
G a m in g S o c ia l N e t w o r k in g
R e a l- T im e C o m m u n ic a t io n s O th e r
Streaming Video Up to 37% of Internet Traffic Mobile Video = 41% of Peak Hour Traffic, Up
During Traditional “TV Hours” from 27% in January
Telefonica I+D 27 Source: Morgan Stanley

28. And IP traffic will increase 4X from 2009 to 2014
Global IP Traffic
34% CAGR
2009-2014
X4
PB per month
X3
Source: Cisco Visual Networking Index – Forecast, 2009-2014
In 2014, more than 60 exabytes* per month will cross the global network
*A exabyte is a thousand petabytes (1018 Bytes)
Telefonica I+D 28

29. Efficiency improvements and technology evolution have
made possible capacity and speed upgrades without a
raise in end users prices
Technology evolution Download speed evolution (Mbps)
BAF Fixed Broadband Mobile Broadband Average Download Speed in Europe
Bandwidth per Optimal Commercial Nominal Bandwidth available per
Fiber
access Speed (Europe) technology
Mbps Co FO VDSL
Mbps
1000
ADSL 2+
LTE
100
ADSL 2 HSPA+ >100
22
42
10 Source: Analysis Mason
ADSL HSPA
6 14.4
1 UMTS Broadband prices evolution
0.384 Average (€/Month/Mbps) price per
monthly broadband
0.257 GPRS Mbps nominal speed in Europe
0.1
0.08
GSM
0.033
0.01 FTTH 0.0096
0.009
6 VDSL
0.001 ADSL2+
0.0003 ADSL
0.0001
82 92 96 00 04 08 14 95 01 03 08 10 12
Source: Analysis Mason
Telefonica I+D 29

30. Traffic growth explosion and current Internet economic
model is driving the decoupling between revenues and traffic
Traffic
Connectivity
Decoupling revenue/efficie
ncy gains
enabling
might not
follow data
Revenues??
traffic
Cost???
Voice Data Time
Dominant (Video)Dominant
What can we do to improve the cost of transmitting videos? CDNs? Better codecs?
Cheaper networks? A different interconnect model?
Telefonica I+D 30

31. We will have to deal with information in new ways
How will we find the information we need when we need it?
How will we know what information we need to keep, and how will we keep it?
How will we follow the growing number of government and industry rules
about retaining records, tracking transactions, and ensuring information
privacy?
How will we protect the information we need to protect?
Technology Strategy 31
Telefónica I+D

32. And discover new business models
Where to pay attention?
% of Time spent in Media vs. % of Advertising Spending, USA 2009
50%
T im e S p e n t Ad Spend
% o f T o ta l M e d ia C o n s u m p tio n T im e
40%
39%
o r A d v e rtis in g S p e n d in g
30%
31%
28%
26% ~$50B
20% Global
Opportunity
16%
10% 12% 13%
9%
0%
P r in t R a d io TV In te r n e t
1995E 2009E
Global Internet Ad Revenue $55MM $54B
Ad Revenue per User $9 $46
Global Internet Users 6MM 1.2B
Technology Strategy 32 Source: Morgan Stanley
Telefónica I+D

33. Telcos have many valuable but latent data assets
Address Gender Bank
MY M Y School
P E R SON A L R E L A T I ON SH
DA TA
Name Preferences Profile Workplace P S Friends
I
SIM Serial Number Browsing History
MY
M Y DEV I CES I N TE R A C TI
Device details SoftSIM .mobi domains SQR Codes
ON
Number SIP Number Location Presence Pictures Videos
MY
I DE N TI F I E R M Y C ON T E X T M Y ST U F F
S
IP Address Roaming Address Book Calendar
On/Off
Source: Telco 2.0
Technology Strategy 33
Telefónica I+D

34. Managing users identity will be an opportunity…
The role of identity
Identity management Network-agnostic identity
information will evolve,
will enable new revenue management is the key
strengthening the operator’s
opportunities, and enhance component of tomorrow’s
position in
the user experience multi-access network
the value chain
Customer Identity
profiles federation
Close & trusted Attribute
Single sign-on query/push
(SSO) relationship with subscribers
and communities
Mutual Authorization &
authentication trust management
Technology Strategy 34
Telefónica I+D

35. …as well as helping people control their privacy
Privacy is a key concept for trusting a brand
FROM viewing customers as victims
whose privacy needs to be protected The need for Information Security
through regulation… Percentage of the Digital Universe
…TO viewing customers as active players
in control of their privacy and trading their
personal information for benefits Source: IDC Digital Universe Study, sponsored by EMC, May 2010
Technology Strategy 35
Telefónica I+D

36. The Customer: the final frontier…
Knowing them better to be closer
FROM a partial view of the
TO a holistic, one-view of the
customer and different perspectives
customer
from each business
Commercial Web
Traffic
Call Center Services To improve business intelligence
and personalised services:
IPTV -
Net Incidences Imagenio
Targeted Advertising
Downloads
Contextual Services
Technology Strategy 36
Telefónica I+D

37. Telefónica I+D
Leading the innovation
at Telefónica
Find us on
http://twitter.com/telefonicaid
Technology Strategy 37
Telefónica I+D

38. Technology Strategy
Telefónica I+D

39. And this is only the beginning
2 billion internet users worldwide 5 billion internet users worldwide
5 billion mobile subscription 10 billion mobile subscription
1.4 billion of connected machines 40 billion of connected machines
800 exabytes of digital info in the 53 zettabytes of digital info in the
world- videos, photos, music, texts… world- videos, photos, music, texts…
Technology Strategy 39
Telefónica I+D

40. Video content is driving consumer IP traffic growth
Consumer IP Traffic & Mobile Internet 2009-2014
91%
Video
traffic
Source: Cisco Visual Networking
Index – Forecast, 2009-2014
The sum of all forms of video (TV, video on demand, Internet, and P2P) will
continue to exceed 91% of global consumer traffic by 2014. Internet video alone
will account for 57% of all consumer Internet traffic in 2014.
Telefonica I+D 40