World Telecoms Council Telco 2015

3. Telcos’ revenue is no longer growing in any significant way in most mature markets Fixed and mobile market revenue growth in 2009 40% 37% EU27: -2.1% overall (-3.2% fixed / -1.1% mobile) 35% 33% Japan: -2.8% overall (-2.2% fixed / -1.1% mobile) 30% US: +0.7% overall (-1.6% fixed / +3.3% mobile) S.Korea: +1.9% overall (-0.7% fixed / +3,5% mobile) 25% 21% 20% 15% 13% MiddleEast & Africa 14% 11% Latin America (excl. Brazil) Telecom 10% 11% 8% Brazil, Russia, India, China (BRIC) Services 5% 5% 5% Asia Pacific (excl. India & Japan) Revenue 4% 2% North America Growth 1% 0% Europe (excl. Russia) 2005 - 2009 2005 2006 2007 2008 2009 -3% Japan -5% -10% Revenue growth rates fell under 2 digits almost everywhere Source : IDATE, in "World Telecom Service Market", 2008 Edition - January 2009, revision in July 2009; © 2010 IBM Corporation IBM Institute for Business Value (IBV) Analysis

4. The sector’s annual growth worldwide (+2%) is now being sustained almost singlehandedly by emerging countries and BRIC Toward a new hierarchy Top 10 mobile markets worldwide France; France; 46 46 (M subs) UK; 68 UK; 68 1. Regional consolidation: Italy; 71 Italy; 71 China; 375 ± 100 telcos in Europe China; 375 2005 India; 75 India; 75 versus AT&T and Verizon in US Germany; 79 Germany; 79 Mobile Brasil; 86 Brazil; 86 markets 2. The growing role of the increasingly emerging markets Japan; 90 Japan; 90 USA; 208 USA; 208 being driven by emerging Russia; 126126 Russia; – The emergence of new countries giants: China Mobile, UK; 76 Mexico; 65 UK; 76 Mexico; 65 Bharti, Vimpelcom, Italy; 83 Italy; 83 Germany; 87 Etisalat, ... Germany; 87 2010 Japan; 123 Japan; 123 China; 770 – ...and the know how to China; 770 Brazil; 143 make profit with ARPU < Brasil; 143 USD 5 Russia; 215 Russia; 215 USA; 207 USA; 270 India; 376 India; 376 Source: IDATE, IBM Institute for Business Value (IBV) © 2010 IBM Corporation

5. While overall communication have increased, much of the growth has been over-the-top with share of traditional unchanged FRANCE TOTAL COMMUNICATIONS MARKET (billions of call minutes and equivalents¹) 1200 1000 800 Increased share of 600 communication services by Internet Communication 400 services providers 200 Stable use of traditional 0 communications services 2005 2006 2007 2008 2009 2010 Wireline Mobile SMS/MMS E-mail(excl. spam) IM P2P VoIP Source: Idate: Telco’s views of Notes: (1) An SMS/MMS or e-mail is considered as a 30 second call. Openess, Digiworld Summit 2009 Source: Ronald Montagne “Telcos’ views of openness”, IDATE, October 2009 © 2010 IBM Corporation

6. Telecom revenues do not track the increases in network traffic anymore Traffic Traffic Volume / Voice Revenue Dominant Network Cost (existing technologies) Ecosystem Revenue Value Opportunity Telecom Revenue Network Cost (future technologies) Data Dominant Time © 2010 IBM Corporation Source: Nokia-Siemens; IBM Institute for Business Value (IBV) Analysis

7. After a decade of massive change what is the future of telecom? Likely but uncertain trends 1 Telecom industry revenue and with potentially high profitability outlook for each impact and multiple scenario by region and access outcomes (fixed/mobile) for 2015 QU OD Revenues AB L 2 S RI CA Determining Trends LE AN EL M 5 VA ITI TIT ING 3 Underlying trends in the evolution of the CR AT communications industry for which SCENARIO 2008 S rvivo u r C so tio on lida n Market Sh ut akeo Clashof G ts ian G ne e rative Ba r zaa IVE there is very high degree of SYNOPSIS & certainty and consensus Free Cash Flow OUTCOME (EBITDA - Capex) Provide backdrop for the future of telecommunications in 2015 REALIZATION 2008 Surviv or Co nsoli dati on Market Sh akeou t Cla sh o f Gi ants Ge neratie v Ba za ar PATH Major economic, competitive and technological events that 4 trigger each scenario © 2010 IBM Corporation

8. Telco 2015 – five telling years, four future scenarios Scenario Envisioning Challenges & Trends Scenarios & Outcomes Implications Primary Research Consumer Survey Telco Provider (9 countries) Interviews (±60) Strategic Imperatives 1,541 CEO interviews from Global CEO Study; ~80 from CSPs CLASH OF GENERATIVE Critical attributes for GIANTS BAZAAR success Potential capability gaps Telco Industry Trends Telco by Operator 2015 2015 SURVIVOR Scenario-specific MARKET Forces Shaping Telecom CONSOLI- SHAKEOUT recommendations DATION Uncertainties Cross-scenario recommendations Scenario Revenues and Profitability Macro Industry Data/ Revenues Economic Analysis Trends (IDATE) 2008 S rvivo u r Market Clashof G ts ian Ge rative ne C so tio on lida n Sh ut akeo Ba r zaa Secondary Research Free Cash Flow (EBITDA - Capex) 2008 Surviv or Market Cla sh o f Gi ants Ge neratie v IBM Institute for Business Value Analysis Co nsoli dati on Sh akeou t Ba za ar © 2010 IBM Corporation

9. There are a number of Forces shaping the future of telecommunications into 2015 USAGE/ SERVICES PSTN decline accelerates VOIP (incl. mobile VOIP) grow INDUSTRY Ubiquitous and seamless access STRUCTURE ACCESS High digital content consumption New infrastructure competition Broadband pervasive as TV from government, municipality Multiple communication tools Mobile broadband favors LTE Net Neutrality remains Ultra low-cost devices grow Mobile and fixed termination BUSINESS converge One in three devices is MODEL smartphone, MID, or Netbook Pure plays disappear Voice monetized as a feature of connectivity Green Telecom revenues 3rd – party connectivity revenues © 2010 IBM Corporation Source: IBM Institute for Business Value (IBV) Analysis

10. Communications remain fragmented across multiple services from traditional telecom and over-the-top (OTT) providers Communication usage and growth (Under 25s) Under Use Several 2009-2015 25s Times a day (74%) Mobile Instant Voice Text/SMS Email Messaging (73%) Landline/ (46%) (64%) Social Fixed Voice Networking (40%) (43%) Size of Bubble: % of respondents Frequency of use Postal Service who use service every day (10%) MMS VOIP (11)% Video (9%) Mobile email (on Calls Smartphone) Voice VOD (12%) Conferencing (7%) (5%) Never % of consumers expecting to increase/decrease use of service -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% Source: IBM Institute for Business Value Global Telecom Consumer Survey, 2009; N= 7722 © 2010 IBM Corporation

11. A new round of investment in FTTx, while the race for mobile broadband appears to have been decided in favour of LTE 9. Which of the following access technologies are going to be critically important to the success of your business over the next 5 -10 years? World’s top 8 FTTx operators Critical to Success Neither Not Critical to Success FTTx 71% 27% 2% 4G/ LTE 67% 33% 3G 44% 48% 7% xDSL 43% 48% 9% CATV 27% 39% 34% LTE developments 2G 20% 42% 38% WiMAX 8% 38% 54% 0% 20% 40% 60% 80% 100% “WiMAX only relevant if 3G/4G spectrum lacking” Head of Product-IT Development, European CSP Source: If applicable, describe source origin © 2010 IBM Corporation 2009 IBM Institute for Business Value Telecom Industry Survey N=61

12. Infrastructure sharing will become increasingly important as part of overall cost re-structuring 14. (B) Which of the following changes to your cost structure will be critical to improve your competitiveness and agility over the next 5-10 years? Network infrastructure sharing (incl. with competitors) 80% Evolve IT infrastructure through cloud and dynamic infrastructure 75% Leverage global delivery skills/capabilities for IT and back-office Phase out and re-farm GSM/2G spectrum to offer 3G services 70% Outsource access network St Create separate services customer management business ra Outsource data center operations 60% te g ic Outsource core network 50% co 47% st 40% st 40% ru 35% ct ur 32% 32% 32% e 30% pr 25% io 20% rit 21% 20% i es 16% 10% 10% 0% High Performance Operator Low Performance Operator © 2010 IBM Corporation

13. In addition to these trends there are a number of potentially high- impact variables that are, as yet, uncertain • New Vericals: eHealth, • The Future of voice Services Smart Grids, … • OTT versus Network optimized content Usage • Premium connectivity • Siloed versus unified communication Industry Forces • Ultra-Fast Broadband structure shaping availability Access and the • Open Versus Closed regulation future Devices. • ServCo/NetCo versus Vertical • Integration Network sharing versus Outsourcing • User-funded versus third-party Funded • Regulation: ex ante versus • Pricing model: flate rate, tiered pricing Business based on speed, bytes, quality, bundled ex post, from asymetric regulation to symetric regulation, model service, … the future of Net neutrality, … • M2M impact © 2010 IBM Corporation Source: IBM Institute for Business Value (IBV) Analysis

14. These variables are gathered in tw major deimensions - addressable market growth and the competition/integration structure Future The Future of OTT vs. Network Voice optimized content Silo vs. unified Expansion into Scenario C communications Adjacent Verticals Addressable Ultra-fast Broad- Market Growth Scenario D band Availability Premium Connectivity Present Scenario A Service Pricing Scenario B Model M2M communications Open vs. Vertical vs. Hori- closed devices zontal Integration Network sharing vs. User vs. 3rd Party / Competition/ Integration Outsourcing ad funded Structure Regulation © 2010 IBM Corporation

15. The interplay of these critical variables / uncertainties produces four distinct future industry scenarios Expanding CLASH OF GIANTS GENERATIVE BAZAAR Spectrum Spectrum Passive Infrastructure Passive Infrastructure Enabling the two-sided business Active Active Device Aplication Media Telecom Electric Banking & SERVICE OTT/ Device Aplication Media Telecom Electric Health Care Banking & Network Network Manufacturers Developers Organizations Retail Utilities Health Care Finance Finance PROVIDERS Addressable Market Growth Manufacturers Developers Organizations Retail Utilities Support Support $ Telco Infrastructure Retail Infrastructure Retail OEM $ NET CO-OP OPEN ACCESS Channels Channels NET CO-OP Telco Devices Devices $ CONSUMERS CONSUMERS / BUSINESS Customer Customer SURVIVOR CONSOLIDATION MARKET SHAKEOUT Spectrum Passive Passive Active Infrastructure Spectrum Infrastructure Network Active Few large Declining/ Stagnant Network Support Retail Devices Channels Support Infrastructure players Infrastructure Retail Channels dominate Devices Brand Brand Market Customer Customer Customer Many players - Fragmented Competition/Integration Structure Concentrated / Vertical Fragmented /Horizontal © 2010 IBM Corporation

16. .....with contrasting characteristics •Carrier cooperation and •Netco/Serco split with dominant alliances lead to global Net-Coop and myriad of asset-light consolidation service providers •Face-off with either global •Open access provided by Net co- application and content provider op through new funding models or OEMs/NEPs •Mega carriers expand into •Virtuous cycle of open innova-tion CLASH OF GENERATIVE selected vertical markets(e- GIANTS BAZAAR for apps, content & devices health, grid) SURVIVOR MARKET •Carrier assets disaggregated – •Reduced spending by CONSOLIDATION SHAKEOUT financial re-engineering – among consumers service providers, NEPs, Device OEM, IT Providers, new investors •Revenue erosion/stagnation •Capex reduction •Lack of infrastructure investment triggers municipality involvement •Triggers defensive •Multiple brands compete for consolidation customer attention © 2010 IBM Corporation

17. Scenario outcomes for selected critical variables: Ultra broadband availability •Operators infrastructure •Open access on a Net Co- sharing to deploy NGA op owned infrastructure •Sharing can be based on •The Net Co-op will be commercial agreements or owned by private & public NRA driven CLASH OF GENERATIVE players achieving high Ultra GIANTS BAZAAR •No more than 3-4 players in BB coverage the market SURVIVOR MARKET CONSOLIDATION SHAKEOUT •Due to financial and •Government and regulatory constraints, municipalities step in to Ultra BB are deployed in take UltraBB to “grey” densely populated “black” areas areas only •Access to municipal •New services cannot networks will be open unfold their full potential © 2010 IBM Corporation

18. Scenario outcomes for selected critical variables: Open vs closed devices •Closed comms-centric •Largely open devices: devices in low-end segment users will choose devices •Strong competition for open that fits their needs best devices in high-end segment •Carriers & OEM might •Strategic partnerships with CLASH OF GIANTS GENERATIVE BAZAAR team up to provide OEMs optimised handsets for distinct services SURVIVOR MARKET CONSOLIDATION SHAKEOUT •Cheap closed devices •Open devices prevail continue to dominate market Linux •Handset subsidies will Android Palm disappear •Handset subsiduation RIM continues Apple •SIM-only dominant model Symbian for carriers Windows Mobile © 2010 IBM Corporation

19. Scenario outcomes for selected critical variables: Regulation •Light-touch regulation on •Open access is the norm infrastructure to encourage infrastructure competition •Evolution of Internet-style model with light-touch •No endorsement of strong regulation for Telcos net neutrality positions CLASH OF GENERATIVE GIANTS BAZAAR •Level playing field in services SURVIVOR MARKET CONSOLIDATION SHAKEOUT •As is, withy ongoing •Strong access obligations on regulatory uncertainty infra and strong net neutrality stance undermine •As a consequence NGA investment initiatives investment is stifled •Telcos focus more on whole- •Competition intensity is ale backbone business as limited well as ICT services © 2010 IBM Corporation

20. Communications-connectivity substitution will increase over the next 5 years regardless but dominates revenue mix in Generative Bazaar … 2008 – 2015 Changes to Segment Revenue Mix by Scenario 35% 49% Advanced 69% 64% Markets 2015 Revenue Mix Scenarios 60% 49% 31% 30% Communications 75% 1% 2% 5% 5% Connectivity Survivor Market Shakeout Clash of Giants Generative Content Consolidation Bazaar Emerging 63% Markets 85% 80% 82% 24% 2015 Revenue Mix 1% Scenarios 34% 2008 14% 20% 18% Communications: PSTN Voice, VoIP/ VoBB, Mobile Voice, SMS revenues 1% 0% 1% 3% Connectivity: Fixed Broadband, dial-up internet, legacy corporate data service, 3G/Mobile Broadband and Machine-to-Machine revenues Survivor Market Shakeout Clash of Giants Generative Content: IPTV and Mobile Content (music, video, mobile TV, games, advertising) Consolidation Bazaar © 2010 IBM Corporation Source: IBM Institute for Business Value (IBV) and IDATE Consulting & Research Analysis

21. …and represents the most optimistic outlook for telecoms, relative to the IMF’s global GDP forecast for 2010 - 2014 7% Global GDP vs.. Telecom Services Growth Scenarios 2009 – 2015 Telecom Growth Scenarios ( 6% Global Telecom Generative Bazaar 5.3% 5% 4.5% Global GDP Growth 4% Clash of Giants 3.3% 3% 2% Market Shakeout 1.8% 1% Survivor Consolidation 0.2% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -1% Source: International Monetary Fund (IMF), World Economic Outlook Database, October 2009; http://imf.org/external/pubs/ft/weo/2009/01/weodata/index.aspx, IBM Institute for Business Value (IBV) and IDATE Analysis, 2004 - 2009 growth forecasts are based on IDATE "World Telecom Service Market", 2008 Edition - © 2010 IBM Corporation January 2009, revision in July 2009. 2010 -2015 are IBM Telecom 2015 scenario forecasts

22. Telcos need common and scenario-specific attributes for success CLASH OF GIANTS GENERATIVE BAZAAR Collaborative inter/intra-industry Structural separation of network and 1 1 alliances services operations 2 Innovative and differentiated network- 2 Pervasive open network access optimized experiences infrastructure Common 3 Enhanced service provider roles in 3 Third party applications / services vertical markets Critical Success innovation Attributes Efficient and competitive Cost-effective ultra-fast broadband Dynamic business design 4 4 infrastructure deployment strategy Achieve scale across regions and Network / customer insights to Leverage advanced customer 5 5 access (fixed, mobile, Internet) enhance experience & optimize cost and network analytics SURVIVOR CONSOLIDATION Culture of collaboration MARKET SHAKEOUT 1 Achieve Scale Clear & distinctive role(s) in 1 Agile, flexible and reconfigurable disaggregated value chain processes and infrastructure 2 Reduced cost-to-serve 2 Powerful brand / reputation Cost containment 3 Viable premium connectivity Contain voice ARPU erosion 3 propositions for 3rd party providers Secure significant share of ultra-fast Agile, flexible and reconfigurable 4 4 broadband in densely populated areas processes and infrastructure 5 Increased share of high value Ubiquitous and cost-effective 5 customers broadband access © 2010 IBM Corporation Source: IBM Institute for Business Value (IBV)

23. Summary and Conclusions A return to strong growth requires the industry to act collectively to create the necessary conditions for the emergence of more profitable scenarios Overall, the financial model suggests Generative Bazaar is potentially the most profitable, with the highest revenue and growth prospects but is so the most challenging scenario A return to strong growth requires the telecom industry to act collectively to create the conditions for the emergence of profitable scenarios, Clash of Giants / Generative Bazaar: – Global industry collaboration on common capabilities ,enablers and platforms – Enhancing the role of the service provider in adjacent vertical markets – Pervasive and open access connectivity for any person, object and device – Value propositions for third-party application providers – Harnessing information and business insights new business models. © 2010 IBM Corporation

24. Key contacts http://www- 935.ibm.com/services/us/gbs/bus/html/ibv- telco2015.html?cntxt=a1000065 Thank you! www.ibm.com/iibv http://www- 935.ibm.com/services/us/gbs/bus/html/gbs- telcos-socialnetworking.html?cntxt=a1000065 Rob van den Dam Nick Gurney Ekow Nelson Global Telecom Industry Lead, Global Telecom Industry Leader Global Telecommunications IBM Institute for Business Value Global Business Services Industry, IBM Corporation rob_vandendam@nl.ibm.com nick@au1.ibm.com ekow.nelson@uk.ibm.com © 2010 IBM Corporation

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