Freemium Internet - Universal Basic Internet

1. FREEMIUM INTERNET - NEXT GENERATION BUSINESS MODEL TO CONNECT NEXT BILLION STEVE ESSELAAR STEVE SONG CHRISTOPH STORK 1 ResearchICTSolutions

2. FREEMIUM INTERNET

3. Africa Total Population 1.2 Billion 960 Million people covered by 2G signal in Africa 310 Million Internet Users in Africa POPULATION COVERAGE EXCEEDS INTERNET USERS 3 TO 1 3

4. Freemium Business Model FREEMIUM INTERNET: FREE SLOW INTERNET 4 2G 3G 4G Percentage of Population Covered by Mobile Signal 20% 50% 90% 30% PercentageofPopulationUsingInternet 90% Affordability Gap

5. Free Basics Freemium Internet What is free zero rated content Internet access Content controlled by Facebook open Speed any 2G speeds, eg up to 64 kbps Initiated MNO MNO / Regulator Defaults Facebook None Comparing Free Basics to Freemium Internet

6. NEXT GENERATION BUSINESS MODEL FREEMIUM INTERNET AN OPTION?

7. International traffic in billion minutes (Source: Telegeography) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 550557562552 522 478 436 408 387 353 310 277 557 424 306 215 160 115 86 553321147 OTT trafﬁc Carrier trafﬁc

8. Retail pricing: In future only charging for data Revenue 0% 25% 50% 75% 100% 2000 2005 2010 2015 2020 Voice + SMS Data

9. Network Stats (Source GSMA) Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 31% 25% 18% 13% 10% 7% 61% 56% 52% 47% 41% 34% 58%56% 54% 50% 43% 35% 3G Network population coverage % unique Mobile Internet subscribers % of smartphones among active connections

10. Transition to a next generation business model Item Traditional Voice, SMS and Data business Model Next Generation Business Model Services Voice, SMS, Data Data Billing Access and usage billing: Detailed billing systems for voice and SMS that can distinguish between off-net / on- net, peak / off-peak Simple access billing Traffic Monitoring Detailed traffic monitoring as part of the billing system Usage monitoring limited to data use Post paid subscribers Detailed vetting to reduce risk or revenue loss and expenses that arise from call termination and subsidised handsets • Postpaid risk limited to revenue of one billing cycle • No external expense risks • Prepaid and postpaid do not need to be distinguished by pricing • Postpaid may be extended without significant vetting

11. Friends & family Dynamic pricing On-net calls Peak On-net calls Off Peak On-net calls Off Off Peak Off-net calls Peak Off-net calls Off Peak Off-net calls Off Off Peak Fixed- line calls Peak Fixed-line calls Off Peak Fixed-line calls Off Off Peak SMS On-net SMS Off-net Data MMS On-net MMS Off-net Recharge based incentives Usage based incentives Zero-rated services Mobile content Speed Volume Old Business Model New

12. Totalcombinedsubscribersinbillions 0 0.75 1.5 2.25 3 2013 2014 2015 WhatsApp Facebook Messenger WeChat Slow Internet is valuable (Source: Facebook and WeChat)

13. Communication OTTs Mobile Content OTTs Non-Telco OTTs Description • Applications using VoIP • IP driven instant messaging Audio and video content over mobile broadband, by MNO directly or by third parties Other sectors benefiting from an IP based connectivity platform Examples WhatsApp, Facebook Messenger, Twitter, Skype, WeChat Facebook, ringtones, Youtube, Instagram Uber, Internet of Things (IoT), e-Gov, e-Health, e-Edu, mobile money Data volume Significant potential None: MNO content mostly offered zero-rated Modest potential Other revenues Low potential Modest potential Significant potential Different types of Over the Top (OTT) services

14. FY11 FY12 FY13 FY14 FY15 FY 16 11% 9% 6% 5% 5% 5% 21% 20% 18%18% 16% 12% M-Pesa revenue as share of total Mobile data revenue as share of total Safaricom’s M-Pesa and mobile data revenues as share of total revenues

15. Proﬁles Mostly 2.5G network and poor network quality Mostly 2.5G network but data channel is under- utilised Mostly 3G and 4G network or better Commercial Viability No Potentially Yes Strategy 1: drive data demand by getting all prepaid customers to use data No Yes Yes Strategy 2: OTTs will increase data demand No Yes Yes Strategy 3: Utilise 2G capacity for slow data No Yes Yes Strategy 4: Drive non-ICT value (e.g. mobile money) Yes Yes Yes Incentives to upgrade to 3G and 4G networks Wide ranging incentive framework incl. spectrum allocations and ﬁbre backhaul networks Generally conducive investment climate Direct incentives to offer Freemium Internet Selected incentives to support faster adoption (foregone USF levies or licence fees or additional spectrum) Freemium Internet implementation profiles

16. FREEMIUM INTERNET TODAY

17. Prepaid Freemium Internet implementations in Malaysia and India Malaysia India Celcom (Axiata) Digi U Mobile Maxis Aircel Smart Phone Penetration Q4 2016 64% 64.7% NA 76% EBITDA margin FY 2016 38.6% 44% NA 52.8% NA Product name Xpax Free Basic Internet Free Basic Internet Free Internet Hotlink Free social chat Free Basic Internet Launch Data Q4 2016 Q3 2015 Q3 2015 2013 Associated with prepaid product? all-new Xpax Digi Prepaid Power Prepaid Plan Hotlink prepaid Any Speed General 64kbps Facebook high speed 64kbps 64kbps 64kbps initial speed 64kbps for 500MB then 32 kbps Monthly free data volume 10Gb any Internet + 10GB Facebook 500 MB 2 GB 500 MB 500 MB Requirements Active SIM card Active SIM card Active SIM card Active SIM card 150 Rp recharge per month Limitations None No ﬁle sharing VoIP, or Internet tethering None None new customers only, 2G networks only

18. AIRCEL AND JIO - INDIA • Two mobile operators offer Freemium Internet in India. Aircel to all customers, and Jio for an introductory period. Both test the market and allow each operator to gain a better understanding of the response to Freemium Internet. • Aircel in India does not publish audited financial statements and little is known about the success of introducing Free Basic Internet to new subscribers other then sporadic press briefings. In February 2016 one statement was released saying that it helped Aircel to attain 60% growth in data revenue. • The Ericsson Mobility Report (Ericsson, 2017) found that the recent “introductory free data traffic offers in India have pushed up global traffic noticeably”, and that India added 43 million data users in Q1 2017, largely thanks to Reliance Jio's free data offer. While the Jio offer was only introductory, it demonstrated two important points: • Free Basic Internet significantly drives up user numbers and data traffic • Free Basic Internet may be the next hygiene factor: if you don't have it, churn might increase as subscribers move to other operators.

19. MAXIS - MALAYSIA • In Malaysia, Maxis was the first to offer Freemium Internet (called Free Basic Internet) on its Hotlink prepaid product in 2013. • Data revenues are not reported in Maxis’s audited financial report or quarterly investor presentations. However, figure 8 shows that prepaid and postpaid data use per subscriber in GB per month has steadily increased over the last 3 years. Its EBITDA margin of 52.8% in FY 2016 indicates that it is very profitable and the Free Basic Internet that it introduced can be judged as successful. A further indication of its success is that all of Maxis’s competitors followed suit with similar or better offers by Q4 2016. 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2.6 2.0 1.61.4 1.3 1.2 1.00.90.8 0.60.5 3.7 3.0 1.91.91.7 1.51.41.41.31.11.2 Postpaid GB per month Prepaid GB per month MAXIS growth in data use per subscriber in GB per month

20. DIGI - MALAYSIA • In Q3 of 2015, Digi along with U Mobile launched Free Basic Internet. • Since the introduction of Free Basic Internet, Internet data revenues have grown by 17%. 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 621616597 562539535530507505480449 409374 Digi Internet data revenues in RM million

21. DIGI DATA USAGE PER DATA SUBSCRIBER PER MONTH IN GB • At the same time, data usage per subscriber has grown over the same time period - Q3 2015 to Q1 2017. • Digi estimates that data usage per subscriber will top 6GB per user by the end of 2017. 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 5.0 3.9 3.2 2.8 2.3 1.8 1.51.41.4

22. CELCOM - MALAYSIA • Lost 1.7 million subscribers in 2016, 600,000 alone in Q4 2016 • Lead to the introduction of Free Basic Internet in December 2016 • Data revenues have grown 8% and network costs declined since then • The expectation that Free Basic Internet would drive up network costs and lower data revenues are unfounded 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 Data revenues (Internet) RM m Launch of Freemium Internet Network Cost RM m Direct Expenses RM m 360360372397388 274308297266227 660 609587555516

23. INCENTIVE FRAMEWORK

24. REDUCED USF FEE • USF levies may be reduced or waived for MNOs offering Freemium Internet • Regulatory Impact: Lower USF revenues, which may be difﬁcult to implement if controlled by treasury and not the regulator • MNO Incentive: Direct monetary beneﬁt to MNOs.

25. DEDICATED SPECTRUM • Improvements in spectrum management can make valuable 4G spectrum available in selected parts of the country • Improved spectrum allocation reduces opportunity cost of inefﬁcient spectrum use at no signiﬁcant expense to the regulator • MNOs hoard spectrum to prevent other operators from using it. At the same time, the shift to 4G and 5G means that operators need new spectrum ranges, MNOs will hence be open to a dialogue about a new spectrum regime

26. REDUCED LICENCE FEES • Operators that offer Freemium Internet could be offered a lower service licence fee. • Regulators are unlikely to go this route as it reduces their budgets and therefore power and inﬂuence. • Direct monetary beneﬁt to MNOs.

27. FREEMIUM INTERNET LICENCES • Separate new licences including spectrum and rollout obligations with condition to offer Freemium Internet. • The regulatory burden is the same as for any other new licence • The New MNO would be limited to the next generation business model strategy but could immediately plan a mix of 4G and Wiﬁ networks.

28. ESTABLISHING FIBRE BACKHAUL • Many 2G base stations have insufﬁcient data backhaul and can only be converted to 3G or 4G which more backhaul capacity available at the site • Regulator has several intervention points but needs to co-ordinate with other entities • Allows MNOs to increase the revenue base of existing base stations

29. SUMMARY

30. 600M More Africans could be using Internet UAS Universal Service mostly a question of business model MNOs Freemium Internet makes business sense REVENUE Helps gain new data subscribers VOLUME Pushes data volume TRANSITION Towards an IP-only business model

31. CONNECTING THE NEXT BILLION MAKES BUSINESS SENSE

32. RESEARCH ICT SOLUTIONS STEVE ESSELAAR PARTNER, RIS MBA DR. CHRISTOPH STORK PARTNER, RIS PHD, ECONOMICS 17 years ICT sector research experience in Africa Designed and managed household and business surveys on ICT access and use across Africa +27 84 999 000 2 christoph@researchictsolutions.com 15 years ICT sector experience Senior Technology Consultant focused on strategy, policy and regulation. Conducted multiple FGDs over the last decade. +1 778 865 5695 steve@researchictsolutions.com

Freemium Internet - Universal Basic Internet

Freemium Internet - Universal Basic Internet

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