2014 06 12 ICT Value Chain Insights - Excomm

DISCOVER. DISRUPT.
DELIVER
Corporate Strategy
12.06.2014
ICT Value Chain insights and TEF read across
DISCOVER. DISRUPT. DELIVER
1. TSR performance and peer group analysis -
profitable revenue growth is the critical driver

2. ICT value chain size, disruptive trends and the
ecosystem war focus on sustainability

3. Market insights - key levers to achieve
profitable and sustainable growth

4. Conclusions and read-across for Telefnica

2
TSR supported by sustainability and cash flow discipline but
turnaround in revenue and margin is our top priority
3 1. Rev 1Y FWD, EBIT margin 1Y FWD; 2. EV / EBIT 1Y FWD
FUNDAMENTALS CASH FLOW USE TSR SUSTAINABILITY
TEF historic TSR disaggregation (1Y FWD estimates) YTD up to June 5
th
2014
F S CF
+ + =
Financial mgmt
drives TSR in spite
of negative
fundamentals +
sustainability
4
Among 26 companies, 10 operators have best 3Y TSR due to
improved Fundamentals and Sustainability
TSR < 0
TSR > 0
Fundamentals +
Sustainability +
5
21
Fundamentals +
Sustainability
contribute
positively to TSR
3
18
Fundamentals
Sustainability +
7
0
All
analyzed
companies
26
Fundamentals +
Sustainability
TSR 3Y
CF F S
+ + >0
F S
+ >0
F S
+ <0
11
TSR 1Y TSR YTD
9
2
2
2
7
2
7
1
9
11
5
Sustainability drivers - TEFs earnings yield gap (inverse PE
vs. Spanish 10yr yield) is back to pre-crisis levels
Earnings yield vs. 10yr Spanish bond yield up to June 6
th
2014
4.6 p.p.
6
and it is now in the middle of the pack relative to our
direct peer group (AMX, BT, DT, ORA, TI, VOD)
Earnings yield vs. respective 10yr National Bond yield up to June 6
th
2014
4.9 p.p.
4.7 p.p.
4.6 p.p.
3.6 p.p. 3.7 p.p.
1.2 p.p.
5.7 p.p. ORA
TI
BT
TEF
DT AMX
VOD
1. TSR performance and peer group analysis:




7
+ $217 bn
ICT value chain near $3trn
1
in retail revenues and
Moores Law driving the consumerization of IT
8
NETWORK EQUIPMENT CONNECTIVITY
CHIPS
DEVICES
APPLICATIONS
AND CONTENT
DISTRIBUTION
INFORMATION
TECHNOLOGY
CONTENT
PRODUCTION
CUSTOMER EXPERIENCE
$878 bn
$328 bn
$1,100 bn
$1,547 bn
$533 bn
+3.3% CAGR
+ $210 bn
+8.6% CAGR

+ $112 bn
+3.1% CAGR

Variation
2012-2016E
Revenues ($bn)
1. Money from final customers. Sources: IDC, Strategy Analytics, Gartner, PWC (2012 data)
9
as Technology-intensive elements are subject to price
deflation, driving innovation and consumer adoption
Computing power Storage
Connectable devices Bandwidth
Source: KPCB Internet Trends, Code Conference (May 2014)
10
Top 25 global brands ICT dominates with over 50% share

14 out of the Top 25
global brands (>50%)
operate in the ICT
Value Chain
In terms of brand
value, these 14 ICT
brands concentrate
$986bn:
61% total
value of Top
25 brands
Connectivity shares a
relevant contribution
(14.1pp out of 61),
but lag behind
Internet (21pp) and
IT Solutions (14.5pp)
ICT
Source: Millward Brown and team analysis
11
Disruptive trends impact the entire chain, not only
telecoms, and pace of innovation keeps accelerating
INCUMBENTS ATTACKERS DISRUPTIONS
CONNECTIVITY
DEVICES
APPLICATIONS
AND CONTENT
DISTRIBUTION
Telecom operators Access Service (e.g. SMS)
Cable
ULL
MVNOs
IT providers
Apps (e.g.
WhatsApp)
Pay TV distribution platforms used to
provide FBB
Resellers leveraging regulation
IT players reselling connectivity
Communication offered through apps
B2C Internet
B2B IT
Media
Mobile advertising shifting to Social
Networks
Mobile ecosystem leaders leveraging
mobile ID for e-commerce
From product (SW license) to
service (cloud)
Content distribution offered through
apps
From product (downloads) to service
(subscriptions)
From product to service: low margin
devices cross-subsidized by other
core services (e.g. advertising, e-
commerce)
The Big 3 technology players compete in all segments
of the value chain with similar products but
12
1. An invitation for device unveiling event has been
made by Amazon for June 18
th
in Seattle
Developers are key: >9m
developers (+50% yoy !!!) in
Apples ecosystem have
created ~1m apps at no cost
for Apple (which actually
retains part of the
generated revenues)
Established ecosystems
expanding to new markets:
Apple focus on Health
(HealthKit), Home
(HomeKit) and Car (CarPlay)
Asian players starting to
build new ecosystems:
Alibaba, Tencent, Baidu,
Xiaomi? (initially focused on
China but now expanding
internationally)
13
sustainability is a concern, even for the most powerful
player in the internet ecosystem at the moment
EV /
EBITDA
7x
$45.6Bn
+12%
x%
+23%
+19%
YoY rev growth
x% EBITDA %
32%
1

32%
2

iPhone revenues alone are larger than the entire revenues of
Amazon or Google and over 10x Facebooks
Apples valuation multiples discount a material reduction in
iPhone pricing and much lower future profitability
Revenues calendar Q1 2014 ($Bn)
5%
2

EV /
EBITDA
20x
EV /
EBITDA
12x
EV /
OpFCF
8x
EV /
OpFCF
53x
EV /
OpFCF
16x
+72%
49%
2

EV /
EBITDA
18x
EV /
OpFCF
25x
1. FY2013A (Sept 2013), 2. FY2013A (Dec 2013)
14
Fundamentals - revenue growth and margin comparison
EBIT Margin
R
e
v
e
n
u
e

g
r
o
w
t
h

Revenue growth vs. EBIT Margin
TELCOS + ICT
TWTR*
*Twitter: 53% Revenue growth; 5% EBIT Margin
FB: 29% Revenue growth; 50% EBIT Margin
FB*
15
Sustainability implied long term growth rates vs. capital
structure suggest higher long term "safety" in telcos
Implied growth rates vs. capital structures
Net Debt / EBITDA
E
B
I
T

/

E
V

Low implied growth
High implied growth
TELCOS + ICT
Average
WACC
*Twitter: -8.3x Net Debt/EBITDA; 0.5% EBIT/EV
TWTR*
16
Leading telcos have the opportunity to exploit the central
role of connectivity in the digital customer experience
CONNECTIVITY
DEVICES
APPLICATIONS
AND CONTENT
DISTRIBUTION
CUSTOMER EXPERIENCE
As a capital-intensive business, connectivity
has significant barriers of entry (more
sustainable vs. other value chain agents)
In the digital world, connectivity is at the
center of customer experience, as the link
between devices and services in the cloud
So we have the opportunity to protect /
reinforce our position, investing in:
The best access network...
with a best-in-class approach to
customers and customer care
and becoming the partner of choice
for the best digital products / apps
We must transition to a subscription based
revenue model and a more agile resource
allocation (i.e. reduce legacy OpEx/CapEx to
focus on growth and transformation CapEx)




17
18
Key levers and opportunities to achieve sustainable growth
Telecom becoming
a data business,
and data is
increasingly used
in mobility
Retail channel transformation
Stronger customer insights leveraging mobile data devices
Connecting the remaining un-connected to data networks
Smartphones and LTE driving ARPU increase in some markets
Bundles enabling telecoms to become total providers of ubiquitous
connectivity plus video, ICT and selected services
Evolution to data-only operations. Opportunity to combine cost
reductions with growth stimulation
Access network modernization (Mobile and Fixed)
Increased network intelligence and operational flexibility.
Virtualization a key driver
IMPROVING PROFITABLE DATA MONETIZATION
SIMPLIFYING THE OPERATIONS & MANAGING LEGACY ASSETS
SPEEDING-UP NETWORK MODERNIZATION
19
Data monetization: insights from across value chain
NETWORK EQUIPMENT
CONNECTIVITY
CHIPS
DEVICES
APPLICATIONS
AND CONTENT
DISTRIBUTION
INFORMATION
TECHNOLOGY
CONTENT
PRODUCTION
What are other operators
doing? What has changed
recently?
What are the best
opportunities to
build bundles
with telecom?
(B2C, B2B)
Where are the
most attractive
partners?
Can we leverage
trends in devices to
connect the
unconnected?
Can device evolution
affect our growth
options?
What are the
best technology
options to
improve our
customer
insights?
A
B
C
D
20
Monetization: Main takeaways
CONNECTIVITY
Back to growth in some
European mobile markets
(Nordic Countries)?
Signals of lower growth in
the most advanced LTE
markets (Korea)?
Opportunity to monetize
international roaming
mobile data usage
Fixed-only players
aggressively entering
Mobile
Mobile payments getting
hot in emerging markets
Mobile + Satellite TV
bundles as a new
opportunity to explore?
A APPS & CONTENT B DEVICES C
IT D
What has changed in 1Q14?
Premium devices looking for
differentiation through increasingly
powerful ecosystems, potential risk
Cheap, powerful devices may help us
boost MBB adoption: connect un-
connected customers
IT vendors investing heavily to
differentiate in customer insight &
experience management
IT & Professional Services providers
rushing to scale enterprise mobility
practices
OTT video is slowly becoming a
Pay-TV substitute
Big 3 Internet players and
Netflix are strongest in OTT
Telecoms entering video chain
to create bundles and increase
customer life time value
Operators can successfully
bundle 3rd party Internet
services with connectivity
In B2B, operators lag other
players in terms of Digital ICT
investment
A pure catch-up strategy in
Digital ICT is not enough
(CenturyLink case study)
21
Bundling leads to increased customer life time value
5, 6, P
+ Private cloud
Public cloud
Security,
Storage
Back up
Monitoring
Personal cloud
Content
Communications
Security / privacy
Social apps,
B2B
B2C
ARPU
(/month)
Churn
(annualized)
Average customer
life
(years)
Life time revenues
(000 )
1P 2P* 3P** 4P***
23.1
41.4
61.7
76.4
23.8%
43.2%
27.6%
14.4%
10.8%
-3.6 p.p
TEF SPAIN example
5, 6, P
3P
2.3
3.6
6.9
9.3
33.3%
642
1,800
5,142
8,489
65.1%
4P vs. 3P

* BAF + ATF

** BAF + ATF+ VC

*** BAF + ATF+ VC+TV

22
Simplification: insights from across value chain
recently?
Can we leverage trends in the vendor
industry to improve procurement savings?
What solutions are vendors offering to
manage legacy technologies?
NETWORK EQUIPMENT
CONNECTIVITY
CHIPS
DEVICES
APPLICATIONS
AND CONTENT
DISTRIBUTION
INFORMATION
TECHNOLOGY
CONTENT
PRODUCTION
A
C
B
What can we
learn from the
IT industry for
process
simplification?
23
Simplification / Managing legacy: Main takeaways
CONNECTIVITY A IT C
Telecom IT shifting to
pre-made, integrated
packages that reduce
complexity
As Chinese network vendors
have reached a
comfortable market
share, we may need to look
at new entrants to enable
additional procurement
efficiencies

NETWORK EQUIPMENT B
Industry trade-offs: some
operators stop doing some
things, to increase focus on
the core
Many operators are placing
Simplification among
top strategic priorities,
and launching operational
transformation programs
Migration to All-IP
perceived as a key
opportunity to simplify
operations and reduce
legacy costs
24
Network modernization: insights from across value chain
recently?
What are the key technology roadmaps
that can affect our access & core /
transport network modernization?
NETWORK EQUIPMENT
CONNECTIVITY
CHIPS
DEVICES
APPLICATIONS
AND CONTENT
DISTRIBUTION
INFORMATION
TECHNOLOGY
CONTENT
PRODUCTION
A
B
25
Network modernization: Main takeaways
CONNECTIVITY
LTE keeps advancing. Some operators
will launch VoLTE immediately
Significant activity in the video
platform space: what is the future of
IPTV?
A NETWORK EQUIPMENT B
Mobile access vendors accelerating LTE
rollouts and developing new features to
boost performance
Small cell demand has not yet exploded,
but analysts remain optimistic and vendors
continue upgrading portfolio
Fiber leads fixed access shipments but
cable and copper-based solutions also will
play a relevant role
Network Virtualization opens the game to
IT suppliers but network vendors are racing
to build their own solutions
What has changed?




26
27
Global trends but local economics main EV drivers are
market size and growth, revenue share and OpFCF margin
2014B Market size (bubbles) relative to TEF revenue share and OpFCF margin
(Ex ARG and VZ)
SPA 21bn
PER 3.8bn
GER 38.7bn
UK 35.3bn BR 34.1bn
CHL 5.5bn
COL 7.8bn
MEX 13.2bn
0%
10%
20%
30%
40%
50%
60%
0% 5% 10% 15% 20% 25% 30% 35% 40%
R
e
v
e
n
u
e

M
a
r
k
e
t

S
h
a
r
e

OpFCF/Revenues
TEF Group 29%
Source: TEF Planning & Control (SP 2013-16)
* IMPORTANT - Market size in TEF Footprint (current )
28
Conclusions dynamic industry and valuable insights
To achieve sustainable and superior TSRs, we need to grow revenues profitably:
revenue and EBIT margin growth lead to higher multiples, driving up TSR performance
Industry analysis reveals that data monetization strategies and selective bundling of
digital services with the best network connectivity are the main tools, together with
operational simplification, to achieve profitable revenue growth
The digital services value chain is highly dynamic and we need to closely monitor
market trends to identify the best opportunities for bundles (partner of choice
strategy for third parties) and offer the best digital experiences to our customers
Corporate Strategy team is dedicated to support Telefnicas global and operating units
to help identify opportunities, accelerate growth and drive superior TSRs
APPENDIX / BACK-UP
29
30
Back to growth in some European mobile markets (Nordic
Countries)?
NORDIC MARKETS ARE OUTPERFORMING THE REST OF EUROPE
Mobile service revenue growth (yoy)
1
1. Source: Nomura. Europe includes 15 countries; 2. Prices shown
for the option with 1,000 voice minutes /month and 1,000 SMS
messages / month (many other combinations are possible)
Market effects: Price wars over in Sweden,
three-player market structure in Norway
Advanced markets in customer experience
management tools
Strong demand for mobile data: migration to
bundled offers, significant upselling opportunity
Innovation in the offer: E.g. tiered-pricing
based on speed ( la Swisscom) in Elisa Finland
2 Mbit/s (3G)
21 Mbit/s (4G)
50 Mbit/s (4G)
Unlimited
data
2

MBB Plans with unlimited data + bundled calls + SMS
2

Contract ARPU evolution in Nordic markets
is clearly outperforming the rest of Europes
23.80 / month
27.80 / month
33.70 / month
Sweden
Norway
-7.5%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14
Finland
+1.3%
+1.8%
+2.3%
Signals of growth slowing in most advanced LTE markets
31
RECENT MARKET DYNAMICS IN KOREA
Growth in LTE Penetration (pp)
20
14
11
8
14
13
11
8
3-9/2012 9/2012-3/2013 3-9/2013 9/2013-3/2014
9%
21%
10%
8%
-3%
4%
6%
5%
-5%
8%
6%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14
ARPU growth (yoy)
ARPU growth
linked to LTE
upgrades
As LTE
penetration
saturates,
ARPU growth
decelerates
Competition
shifting to offer
Unlimited
data plans
Bundles with
other
services
beyond
connectivity

Unlimited LTE data plans (Since April 2014)
As technology-only differentiation saturates, customer insights becoming more relevant
Current Opportunity 2020F
There is an opportunity to monetize international roaming
mobile data usage
32
SIGNIFICANT LATENT DEMAND AND MANY OPERATORS LAUNCHING INITIATIVES
Total demand=
x25 roaming
traffic in 2014
2014
2014
Current
Roaming days
% turning on for data
Usage per user
(relative to at home)
Annual international
data traffic
2020F
2.7bn 5.5bn
50% ~100%
<10% ~100%
~6PB ~>750PB
WiFi
Unmet
2x travelers
Consuming
abroad as
at home
125x
Growth
Latent annual traffic demand for mobile data in
roaming (2014 2020 Forecast)
~6 PB
~150 PB
~750 PB
Total demand=
x125 roaming
traffic in 2014
Operators offering data roaming packages
Offer to take home tariff
abroad for 3/day
Available in 15 European
markets with 14m customers
Strong growth in data roaming
The usage of data goes
up immensely
International plan included in
Simple Choice postpaid plans
Roaming customers: +53% since
launch, 250k/month on average
Plan drives increased usage

33
Fixed-only players aggressively entering Mobile (and
changing wireless markets drastically)
TELENET HAS CHANGED BELGIAN MOBILE
MARKET
BT: A REVOLUTION IN UK WIRELESS IN
2014/15?
Leveraging own assets: fiber network, Wi-Fi (at
FBB homes + hotspots), 4G spectrum assets
Launching Fixed + Mobile offers this year
B2B: 2Q14
B2C: April 2015
Belgium MNOs service revenue growth (yoy)

Telenet relaunch
-3.1%
-6.0%
3.5%
-6.2%
-0.6%
-16.2%
3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14
Belgium wireless market shares

39% 42%
26%
25%
33% 27%
2%
6%
2Q12 4Q13
Sources: Citigroup, BofAML
34
Operators driven Mobile Payments becoming hot in some
emerging markets
Money transfers (P2P
and international),
bill and wages
payments, financial
services (savings,
credits)
Money transfer and
micro-financing
service
23%
New revenues for Safaricom
in 2013/14 came from M-Pesa
KENYA
12m FY14 active users (+15.4% YoY)
6.6
9.9
1Q13 1Q14
Customer base (m)
21%
% of mobile base
with Orange
Money in 4Q14
(where launched)
19%
% of total service revenues
(14% in 2013)
5.9m
FY14 active users (+21.6% YoY)
50% of total customer base
TANZANIA
Mobile wallet (incl.
smartphone app),
payments, money
transfers (P2P and
international)
INDIA AFRICA
1
+25%
1.7m
+26%
3.5m
1Q14 Active users
(+30% QoQ)
1Q14 increase of
transactions (QoQ)
1Q14 Active users
(+28% QoQ)
1Q14 increase of
transactions (QoQ)
1 All 17 countries where Airtel has operations; 2. Currently 2%
Vodafones AMAP revenues, expected to grow up to 10% in 2018
+48%
PAYMENTS BECOMING A (VERY) RELEVANT SERVICE FOR MOBILE OPERATORS IN SOME EMERGING MARKETS
More global revenue (today) for Vodafone than M2M (FY2013/14)
2

35
Mobile + Video bundles - potential opportunity?
Agreement to bundle Netflix with 4G plans
including mobile video as a key claim
you can now get access to our ultrafast
network and use it to stream your favourite
shows and films on the move
3

1. Source: WSJ; 2. Source: at&t (Nov 2012);
3. Source: Vodafone (May 2014)
Demo of LTE-Broadcast technology at Indianapolis
500 race (May 2014 - ~250K attendees)
Wireless streams of ABCs live race broadcast +
video from cars, to mobile devices
LTE-Broadcast could also be used for other services
(e.g. massive downloads of specific content)
MOBILE + SATELLITE TV
Potential Mobile + Satellite TV bundles out of U-
Verse footprint?
~40% DirecTV customers out of U-Verse footprint
1

at&t could connect Satellite boxes to the LTE for
interactivity and other services (e.g. OTT video)
Is this feasible? (Pros & Cons)
MBB capacity increasing (technology, spectrum,
densification): video as a key driver
New technologies (e.g. LTE Broadcast) enable
video to mobile devices with low capacity usage
Mobile has limited operational synergies with
Satellite (but also with Fixed)
Potential marketing complexity? (fitting Pay TV
bundles with U-Verse vs. bundles with mobile)
MOBILE + OTT
MOBILE + LTE
BROADCAST
36
In the US market, OTT video, starting as a complement, is
slowly becoming a Pay-TV substitute
40
60
80
100
120
140
2008 2009 2010 2011 2012 2013
Cable TV Satellite Telco Netflix
Pay-TV subscribers evolution (m HH)
1
Today, traditional Pay-TV is expected to grow mainly due to emerging countries, however trends clearly indicate that in
mature markets TV will shift to OTT and in 10 years OTT will be the preferred way of consuming video world-wide
1
Source MoffetNathanson
2
Source Harris Interactive
OTT used as a complement rather than a
substitute of current traditional Pay TV:
1. OTT restricted to low-value content windows
2. No live content (sports, realities, news, etc.)
3. Still a lot of inertia to consume traditional
TV, especially among older (+36 yrs) segment
However, this trend may change soon:
1. Some OTTs already producing own content,
so they can differentiate vs. traditional Pay-TV
2. Some have shown interest to acquire sports
rights in US and UK markets (Total World
sports rights estimated value of ~$30bn)
3. Higher OTT penetration vs. traditional Pay
TV in younger segments (18-36)
% Americans who subscribe to Pay TV per age group
2
0%
10%
20%
30%
40%
50%
60%
70%
18-36 37-48 49-67 68+
Cable TV Satellite TV Netflix Amazon Prime Hulu Plus
37
Main OTT video threat coming from the Big 3 Internet
players and Netflix
Consumer Electronics
OTT

Media Networks OTT

Stand-alone OTT

Trad. Pay TV OTT

Big 3 OTT

DEFINITION
Content producers and aggregators
that distribute some premium channels
directly over the top, either linearly or
SVOD
OTT players that base their business in
aggregating no-linear low-value
content and monetize it through SVOD
and TVOD at low price points
Traditional Pay TV operators that
complement their business with pure
OTT product offers (either stand-alone
or complementary)
Big Internet companies that try to
strengthen and expand their core
business (non-media) by controlling the
living room of its customer base
Consumer electronics manufacturers
that are already present in most of the
living rooms (consoles and TVs) and
want take its share in the Pay TV
distribution business
THREAT
LOW
LOW
HIGH
MEDIUM
HIGH
N
E
T
F
L
I
X

O
T
H
E
R
S

MEDIUM
Not well positioned to compete Well positioned to compete
38
Untapped opportunity TEFs footprint covers a pay TV
market of 105mn subs but offer video services in 35mn
Pay TV subscriber market in TEF footprint
105m of households
Germany 24.5m
UK 16.8m
Mxico 14.9m
Argentina 8.8m
Centroamrica 4.6m
Brazil 18.1m
Colombia 4.7m
Venezuela 4m
Spain 3.8m
Chile 2.6m
Per 1.4m
N
O
N
-
A
D
D
R
E
S
S
E
D

A
D
D
R
E
S
S
E
D

Total addressable Pay TV subscriber market by TEF
35m of households
Brazil
12%
1
T
E
F

-

D
T
H

&

I
P
T
V

N
e
t

S
e
r
v
i
c
o
s

-

C
a
b
l
e

S
k
y

-

D
T
H

E
m
b
r
a
t
e
l

-

D
T
H

O
i

-

D
T
H

&

I
P
T
V

O
t
h
e
r
s

Colombia
6%
1
T
E
F

-

D
T
H

&

I
P
T
V

Telmex - Cable
EPM - Cable &
IPTV
D
i
r
e
c
t
T
V

-

D
T
H

O
t
h
e
r
s

Venezuela
5%
1

T
E
F

-

D
T
H

DirectTV - DTH
I
n
t
e
r
c
a
b
l
e

-

C
a
b
l
e

S
u
p
e
r
c
a
b
l
e

-

C
a
b
l
e

Others
Spain
-2%
1
TEF - IPTV Sogecable - DTH Ono - Cable
E
u
s
k
a
l
t
e
l

-

C
a
b
l
e

O
t
h
e
r
s

Chile
8%
1
TEF - DTH/IPTV VTR - Cable
Claro -
DTH/Cable
DirectTV -
DTH
O
t
h
e
r
s

Per
9%
1

TEF - Cable/DTH
DirectTV -
DTH
Claro -
DTH/Cable
Others
1
Expected 5 year compound annual growth rate by Pyramid
Research
Become the partner of choice - offer bundles of best local
connectivity with best in class B2C Internet services
Bundling strategies
generate higher
customer life time value

Internet services
encourage use of data
Partnering and
distribution better than
internal development
39
B2C services drive smartphone adoption and data consumption
Bundling of Internet and data services reinforces the effect
B2C Internet is highly competitive: Big 3 ecosystems attract thousands of
competitors. Apples ecosystem has >9m developers who have created ~1m apps at
no cost for Apple (in fact it actually keeps around 30% of app revenues)
Building requires elements not present on Telco: Internet mindset, talent,
agility, no exclusive revenue-focus, global scale, knowledge of highly specific areas
Telecoms around the world are bundling selected Internet services and
connectivity with success (retaining customers and higher ARPU)
Becoming the partner of choice: Telecom bundling is a way for apps to reach mass
market. Telecoms can be the preferred choice for innovative services providers
(power to shape the industry / balance players power)

In B2B operators lag behind other players in Digital ICT
M&A investments
Sources: IDC July 2012, Yankee June 2012, Company Data, PwC, KPMG, TEF Enterprise , Team analysis
Notes: (*) Addressable market CAGR components slightly differ with Telefonicas classification () Other
companies Digital ICT Investment figures estimated from public info and M&A transaction value
estimations. TEF investment estimated from ACENS acquisition. Actual figures may differ.
64%
27%
~14B
10%
Machine to Machine
Cloud Computing
Big Data
Security
Mobile Apps
Digital ICT
Unified Comms.
Managed Mobility
VPN & LAN
Wifi
Fixed & Mobile Data
Datacenter
Core
SMS / MMS
PABX
Fixed/Mobile Voice
Leased lines
Voice lines
Legacy
24%
-3%
5%
If TEF wants to capture growth in the B2B segment, we need to prioritize B2B Digital ICT
Addressable Mkt
CAGR (2013-17)*
Telefnicas B2B Revenue Mix (2013)

TEF has a delicate revenue mix that depends
heavily on traditional Telco services
and is behind other major players in terms of M&A
investments in Digital ICT services
Selected Players Cumulative M&A investment in Digital ICT vs Revenues Ratio (2011-2014)

0% 5% 10% 15% 20% 25%
Telefonica
Telstra
Amazon
Verizon
Microsoft
NTT
SingTel
Google
Rack Space
IBM
Century Link
VM Ware
EMC
Oracle
Salesforce
40
41
Implementing only a catch-up strategy in Digital ICT
will not be enough to succeed
Sources: John Hagel, Deloitte, IBM institute.
Many B2B players have a considerable head-start vs.
telecoms in terms of investment in Digital ICT
E.g. Cloud: huge scale economies already built, relevant
players massively lowering prices in recent years
Thus, mirroring services from large scale IT providers & OTTs
(e.g. IBM, Amazon) will not work (as competition shifts to
price and scale will win)
Telecoms can build differential services using unique assets:
Network, QoS / SLAs, security and trust, integration and
operations expertise, commercial capabilities (local
presence and customer care)
E.g: Bundling cloud with connectivity and providing
improved QoS, enhanced latency, integration expertise,
better customer support and SLAs
Cloud prices becoming commoditized quickly
THE BEST WAY TO COMPETE IN DIGITAL ICT IS THROUGH
DIFFERENTIAL SERVICES LEVERAGING TELCO ASSETS
18%
20%
22%
26%
31%
31%
37%
39%
56%
Lack of continuous availability
Poor service quality
Lack of interoperability
Loss of control over IT
Regularoty compliance
Absence of cost savings
Integration complexity
Inmaturity of technology
Concerns about security of data
Security, trust, integration complexity and poor
service quality are common cloud barriers
Good opportunity
for telecoms to
build differential
services that
address these
issues
$1,000
$100
$10
$1
$0.1
$0.01
1992 2002 1997 2007 2012
$569
Global Storage Cost Trend ($ per GB)
(y-axis in logarithmic scale)
IBM Institute: Cloud adoption barriers Survey (% of respondents)
42
Leveraging telecom assets with IT capabilities may be
starting to pay-off (CenturyLink case study)
Revenues Business segment ($bn)
39%

41%

43%

Strategic
B2B: IP
connectivity
and cloud
(hosting)
Legacy and CPE
1Q12 1Q13 1Q14
49%
52%
53%
1.82 1.84
1.91
51%
48%
47%
B2B /
Total
Recent announcement to offer cheaper
cloud than Amazon Web Services:
cheaper in bandwidth (outbound)
cheaper in cloud (Computing and
Storage)
Developing cloud skills
Acquisitions: Savvis ($3.2bn
2
in 2011);
Tier3 and Appfog (2013)
Partnership with VMware
Doubled cloud capacity last year
50%
7%
AGGRESSIVELY INVESTING TO
BUILD THE OFFER
AGGRESSIVE POSITIONING (vs. CLOUD
LEADERS FROM IT WORLD)
GOOD RESULTS
CAN A TELECOM OPERATOR COMPETE WITH AMAZON IN CLOUD?
CenturyLink
seems to be
exploiting a
strong bet on
Cloud (e.g.
Savvis
acquisition)
Can operators
succeed
developing Cloud
capabilities
internally or
should there be
an inorganic bet?
6.6%
CAGR 12-14
-1.4%
43
Premium devices looking for differentiation through
increasingly powerful ecosystems
iOS as the core of
communications,
navigation and
entertainment in
the car
iOS to manage boarding passes,
movie tickets, gift cards, loyalty
cards
iOS to stream content to the TV
or external speakers
APPLE iPhone
Positioning iOS smart devices at the center of an ecosystem of
functionalities beyond these devices
On June 2, Apple announced new
ecosystems for health and digital
home
PRODUCT:
Upfront
payment; no /
very low fee
for the service
SERVICE:
Monthly fee
& subsidized
device(s)
acquisition
Device-driven Telecom-driven vs.
E.g. in digital home, operators will
compete with ecosystems from
premium device brands, with
different business models
44
Cheap, powerful devices may help us boost MBB adoption:
connect un-connected customers
In some markets,
local smartphone
vendors are
grabbing a
remarkable
market share
68%
40%
7%
6% 5%
China India Brazil Thailand France
Local smartphone vendors volume market share (2013)
% smartphones under $80 with
a processor faster than 1GHz
1
% smartphones under $80 with
a screen larger than 4 inches
2012
42%
8%
2013
87%
38%
Global market
Local vendors
are capturing
share through
increasingly
powerful devices
at increasingly
low prices
Opportunity to
connect the
un-connected:
Drive MBB
adoption in
emerging
prepaid &
low-ARPU
markets (e.g.
LatAm)
Connect
remaining un-
connected in
developed
markets

LOCAL VENDORS IN FASTEST GROWING MARKETS SELL CHEAP, POWERFUL SMARTPHONES
1. As a reference, iPhone 4S includes a 1GHZ processor.
Source: Strategy Analytics, IDC.
45
Local, low-cost Chinese chips are empowering cheap
Chinese smartphone brands
52%
11%
33%
4%
Smartphone processor market share in China (2013)
1

Chinese & Taiwanese chipmakers
are exploiting low entry barriers to
Application Processor Market:

ARM Intellectual Property
Licensing Model reduces R&D
spending and makes everyone
equal. (95% of smartphones
processors worldwide are based
on the ARM architecture)

These suppliers offer turnkey
solutions to handset
manufacturers, reducing risks, cost
and time to market.

What can Spreadtrum do in smartphones?
Bring performance of globally popular smartphones to
$100 price segment
Enable ultra low end $50 smartphone
1. Source: DRAMeXchange, Jun 2013
46
IT vendors investing heavily to differentiate in customer
insight & experience management

Big Data & Real
Time Analytics is
changing the IT
value chain: focus
on data vs.
hardware and
middleware

Main IT players
aware of the shift:
developing /
acquiring skills in
this area is an
strategic imperative
DATA EXPLOSION DRIVEN BY: MOBILE, SOCIAL MEDIA, INTERNET OF THINGS
$100m in 10 labs to improve customer experience by aligning marketing, sales and
services capabilities
Developing curriculum for analytics with 1,000 universities
$24bn invested since 2005 in 30+
acquisitions
$1bn to develop cognitive services and
applications
I.e. Influence Analysis, Life Event Detection,
Psycholinguistics Analytics, Behavioral Pricing,
In 2012. invested $2.4bn in Quest
Software: forecasting suite for
midmarket companies.

In 2014, after going private, has
acquired StatSoft (terms undisclosed):
predictive analytics software that
serves more than one million users.

Applications for offer, procurement,
inventory and field force
optimization.
$12bn invested since 2011 in three big
data companies

In 2013, unified these big data assets
under a common architecture: the
HAVEn Platform.
47
Also OSS/BSS vendors are developing telco-specific
customer experience platforms
Successful players
would be those that
develop analytical
applications with a
holistic view able to
discover insights and
generate
recommendations
within different
operator domains.

TELCO VENDORS LEVERAGE ON THE NETWORK IMPORTANCE AS A SOURCE OF CUSTOMER EXPERIENCE
CEM-related consultancy:
process re-engineering
Technology
implementation/migration
measuring business outcomes
and optimization
Cross-organizational mindset
change
48
IT & Professional Services providers are helping enterprises
to become a mobile business
SHIFT IN CUSTOMER HABITS DRIVES CHANGE: NOW FIRST POINT OF CONTACT IS MOBILE
Usability Testing Labs
Application Factory
Ready-to-go mobile solutions:
channel for customer engagement,
sales force automation

Creative user interfaces resources
to rapid prototyping
Remote testing services for
content providers: high-quality
content and applications
2K+ client implementations
10 industry-specific ready apps that
can save up to 60% time and resources
18 MobileFirst Strategic Studios
Enterprises need to develop
an enterprise-wide mobility
strategy covering:

Open mobile sales and
marketing channels
Drive revenue through
transactions & engagement
on mobile devices
Improve field
service/customer service

To support this cross-
organizational projects
professional services
providers are building strong
practices.

49
Customer Experience Management initiatives at some
operators may be starting to pay-off
CASE STUDY: OPERATOR IN A NORDIC COUNTRY
1

Introduced a Customer
Experience Management
solution for Mobile BB in
2010, with these
objectives:
Decrease resolution
time in customer calls
Monitor customer
service quality
performance
(When needed) scale
to 2
nd
and 3
rd
lines
with complete and
accurate information
Increase of customer
satisfaction
Financial benefits
2010 2011 2012 2013
2011 2012 2013
Consumer
Enterprise
Operator Market average
+[VAL
OR]
+[VAL
OR]
-5.2%
-5.0%
Customer
care /
Network
Management
OpEx
Customer
churn
MBB
Revenues
EBITDA
Annual impact 1Y post-launch
1. Source: Ericsson
50
Industry trade-offs: some operators stop doing things or
make certain choices to increase focus on the core
OPERATOR WHAT THEY ARE NOT DOING WHY?
Fixed incumbents (NTT East /
West) will stop commercializing
FTTH connectivity
Announced May 2014
Regulation: enabling DoCoMo to
commercialize 4Play bundles (to compete
with KDDI)
Focus (B2B / B2B2C): Value Partner for
customer to accelerate transformation of
customers business models
Not creating global OTT apps,
seen as an external trend that
local connectivity operators need
to embrace (as enablers)
Focus: offering good local products and
services, monetized through clever
pricing, leveraging best local network
assets
NON EXHAUSTIVE EXAMPLES
Not interested in local operators
outside USA (different strategy vs.
at&t?)
Focus: local market (B2B+B2C) + global
B2B services based on IT layers
beyond raw connectivity (leveraging
international cloud assets from
Terremark acquisition)
51
NTT shifting to a wholesale + B2B-only strategy for FTTH
FROM B2C TO B2B2C
Current model
NTT East and NTT West
directly provide fiber
access services to end
users
Carriers MVNOs, ISPs
Companies in
other industries
Wholesale fiber access service (Value Partner)
Transportation
Tourism
Health Care
Distribution Manufacturing
Environment
Sports /
Entertainment
A variety of market players provide their own integrated
services to end users through the wholesale fiber access
service of NTT East and NTT West
Hikari Collaboration model
52
Operational simplification: the case of Belgacom
Accelerate simplification of networks to
decrease operational costs
and employ new IT enablers to simplify
products & processes for better customer
service & higher efficiency
3.7M PSTN equivalent lines to migrate and
1k switches to be removed by 2018
100% ATM lines migration by 2015
Out-phasing and selling of 30 technical and
office buildings
Reduce order introduction time with 50%
Increase automatic order handling with 25%
Reduce repair field interventions with 15%

NEW STRATEGIC PRIORITIES (01/14) AND SIMPLIFICATION TARGETS
53
DT have been very explicit on their targets for
switching-off the PSTN
All IP migration
among Top 5
Strategic
Achievements in 1Q14
100% Fixed lines
migrated to IP in
2018
LTM
1
(1Q14): 21.4%
FBB lines (+10.6pp)
and 12.5% Fixed lines
(+7.0pp)
Explicit targets for PSTN
switch-off in Germany:
1. Last twelve months
0.6
1.2
2.6
1Q12 1Q13 1Q14
Retail IP accesses (m)
5.5
12.5
9.8
21.4
1Q13 1Q14
% Retail IP accesses (%)
Fixed lines
FBB lines
DT - Germany
100%
Fixed lines
migrated
in 2018
Objective:
54
What new entrants in the network vendor space could we
leverage to increase procurement efficiencies?
0%
10%
20%
30%
40%
50%
60%
70%
Market share of key vendor groups
(% of total market share) +30,8% RAN revenues in 2012: KDDI,
LG U+, Korea Telecom, SK and Sprint.
2013: 3 (UK and Ireland) and Telefonica
Chile, MTS and Reliance
Assigned Seoul in the first
LTE-Advanced deployment
Are Chinese vendors comfortable with the
market share gained till 2011 ?
IP Edge market identified in their
Investors Day as key area of growth.
Till 3Q13, 78 contracts including
Softbank, O2 (UK), Metro PCS, Mobily.
Which other players can perform the role of
challengers ?
Source: Ovum.
CHINESE VENDORS ARE NOT GAINING SHARE SO INTENSIVELY AS BEFORE
1Q06 3Q13
In 2013, Infinera growth 23% compared to
the total Optical Network market which
declined by 1%.
55
For processes that can be standardized, Telecom IT shifts
to pre-made, integrated packages that reduce complexity
TELCO PROCESS STANDARDIZATION
Vendors standard-based suites are maturing
Increasing domain coverage
Investing in preintegration of components
PRE-INTEGRATED & STANDARDIZED
VENDOR SUITES
Less operational complexity
Lower integration costs
Faster time to market
Enhance customer experience
Fewer bugs
Expert support and training
Telcos demand evolving from proprietary software to standard / pre-integrated solutions
Main drivers: reduce cost, increase agility
TMForum drives collaboration between
carriers and IT suppliers to define a
standard framework of carriers
processes covering:

Infrastructure & Product life-cycle
management
Operations management
Corporate or business support
management
56
LTE keeps advancing - some will launch VoLTE imminently
4G ClearVoice launched in May 2014
Initially on Samsung Galaxy Note 3
No additional charges. Emphasis on quality,
services (call forwarding, call waiting) and ability
to use voice and data simultaneously
Announced for late June 2014
Initially on 4 smartphone and 2 tablet models
No additional charges. Emphasis on ability to
use voice and data (up to 150 Mbps)
simultaneously
Video calling planned for 2015

HDVoice launched in May 2014
Initially on Samsung Galaxy S4 Mini, with
coverage in 4 local markets
Emphasis on quality and ability to use voice
and data simultaneously
Launched in May 2014
Initially on Samsung Galaxy Note 3
Free upgrade. Voice and Video calls
Emphasis on faster call set ups, better voice
quality and ability to use voice and data
simultaneously

SEVERAL OPERATORS LAUNCHING / ANNOUNCING VOLTE IN THE LAST MONTH
57
What is the future of IPTV platforms?
Migration of IPTV platform (Mediaroom) to a new OTT
one (TV 2.0), starting by high value customers
Android-based,
with specific
middleware
(developed by
partner i-Wedia)
In-house
customization
Aim to unify TV experience across devices:
Cloud / Multi-device functions are differential vs.
traditional IPTV solution
Sold only with premium bundles (Vivo M, L, XL),
including FBB speeds >300Mbit/s
Phasing out TV 1.0 (IPTV) expected for 2017+
800K TV customers in Korea with Open Platform
Strategy on Android OS
Claim they are
first operator
to converge
IPTV with
Google TV
Open to Google
Play apps
82
661
789
4Q12 4Q13 1Q14
Fast growing customer base (~+130K / Q)
58
Mobile access vendors accelerating LTE rollouts and
developing new features to boost performance
Total investment in mobile access will remain
approximately flat: -1% CAGR14-18
LTE shipments are forecasted to surpass
decreasing 2G/3G shipments in mid 2015
This forecast could be accelerated if carriers
leapfrog 3G and move straight to 4G
Vendors are implementing trials of LTE-Advanced
with new techniques that enable:
higher data speed and capacity.
better customer experience specially far from
the antenna
Max Speed
LTE
2G/3G
Other
2-band 10+10
Comm.
Launch
Technique Vendor Operator Event
150 Mbps
G
l
o
b
a
l

I
n
v
e
s
t
m
e
n
t

(
$
b
n
)

MARKET OUTLOOK
1
FUTURE DEVELOPMENTS
2012 2013 2014 2015 2016 2017 2018
20
30
40
3-band 20+10+10
Trial
300 Mbps
?
2-band 20+20
Comm.
300 Mbps
CA+MIMO 4x4
Trial
580 Mbps ?
MIMO 4x2
Deploy.
-
FDD+TDD-band
Trial
540 Mbps
10
1
Source: Ovum and Team Analysis.
59
Small cell demand has not yet exploded, but analysts
remain optimistic and vendors continue upgrading portfolio
137K
100K 1M
32K 200K
300K 900K
120K
Specific solutions for enterprise,
indoor and outdoor
Macro vendors: capacity to
optimize macro/micro
coordination
Femto vendors: long
experience in the residential
femto market
Wifi Vendor: advancing in
integration with carriers core:
automatic logon, traffic steering.
All developing capabilities to offer
3G&4G&WiFi integrated products:
Cisco acquisition of Ubiquisys
Ericsson acquisition of BelAir

Macrocells
Femtocells
Carrier Wifi
More than 2 MM
3
of Carrier Wifi Access Points deployed
by Asia and US carriers
As of 1Q14, only 100K 3G/4G urban small cells deployed
but analysts forecast
1
5 MM in 2018.

at&t: opportunistic deployment: up to 40K in 2015
1.Source: Mobile Experts LLC for the Small Cell Forum
2.Residential femtos not considered in small cell market. Currently 7.7m deployed mainly for 3G coverage.
3.Source: Ovum report
Small cells market has not yet exploded
LTE has reduced urgency (increasing capacity short-term)
Exception: Carrier WiFi deployments
but macro, femto a wifi vendors continue upgrading
their small cells portfolios
2014
2018
Outdoor Urban SC
Indoor Urban SC
2 MM 4 MM
60
Fiber leads fixed access shipments but cable and copper-
based solutions also will play a relevant role
MARKET OUTLOOK
1
FUTURE DEVELOPMENTS
Global current investment in fixed access is dominated by
GPON solutions but with significant regional differences:
In Western Europe and North America VDSL2 captures
significant attention.
In South America and US, cable represents around 50%
of shipments
To extend copper life, new techniques are being
tested by fixed lead vendors:
2012
Vectoring (deployment): up to 100 Mbps in FTTN
G.Fast (trial): easy-to-install fiber to the door
(remote power, avoid deploy fiber drop )
2013 2014

Next generation of fiber available but ahead of
residential demands: considered for mobile/corporate
backhaul.
Cable evolution standard already defined: 10Gbps
down/1Gbps up. Trials: end of 2014.
PON (fiber) Cable VDSL2 ADSL2+
1.Source: Ovum
61
Network Virtualization opens the game to IT suppliers but
network vendors are racing to build their own solutions
Network Vendors
Major IT Vendors
Cloud Middleware Vendors
Vend. specific net. funct.
Creating internal units to manage the challenge.
Developing complete architectures and roadmaps.
Examples:
Ericsson: plan to virtualize most major functions
2014-2015
Huawei SoftCom: vision for whole virtualized
network.
Assuming different deployment scenarios: providing
full stack or working with layers of third-parties
Conducting major trials with leading operators: at&t,
Telefonica and most recently NTT DoCoMo
Mobile Core (EPC), IMS and CPE first candidates to
virtualize. First commercial products expected end
2014.

De-coupling software-hardware allows to increase the choice
of suppliers in every layer (e.g. non-traditional vendors)
Conscious about the risk, main Network Providers have
embraced the concept and try to lead the shift
OSS/BSS
Network Functions
Orchestration & Control
Servers, Storage
A
P
I

A
P
I

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I

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