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N e w Services and Opportunities in the Telecom Industry

N e w Services and Opportunities in the Telecom Industry. Bruc e Bowden. | 15 Octobre 2004 |. Agenda. French fixed telecoms market environment Overview of neuf telecom New services. 2003 French fixed telco market. LDCOM estimates. 17%. 26%. All alternatives. France Telecom/Wanadoo.

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N e w Services and Opportunities in the Telecom Industry

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  1. New Services and Opportunities in the Telecom Industry Bruce Bowden | 15 Octobre 2004 |

  2. Agenda • French fixed telecoms market environment • Overview of neuf telecom • New services

  3. 2003 French fixed telco market LDCOM estimates 17% 26% All alternatives France Telecom/Wanadoo Alternatives’ share Evolving quickly in 2004 43% 41% Note: excludes 4.2B Euros in revenues (from 0800, cards, public phones, annuaires, non-corporate leased lines) which added to these amounts results in ~20B Euros total market

  4. Neuf and Cegetel are the key integrated fixed-line alternativesneuf has far superior growth profile; others like Tele2 and Free are well-positioned in their niches LDCOM estimates Evolving quickly in 2004 Note: net of intercompany revenues

  5. FT holds ~75% of the fixed market and ~90% of value New entrants France Telecom French fixed telco market: 20 B€ Mkt . share Revenue Margin Value Mkt . share Revenue Margin Value 0.7 0.4 0.3 20% 60% Data & Internet 2.8 2.8 80% 100% 3.5 B€ Voice (incl. dial-up @ mins.) 3.9 1.9 2.0 35% 50% 7.2 7.2 65% 100% 11.1 B € 0.2 0.1 0.1 3% 70% Access & Subscriptions 5.2 5.2 95% 100% 5.4 B € 4.8 2.4 15.2 17.6 (76%) (88%) (24%) (12%) SOURCES: ART, LDCOM ESTIMATES

  6. Agenda • French fixed telecoms market environment • Overview of neuf telecom • New services

  7. Who is neuf telecom? • A growing alternative operator in the shrinking French fixed telco market • A profitable challenger: net income positive for 1H04 • The company with the most unbundled ADSL lines in Europe • #2 fixed-line telco for French enterprises • A leading innovator in broadband services

  8. 8% share of the fixed market • #1 alternative operator for ISPs and other telcos • #1 alternative operator for enterprises • #4 residential alternative operator neuf has grown rapidly both organically and via acquisition

  9. Growth across all segments Résultats au 30 juin 2004, US GAAP

  10. Neuf has been profitable since inception 101 CAGR 1999 - 2003 = + 83 % EBITDA Net income before extraordinary asset write-downs 42 18 11 9 4 4 0 1 - 5 - 13 1998 1999 2000 2001 2002 2003 Note: Figures in US GAAP

  11. Chart shows pro forma key financials of neuf plus 8 acquired businesses since January 1st 2001 Pro forma revenue CAGR of 12% even during integration; revenue now re-accelerating SG&A reduced from 61% of revenues to 26% and still shrinking EBITDA turned around from -45% of revenues to 10.5% Capex divided by 6; effect of one high-quality network shared by nine businesses Proven track record as consolidator

  12. In M€ Cash flows from operations Tangible and intangible investments Other net investments (*) Cash flows from investments Capital increases Minority interests Other financing - net of repayments Cash flows from financing Exchange rate variations Cash as of 31 December 2003 707 (1 329) 176 (1 153) 800 14 43 857 -3 408 € 200 million in CapEx in 2004 (vs. € 130 million in 2003) Neuf has been funded largely by operational cash flow and equity capital CUMULATIVE CASH FLOWS FROM INCEPTION TO EOY 2003 +707 -1153 +857 408 Financing Operations Investment Cash Figures in US GAAP (*) Acquisitions, net of cash in companies acquired and gains on sales of assets

  13. neuf’s shareholders

  14. The largest alternative broadband network Liste des villes demandée 2 000 communes > 50% of the population covered

  15. Agenda • French fixed telecoms market environment • Overview of neuf telecom • New services

  16. Unbundled DSL lines are the key platform for advanced services

  17. Where do we go from here?

  18. Virtual fiber to the home Faster • Broadband up to 25 Mbps • Priced based on « free » backhaul • Using a technology already built into our network (same chassis, new chipset) • Commercial launch in early 2005

  19. Cheaper Lower cost long-haul protocol Lower cost for retail voice services for an alternative operator Deeper Move from single-site to multi-site to PABX Layer on services Hosted PBX, IP CENTREX Private numbering schemes Unified messaging Virtual offices Cheaper and deeper: VOIP

  20. Advantages Industry momentum in support of IP Operating cost efficiency Service complexity Mass customisation of QoS Incrementality of BP Drawbacks Disruptive to the voice market (user cost of voice -70% over 5 years) Bandwidth anarchy / parasitism Security Hyperactive technological advancement (ROI challenges) Ups and downs of VOIP

  21. More disruptive: MVNO & F-M Convergence French mobile penetration rate is still relatively low with potential strong additional growth … … probably linked to low competition within market maintaining high profitability Penetration rate : 69.5% (+1% Q303-Q104) France is lagging behind Market share Revenue (Bn€) EBITDA (Bn€) 2003 figures Orange 48.8% 17.9 6.6 SFR 35.3% 6.8 1.9 Bouygues 15.9% 3.3 1.0 Stable market share with 30-35% EBITDA return Source : CSFB

  22. Convergence of fixed and mobile driven by customer needs • Telephony becomes personal and portable. Using a phone means more and more using a 'Mobile phone' • 16% of households are now mobile only • France Telecom will launch fixed-mobile bundles before the end of the year SIgnificant mobile vs fixed line substitution • Customers expect "universal" usages : • Voicemail, directory, navigator, … Indoor usage of mobile phones as a continuity of service is growing (already ~30% of mobile calls) • Some customer segments need fixed-mobile integrated offers • Consumer need for more simplicity regarding telecom providers • Futur Telecom already proposes fixed-mobile bundles for the business segment • Cegetel business offer includes SFR mobile offer with bundled prices (special rates for calls between employees) • … a single customer care ? a single bill? VPN rates ? …

  23. Convergence of fixed and mobile driven by technology (I) Broadband Internet strong growth multiplies access points usable for mobile calls collect Emergence of IP technology enables services platforms convergence • Strong growth of mobile calls made in-house or inside workspace … • Full IP networks already enable voice and data intergated services • Voicemail / directory available for consultation over computer or IP phone • … • Fixed and mobile network integration will add mobile sevices • Universal voicemail • Unified SMS / MMS Mobile phone usage by consumers • … that can be captured by fixed operator through millions of residential and corporate modems or routers On net « base station » with a 6fold lower cost than GSM / UMTS cost

  24. Mobile Network GSM Bluetooth, WiFi Fixed PSTN & IP Network OSP Bluetooth/Wifi Access Point Convergence of fixed and mobile driven by technology (II) Hybriphone technology should be available by Q1 2005 3 Hybriphone principles : Customer value • Simplicity • One handset for all calls • One phone number • One voicemail • One bill • Pay less • Mobile minute = 6X fixed minute cost • Same handset for all calls (indoor & outdoor) • Communications between handset and access points through short range wireless (Bluetooth or WLAN) • Access points located at home or in workspace Network interconnexion required Fixed-operator value • Capture revenue (increase ARPU) & margin on mobile calls • Capture revenue & margin on mobile incoming traffic • Optimize cost structure HLR • Already tested & being implemented : • BT in the UK ('Blue Phone' project) • Hutchinson in Hong Kong

  25. MVNO can create major new IT platform needs MVNO B : a 'common offer' on the business segment MVNO proposal A • Customer relation (incl. billing) • Customer care • SIM cards (delivered by SFR) • Brand 'Neuf Telecom' • Added value services Mobile operator responsibility • All network • Traffic management • No direct proposal to become MVNO yet • Commercial partnership for common offer with Neuf Telecom on the business segment (<100 employees) • VPN Fixed-Mobile • One bill, one customer care • … • Already a distribution agreement for the business segment MVNO responsibility MVNO requirements • Minimum yearly traffic • Mobile adapted distribution & customer care • 9 years contract Not a full MVNO offer, even though mobile operator proposes to start discussion on a possible future network interconnection

  26. More content-rich: Starting this Fall in unbundled zones 40 chains in digital quality Paired with digital terrestrial TV (Télévision Numérique Terrestre or TNT) … and a few surprises …

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