Convergence: Effecting Evolution of the Telecoms Market

1. Convergence: Effecting Evolution of the Telecoms Market June 2006

2. Contents • The Convergent Landscape • Positioning of Incumbents • New Entrants / Disruptors • The Evolved Telecoms Environment

3. Multiple services on a common network PSTN Mobile IP IP TV • Migration from services embedded in a network to multiple services delivered over a common network Future Model Current Model Web Multimedia Telephony etc Customer Customer Network Driven Services Driven • Limited number of services • Service delivery limited by network • Unlimited number of services • Service delivery limited by access and customer’s device

4. Multiple Access Modes for Single Terminal IP • Common means of accessing services through a nomadic device in home, business, hot spots and wider area • Through Wifi deployment in devices and at network access points • Through 3G, 2.5G & 2G in wider area • Differences in form factor are diminishing • Common operating systems and improved screens and storage on nomadic and mobile devices • Media interfaces possible to overcome differences in form factor • Specialist devices will remain and evolve Web Multimedia Telephony etc Access Mobile Nomadic Fixed Customer

5. Migration to communities Web Community Services User User User User User User User Download only Download and upload Peer to peer communication - Skype - File sharing Source of information - Portal Place of storage and retrieval - MSN Messenger - Google - eBay • Peer to peer disrupts • Technology; unpredictable network loads • Commercially; walled garden failure • Communities provide opportunities for service providers outside access • Communities reduce power of access providers with multipurpose portals such as AOL

6. Generic Positioning Content: Is what you want • Strong content without access is sustainable • Generic content without access is marginal • Strength may come from brand, content value or the community Content Owner Content Strong Portal Content Agg CATV Telco Access Access: Is how you get it • Control of customers access • Ability to offer QoS • Geographic niche or mass • Strong access brands may still need content in consumer market • Generic content will migrate to access except where there is a community • Walled garden approach will be difficult to sustain ISP Weak

7. Access Providers View of Convergence • Principal aim is convergence of all services (voice & data) onto single device • Mobile  continuation of fixed substitution • Fixed  stem the flow of voice revenues from fixed lines • Both have ultimate aim of subscriber giving up “other” subscription • While this battle has been going on for some time, the focus has now moved to data services: • Mobile  3G, with HSDPA and corresponding mobile form-factor changes attempts to shift the emphasis to data; however, there is still persistence with content walled gardens • Fixed  attempts are now being made to develop the broadband opportunity, particularly through the use of VoIP • Both Mobile & Fixed making plays in ISP/Broadband area

8. Case Study – BT Fusion Internet GSM Network • Calls handled via Bluetooth and Broadband connection when within range of Home Hub • Standard GSM phone when beyond Home hub range • Single number is mobile number  Fixed Substitution product rather than convergence • Fixed call rates when using Home hub; Mobile rates elsewhere • Incoming calls always charged at mobile rate • Launched as domestic service to be followed by PABX based enterprise version Partner Mobile Network Operator BTS ADSL HBSC /UNC Soft Switch

9. Entrance of the New Players • Internet companies offering services beyond the PC desktop • Strong plays from Microsoft Mobile, Yahoo!, Google, and Skype • Strategies vary: • Mobile desktop approach from Microsoft and Yahoo! • Straight transfer of PC desktop services to mobile devices from Google and Skype • Common factor is the development of communities, originally around Instant Messaging, but now incorporating VoIP • Strong content owners now also moving into the sector • Satellite TV operator, Sky, making moves with ISP acquisition

10. Case Study – Sky & Easynet • BSkyB, the UK based satellite TV operator recently purchased Easynet, an ISP • Understood that they also have an interest in purchasing AOL’s access base • Aim is to deliver IPTV services • Currently, no interest in moving to triple play

11. Access Providers’ Response to Changing Market Bar VoIP on mobile networks(T-Mobile) Mobile Instant Messaging agreement allows charging for IM similar to SMS Limit access to wider internet – maintain walled garden “3” already signed deal with Skype – as 3G only operator there is no 2G “voice only” network to protect MSN & Yahoo! about to sign interoperability agreement – large community with no fees Only takes one to break ranks - Mandated MVNOs allowing full internet access • Principal aim is to reduce erosion of service revenues that could ultimately leave access providers as purely access providers • Fixed operators have been facing this dilemma for some time Threat to Service/ Revenues: Voice Text Messaging Content Current Action: Long-term:

12. Case Study – TEN MVNO • French regulator recently found all three infrastructure based mobile operators to have significant market power • They are now required to offer access services to MVNOs • Similar position to long-term position in Denmark, and now Spain • Recent launch of new MVNO “TEN” • specialises in providing access to Microsoft-based IP messaging services • Backed by previous CEO of successful fixed competitor Tele2 • First stage in breaking ranks with the walled garden approach of incumbents

13. New Entrants in the Access Space • Threat to players in the mobile space not limited to established internet content players • WiMAX • Claimed to overcome the limitations of unlicensed WiFi • Standards have been delayed but strong push from Intel • Local government & enterprise sponsored access • Proposals to blanket coverage cities and regions • Local GSM • Additional spectrum licensed (UK) for use by private networks • 4G including Satellite • ESA currently looking at inclusion of satellite in 4G delivery of services

14. Evolved Telecoms Environment • Content owners often not interested in owning the customer (e.g. Google, AOL) but reaching the broadest base • New access entrants must still pay for their network deployment and operation, so need a relationship with the end user • Access providers are still in a strong position:- they have the customer billing relationship • Government funded networks may represent illegal cross-subsidies in Europe & challenges mounted in the US based on franchise rights • Therefore, greatest opportunity likely to be for telco with multiple access networks (3G, WiMax, Broadband) who allows subscriber to access all the content he wants

15. Telecos (& Republicans) Want right to charge content providers according to bandwidth and QoS offered Reasonable that services should be charged according to level of service The Net should not be regulated, but left to market forces Telco’s inability to recover costs from where they are incurred leads to reduction in investment Content providers (& Democrats) Want maintenance of level playing field, with no price differentiation Smallest players hit hardest Lead to two-tier internet, with dominance of media giants Stifles innovation; no more Google’s Net Neutrality Debate • Telecoms bill currently passing through US senate