Critical Challenges for Mobile Digital Convergence

María José Aguado GómezShangai, November 2nd

The perspective of an operator

2

Index

Telefónica

The environment for Digital Convergence

Telefónica España: The best starting position

Telefónica España: An ambitious strategy that will extend our leadership

1

2

3

4

3

Telefónica

4

Telefonica has experienced a deep transformation over the last twenty years

Clients 8.9 million subscribers

203,2 million subscribers(*)

1984

X 21

Financial Data

Revenues: 2.3 B€Assets: 10.3 B€Mkt. Cap: 1.6 B€

Revenues: 52.9 Bn€ (*)Assets: 108.9 Bn€ (**)Mkt Cap: 83,9** Bn€ (*)

X22x10x52

Spain with a population of 38 million

WorldwideLatin America, Europe, Africa & Asia > market potential of 760 million

Footprint X 20

Human Resources

67,000employees

More than 230,000 employees

x3

Note: Financial data as of Note: Financial data as of the end of 1984

Services Diversified and large offering of products & services

Fixed line voice and other basic services

@x

2006

* Dic 2006 ** Jun 2006

5

Index

Telefónica

The environment for Digital Convergence

Telefónica España: The best starting position

Telefónica España: An ambitious strategy that will extend our leadership

2

3

4

1

6

The environment is characterized by fast change and transformation

Convergence among sectors

Breaking and dynamic Innovation

”Coopetition” Competence and Cooperation

The Consumer is “the king”

Globalization

Growing Efficiency

All the agents of the sector are

affected by these

tendencies

7

The competence is being consolidated around global players

Telecommunication Operators

55% of the market

Infrastructure providers

Source :Bloomberg

Mobile handset providers

76% of the market

Latin-American market

62%

North America market

54%

West Europe market

60%

4 4

2

2

4

Number of players

8

Convergence

Residential Gateway

Content Ubiquity

Personal TVInstant

Messaging F-M

Management of all the communication and

entertainment services

TV at home, at the PC and at the

mobile

Entertainment, information and

communication services at the TV

Unique handset for mobile voice (GSM) and fixed

voice (WiFi)

On-line communications at the PC and at the

mobile

All the services at a unique

mobile handsetIntegrated Mobile

Handsets

Dual Handsets

The convergence is a progressive tendency

9

A New Global Digital World has emerged

Note: Data for 2006 in Telefónica marketsSources: Pyramid, Euromonitor, Yankee, Ovum, WCIS, Comscore and internal

estimates

193 m PC’s

513 m mobile

phones PC

Mobile

Multimediaequipment

1.5 m IPTV users

36 m mobile games downloads

72 m blog users

6,400 m MMS sent per year

65 m onlinecommunity members

New consumer

trends

New business models

NetworkCustomers Devices

Digital services and content

44% householdswith digital cameras

24 m households with game consoles

Internet players

Other service

providers

Bandwidth2001 2006x40

Broadband users2001 2006x13

Hyper connectivity Proliferation

Telecom operators

BroadbandAccess F+M

IP Digital

Network

Bandwidth and volume

IP traffic:

>90%

Traffic2001 2006x25

Service providers

10

The role of Mobile Digital Convergence

Mobility and Broadband are driving a New Digital World around the customer providing plenty of opportunities

We have aligned our organisation to capture these opportunities

Integrated deliveryBenefits of scale

Sources of growthExtracting value of

industry transformation

GLOBAL GOALS

11

Broadband

Sources of growth

Broadband will be the dominant

access type

Demand explosion for

digital services and

content

Higher bandwidth

Mobile voice will continue growing

* Including M2MNote: Data in Telefónica markets

Sources: Pyramid, Yankee, and internal estimates

Voice(Penetratio

n)

Digital services(Millions)

Penetration

Bandwidth

(Mbps)

Mobile

1.1

2006

~7

2010E

Mobile music audio users

3G handsets / customer basex 8

x 10

x 7

71% 94%+23 p.p.Mobile access/population

4%35%

1.4

~14

>70% in Spain, UK and German

y

> 135%*

in Spain, UK and German

y

Fixed

19%

10 100

2006 2010E

x 6

IPTV customers

1.5~9

Fixed BB/householdsx 2

x 10

64% 61%-3 p.p.

Fixed access/households

35%

>50% in

Spain, UK and German

y

12

Integrated delivery

Integrated delivery will facilitate a set of opportunities...

...and technology will enable it

Access to any type of service from any type of device in a seamless way

Attractive, easy and user-friendly customer experience

Bundles* Telefónica’s markets Millions

2006 2010E

x 2 To address customer needs

*Includes 2P and 3P bundles

“All IP” networks and

platforms

Content Digitalisation

26~55

Efficiency improvement—OpEx and CapEx reduction —Better use of resources

Better quality—Key differentiation factor —Sustainability of price premium

To achieve operational excellence

13

Customer needs are increasingly more global

Benefits of scale

Suppliers are

more global

Technology is more global

Global procurement Common

development of Product & Services

Common operations

Faster deployment of services

Best practices transferred across countries

Lower OpEx and

CapEx

Faster time-to market

Knowledge sharing

Global scale

The New Global Digital World ... ...provides new opportunities

14

Index

Telefónica

The environment for Digital Convergence

Telefónica España: The best starting position

Telefónica España: An ambitious strategy that will extend our leadership

2

3

4

1

15

Spain will maintain a positive macro environment

… and market trendsPositive macro environment…

GDP: +€119bn

Private consumption: +€66bn

Population: +1.5m people

Increasing demand for telecommunication services

• New users

• Room to increase adoption rates

Business opportunity beyond connectivity

+2.9%

+0.9%

+2.2%

+0.2%

Spain Euro zone

+2.8% +1.8%

Source: “Consensus Forecast” for GDP and private consumption; INE and Eurostat for population

CAGR 06-10E

Population: 45 MM

16

We are in the best starting position to capture this growth

THE BROADEST AND DEEPEST RELATIONSHIPS

THE STRONGEST COMMERCIAL REACH

A REFERENCE IN EFFICIENCY

THE MOST SATISFIED CUSTOMERS

17

The broadest and deepest customer relationships

>35% exclusivity in Households >50% exclusivity in SMEs and SOHO >70% exclusivity in Corporate

Market share (FY2006)

Source:CMT, Telefónica, companies press releases

59%

Share of revenues

56%

Share of accesses

Fixed Broadband Mobile

50%

Share of revenues

46%

Share of accesses

> 45 million accesses

… with the best

customers

The broadest …

… the deepest …

18

We have the most satisfied customers

Wireline

Wireless

The strength of our networks and operations allow us to offer the best customer experience

6.996.85

Global satisfaction index (Q2 07) Residential; TV and Broadband customers

Global satisfaction index (Q2 07)

Lowest churn

“Best ISP”

Source: Asociación Internautas feb-07; Telefónica; CFI

6.716.49

6.21

19

The strongest commercial reach with outstanding growth opportunities

≈2,600 sales force for Corporate and SMEs … >75,000 interactions/month

≈10,000 call center positions … 13.5 million contacts/month

Online channels … >15 million visits/month

>7,300 points of sale… >4 million customers/month … more than twice the number of exclusive points than any other competitor

20

We are a reference in efficiency

≈25% reduction in wireline business workforce in Dec.02-Dec.06:

Redundancy plan (ERE)

Application of “lean operations” to all business processes

Source: ML European Broadband Matrix Q2 07, Telefónica.* Includes own workforce and outsourced employees

Employees (wireline) dec-06

Increase in Accesses per Employee (wireline)(Dec.07E/Dec.02)

64,109in 1997

32,39755,705

82,000 86,315 99,902

+40%

+70%

Accesses/equivalent employee*

Accesses/employee

21

Index

Telefónica

The environment for Digital Convergence

Telefónica España: The best starting position

Telefónica España: An ambitious strategy that will extend our leadership

2

3

4

1

22

Our winning mindset is our key value driver

Controlledchurn

More custome

rs

More revenue

/ custome

rREVENUE

GROWTH

Lead the broadband business

Lead the Corporate business

Lead the mobile space

Lead the growth in entertainment

23

We will lead the rapid growth of the mobile data business

Mobile BB/laptops(market)

Strong data

adoption and usage

…

dec-06

>70%

dec-10E

New services: Applications on the move Access to leading services from mobile Speed and ease of use

80% population coverage with HSDPA by 2010E

3G roll-out

Progressive upgrade of handset base

3G handsets/customer base

Data ARPU /ARPU

… supported

by commercially oriented roll-out of

3G networks

20%

14%

2006 2010E

20%-25%

≈80%44%

Non P2P SMS data revenue/data revenue

dec-06 dec-10E

5%

>70%

9%jun-07

24

We will keep enhancing our services

Browsing & Connectivity

New businesses

Enhanced messaging (SMS 2.0) Fulfilling group communication and mobile-PC

communication needs

Easing browsing system New partnerships (GYM) Open access navigation Extending mail services to residential

business Enhanced handset navigation

capabilities

Multimedia Strengthening content offer

based on communities Enhanced TV offering

Advertising: 1st Spanish mobile portal to include advertising

M- commerce Betting …

P2P communications

25

Mobile customers Millions

We will lead the mobile voice business

More custome

rs

More voice usage

Proactive customer acquisition focused on value

Maintain a “Best in class” churn rate

Expanding MoU through innovative pricing schemes leveraging community effect

Outgoing traffic Bn minutes

2006 2010E

>+8%

+5%/+6%

dec-10E

21.5

dec-06

Including

M2M

27.7

CAGR 06-10E

Mobile penetration(market)

10-14%1% %M2M

Outgoing MOU (Q2 07/Q2 06)

Reported

+1.8% +3.5%

Excluding M2M

≈120%103%

dec-10Edec-06

104%≈135%

105%107%

jun-07

≈120%

26

Our actions are yielding good results

Mobile Data Mobile voice

Outgoing ARPU Data Growth

1.5%

8.6%

Q1 06Q2 06Q3 06Q4 06Q1 07Q2 07

Postpaid net adds. Jun.07/Jun.06. Thousands

Last 12M

Increase in data usage in Q2 07:X7 year-on–year

x2 quarter–on-quarter

1,5261,356

472

MOBILE SPACE

Source: Telefónica, companies’ press releases

157

349

390

309

408

43Q2 06 Q3 06 Q4 06 Q1 07 Q2 07

27

New services and enhanced functionalities in Q4 07

New devices

for laptops

connectivity

Blackberry service for 5€/month “Mail Express” for 2€/month

1st player in the world to launch: Smartphone Blackberry 8120: convergence in

access (WiFi/GPRS) and services (multimedia applications and e- mail)

BlackBerry Unite: downloads of content from a BlackBerry smartphone to a PC

e-Mail for the mass

market

Morefunctionalit

ies

Enhanced TV

offering

From 26 to 42 TV channels Agreements with key players: FOX, CNN,

Paramount Comedy, Cartoon Networks…

Sony-Vaio laptops with embedded exclusive 3.5G modules

1st player in the world to launch Novaltel’s HSUPA modem

28

Increased demand for broadband

2010E2000 2006

x 7

x 9

Average bandwidth 2010E: 10x vs. 2006

SDTV0.32 Mbps 4 Mbps

Online Games0.5 Mbps 1 Mbps

BB Internet5 Mbps 10 Mbps0.2 Mbps 0.2 MbpsIP Telephony

Peer to Peer10 Mbps 20 Mbps

HDTV0.5 Mbps 12 Mbps 3DTV 16 Mbps0.7 Mbps

Videotelephony1 Mbps 1 Mbps

Videoconference 4 Mbps

Mobile2 Mbps 7 Mbps

4 Mbps

Total communications traffic in Spain*Thousands Terabytes 18,000

2,200

300* Telefónica estimates

29

We will lead the massive adoption of broadband connectivity services

Massive use of fixed

Broadband

Market-driven fiber

deployment

BB customers Millions

3.7

dec-06

6.1-6.8

dec-10E

From 42% to 75% BB penetration in households with fixed access

Retail BBMarket share 56% 53%-57%

Sustaining BB revenue per access

Wireline BB Coverage % loops

10 Mb 30 Mb 100 Mb

6.7

dec-06

11.0-12.0

dec-10E

BB Market Million accesses

Selective deployment by zone

~€1bn capex 2007-2010E

00

>40

>8054

Enhanced speeds Higher contribution from VAS

(Imagenio, security, maintenance…): ≈30% of BB ARPU in 2010E vs. 16% in 2006≈25

dec-06 dec-10E dec-06 dec-10Edec-06 dec-10E

30

Entertainment: A new digital TV in Q4 07

PAST TV

Enhanced functionalities and new content

Access to most of the content of the 4 leading TV channels in Spain broadcasted during the last week

Rewind TV Instant recorder Personal recorder

From 120 to 160 channels New thematic packages (immigrants, children …) Prescreening of series Soccer summaries New theatrical releases

Enriched content

PVR

SHIFT TV Capability to pause live TV channels

31

Entertainment: the consumer as the decision maker

Past TV Shift TV PVR:

Rewind TVInstant recorder

Personal recorder

New content

HDTV Multiroom Advanced

EPG Advanced

PVR Photo and

video sharing

Interactive advertising

Real video on demand

Most flexible Pay TV offer in the market

EPG T-

commerce

Imagenio on the move

Advanced T- commerce

Other advanced functionalities

Today Q4 07 Q3 08ETo be developed

Entertainment value proposition

32

This will support the growth of the Pay TV market

Commercialization in bundles Continuous learning to improve

customer experience

dec-10Edec-06

Imagenio customers MillionsPay TV Market growth

We are driving the growth of Pay TV market…

…and new functionalities will boost the growth

Additional growth potential leveraging new functionalities

0.4

1.2-1.4

1.0

Jun.07/Jun.06

>20%

>8%

Areas with Imagenio coverage

Total market

33

We are working closer with key partners

TV

Partnerships with third parties to develop and offer innovative services and applications

Partnerships to acquire and distribute content

Aggregation and distribution of content — Modularity, flexibility and advanced functionalities as main differentiation factors

User Generated Content offerings (e.g. web 2.0.) leveraging Telefónica’s own platforms and 3rd party products

Services and Content (Cross-platform approach)

PCMobile

34

Digital services and content will further contribute to growth

“Personal TV” based on IPTV

Satellite to reduce time-to-market

Cable only to leverage existing assets (e.g. Perú)

Attract online audience and monetize it, mainly through advertising— Internet TV + Music

(Terra TV, Pixbox)— Communities (e.g. “Espacio Terra”)— User Generated Content

(e.g. “Tú Reportero”)

Terra unique usersMillions

2006 2010E

x 2

* Non SMS data active users for the last 3 months

PC

~9044

Mobile data active users*Millions

Develop new services with open garden approach:– Information (e.g. search)– Communication (e.g

Instant Messaging)– Entertainment (e.g. Music,

TV)

Stimulate Internet usage, monetising it through data traffic, advertising and pay-per-use

Foster friendly data-enabledhandsets

2006

~70

2010E

x 4

Mobile

17

Pay TV customersMillions

2006

~5

2010E

x 5

1

TV

35

… and it will radically transform our revenue profile

Telefónica España revenue structure

* Includes Wholesale, Interconnection, consolidation adjustments and others (Group companies, handsets, others)

Capturing the full

potential of BB and wireless

data

+2.0%/+3.5%

62%

18%

€19.8bn

FY2006

30%-32%

52%-55%

14%-16%FY2010EFY2002

20%11%

69%

19%

€15.7bnFixed and mobile data

Mobile and fixed voice and access

Wholesale and other*

CAGR 06-10E

36

We are leveraging integration to better serve our customersand to be more efficient…

Full integration of key functions:single management team

Full integration of IT and operationsto capture synergies and develop commonplatforms under a new operating modelFull integration in Corporate business

In Residential and SMEs, convergent marketresearch, cross selling and convergent P&S

…while maintaini

ng our commercial focus

Integrated stores

37

Content

Integrated deliveryBenefits of scale

Sources of growth GLOBAL

GOALS

Through this triple effort we will enhance our leadership and competitive position, providing superior growth and returns

Extracting value of industry

transformation

38

In summary…

Sourcesof

growth

Integrated delivery

Benefits

of scale

Industry transformation is creating the New Global Digital World

~€7.5 bnSynergies for the 2007-2010E period

> 5 p.p.(OpEx+CapEx)/ revenues reduction 2006-2010E

> 290 mAccesses in 2010E

~20 m Fixed BB accesses

~50 m 3G users

+

+

39

Telefónica: a unique incumbent

ON MARKET LEADERSHIP

ON GROWTH

WITH A WINNING MINDSET

40 40