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