Telecom Operators March 2012 Let's face it Core telco revenues the decline is here to stay: -1.8% p.a. until 2015eOver-the-top services: a major threat for mobile but an opportunity for fixed-lineDiversification into adjacent markets can add significant revenues, but not enough to stabilise the top-line Big opportunities to transform costsMega-operator, local hero or infrastructure play: different telcos will make different strategic choices Telecom Operators

Contacts Exane BNP Paribas Antoine Pradayrol antoine.pradayrol@exanebnpparibas.com Exane BNP Paribas, London: +44 207 039 9489 ARTHUR D. LITTLE Didier Levy levy.didier@adlittle.com Arthur D. Little, Paris: +33 1 55 74 29 62 Please refer to important disclosures at the end of this report. www.exanebnpparibas-equities.com Telecom Operators

1 Executive Summary This11theditionofthejointannualreportbyExaneBNPParibas-ArthurD.Little focuses on the consequences of the move to all IP for European telecom operators. Is theopportunitylinkedtoinnovativeserviceslargerthantherisktolegacyrevenues? What are the key strategic choices available to telcos across Europe? In preparing the report, we have met with 105 organisations in the telecom-media-technology arena and beyond, across 15 countries. All in all, we see core telco revenues continuing to decline by 1.8% p.a. until 2015e. The move to all-IP enables anyone to propose IP-based services over any network. This is the over the top (OTT) concept. In fixed-line, OTT TV is more an opportunity for telcos than a threat an opportunity to gain market share in TV and to accelerate super-fast broadband adoption.Inmobile,OTTisadirectthreattolegacyvoiceandSMSrevenues.SMScanbe displacedrapidlybyindependentandembeddedmessagingapplications.Operators are taking defensive steps, but the downside risk remains significant. In an all-IP world, everythingwill be connected. This creates opportunities for telcos in adjacent markets such as automotive, energy and utilities, financial services, etc. We estimate potential revenues at 4-9% of large telcos revenues by 2015e, significant but not enough to reverse the overall negative trend.Inthiscontextofprolongedrevenuepressure,telcosmustacceleratetheircost transformation. We identify large cost saving opportunities both in opex (online-centric business model) and in capex (network consolidation/sharing).Operatorswillincreasinglymakedifferentstrategicchoices:1)mega-operators, competing(andcollaborating)withOTTproviderswhichwillrequirebothscaleanda rangeofnewcapabilitieslikelytoleadlargeincumbentstomakeacquisitions; 2) localheroes,withlimitedgeographicfootprintandapresenceinsomevertical businesses; 3) infrastructure plays, focusing on the network while developing a range of partner agreements in services and distribution. Figure 1: Contributions to the sector growth core telco revenues (7%)(6%)(5%)(4%)(3%)(2%)(1%)0%1%2%3%4%5%6%2010 2011 2012e 2013e 2014e 2015eMTR Mobile data Voice & text Fixed telephony Fixed broadband Pay-TVSource: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

2 Lets face it, the decline in core telco revenues is here to stay We expect core revenues from European telecom services to continue decreasing until 2015e, by 1.8% per year on average, including a CAGR of -2.4% in mobile and -3.4% in fixed-line, partially offset by +5.8% in pay-TV. Theexpectationofadeclineisconsensualamongindustryparticipants,buteven though we expect strong growth in mobile data (the single most important growth driver in the sector), our overall forecast is more bearish than consensus. In a nutshell, we expect the 2011 trend (-2%) to continue in the coming years, for three key reasons: 1) the riskof cannibalisationof voice and text revenues hassignificantly increased,withover-the-topservicesdevelopingfast;2)infixed-line,broadbandand pay-TVarefarfrombeingbigenoughtooffsetthedeclineintraditionaltelephony; 3) thetougheconomiccontextisheretostay,withadirectimpactonusageand indirect impacts on competition and consumer behaviour. Forincumbentsintheirdomesticmarkets,wemodelcorerevenuesdown3.6%p.a., giventheirhigherthanaverageexposuretofixedtelephony,despiteourexpectations of improving broadband market share and increasing pay-TV market shares. The largest uncertainty in the sector is mobile data monetisation: even a small tweak to our 2015e assumptions regarding traffic per smartphone and revenue per GByte could lead the whole sector to return to growth. On the other hand, stronger cannibalisation of voice and text could lead to an even faster decline (-3.8% CAGR).However,ouranalysisofmobileoperatorsreturnoncapitalemployedshowsthata returntogrowthistoooptimistic,asitwouldimplyoperatorsincreasingtheirreturns despitethetoughenvironment(economy,competition,regulation,networkcapex) whilethebearcasewouldimplyreturnsofchallengermobileoperatorsfalling significantly below their cost of capital, hence driving massive consolidation. OTT: risks in mobile larger than opportunities in TV TheoverthetopconceptiswellknowforTVbutactuallyitappliestoalltelecom services, including mobile. As smartphone adoption increases, new applications enable users to save on their bills byusingmobilevoiceoverIPinsteadoftraditionalvoice,andmessaginginsteadof traditionalSMS.Thisriskisnotnewbutitisaccelerating,as:1)smartphone penetration has grown strongly; 2) WhatsApp is one of the three most downloaded paid iPhoneapplicationsinnineEuropeancountries;3)Google,Microsoft,Apple,etc.all haveaninterestinuppingtheirgameincommunicationservicesandthegrowing integration of hardware and software gives them more firepower. Inabearcasescenario,our2015emobilerevenueestimatewhichisalready9% lower than the 2011e figure would be cut by another 8%. Intermsoffixed-line,over-the-topTVoffersareevolvingveryquickly,forboth hardwareandservicesallmadepossiblebyeverfasterbroadband.Viewinghabits arechangingfast,withamassivegenerationaleffect.Fromtheperspectiveof incumbent pay-TV providers, OTT TV is a threat but from telcos perspective, OTT TV is in our view a positive, on balance: 1) telcos have limited exposure to downside in the traditionalpay-TVmarket;2)forthem,playingtheOTTgameisanopportunityto differentiate from established pay-TV players; 3) OTT TV should have a positive impact on fixed broadband, pushing towards faster speeds, provided that operators are able to link speeds with higher ARPU. Telecom Operators

3 Tomakethebestofthisnewworldandavoidcannibalisation,themosteffectivemoves expected from telcos are: 1) price bundling which we think can basically halve the risk of cannibalisation of mobile operators legacy revenues; 2) tiered pricing, in mobile but also in fixedtomakesurethatrevenuesincreaseinlinewithtrafficgrowth;3) leveragingthe box, in fixed-line; and 4) developing wholesale revenues from OTT providers, although this is difficult to quantify except for Content Delivery Network (CDN) activity. Diversification opportunities: working hard for the long term When not only everyone, but also everything is connected, surely telcos should benefit. Howbigistheinternetofthingsopportunityoverall?Howcantelcosbestposition themselves? Will this new world restore growth to the sector? ThankstoIPtechnology,amultiplicityofdeviceswillbeconnected,beyondmobile phones,computersandtablets:carsandothermovingobjects,utilitymeters (electricity,gas,water),butalsootherhomeappliancesorvendingmachines,aswell as medical devices. Mobile phones will become electronic wallets (m-payment). Finally, theincreasingpowerofITinfrastructure,combinedwithbroadbandeverywhere,isa key driver for remote provision of IT services this is the cloud opportunity. Each of these device types relates to specific vertical markets; e.g. automotive, energy andutilities,healthcare,financialservices,etc.Eachoftheseisalargemarketinitself compared to the telecom market, and each can benefit from the smartisation of devices, which can bring cost savings as well as enable innovative services to customers. Mostoftheseareverylongtermopportunitiesandopinionsontheprobabilityof telcos success are divided.We estimate the totalpotential for incumbent telcos tobe 4-9%oftheirrevenuesby2015esignificantbutnotenoughtoreversetherevenue pressure elsewhere. Thelargestoperatorsarealreadypositioningthemselvesandwebelievethatpayment, cloud services, moving objects (including connected cars and fleet telematics) and building surveillance and automation are all interesting areas to explore. Nevertheless, if they are to capitalise on these opportunities, operators will need to be more proactive about extending their value chain positions, potentially by acquiring early movers in the market. Figure 2: Revenue opportunities from diversification into verticals Total telco revenues, EURbn in 2015e, believers caseOutlook for incumbents revenues Fleet and freight telematics, 2.0Connected cars, 1.7CDN, 1.2Building automation, 0.8Vending machines & payment terminals, 0.4Others, 0.5Smart metering, 0.5Cloud, 2.0m-payment, 1.4 4339 395343 433 3713120304050607080901001102011 2015e - Sceptics 2015e - BelieversEURbnMobile Fixed-line Pay-TV VerticalsSource: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

4 Increasingly divergent strategic routes and no silver bullet Telcos have different visions of the industrys outlook (more or less negative), different viewsonkeyassetstoleverage(theinfrastructureorthecustomer),butalsovery different starting positions (leaders versus challengers, local versus global). Figure 3: Three potential strategic choices for telcos Infrastructure ServicesLocalGlobalGeographic footprintAmbition in the value chainMega-operatorLocal heroInfrastructure playSource: Arthur D. Little, Exane BNP Paribas estimates Itisthereforenosurprisethattheyconsiderawiderangeofstrategies,withvarying levelsofemphasisontheretailside(thisisthebitpipeversusfullserviceoperator debate)andvaryingambitionsintermsofgeographicfootprint(withmostEuropean telcosfocusedononeorafewcountries,butahandfullookingataglobalfootprint). Combiningthesetwoaxes,wefindthreekeystrategicroutes:1)themega-operator; 2) the local hero, i.e. the full service telco focused on a limited geographic footprint; and 3) the local infrastructure play. We believe that: The mega-operator approach can in theory create the most value in the long term, butisthemostdifficulttoexecute(needforcapitalandmulti-facetedcompetitive challenges), so the most risky. In any case only a handful of European telcos can play; The local hero could lead to a slightlybetter top-line thanthe infrastructure play, but it comes with additional opex and capex in the next few years along with execution risks.Duetoitsfocusononeorafewcountries,competitivestructureinitshome market will have a material impact on its success; Theinfrastructureplayistheleastriskybutalsobringsthelowestreturnsinthe long term. In any case, it cannot be implemented by operators lacking opex flexibility due to the requirement to be the low cost producer. Telecom Operators

5 Accelerating the pace of change We look at the key prerequisites for telcos to succeed: 1) leaner cost base, with notably a large opportunity from the online transformation of thebusinessmodel,whichweestimatecouldreduceatypicalintegratedoperators total opex by 9% by 2015e; 2)stronginfrastructure.ThisrequirescontinuedcapexnotablyonFTTxand4G hencelocalscalewillmattermoreandmore.Differenttypesofnetworkconsolidation can enable typical mobile operators to save 10-30% of network costs (opex+capex) in the coming years. Combiningthesetwotransformationopportunitiescouldtheoreticallyenablean operatorwithrevenuesdecliningby2.4%p.a.until2015e(inlinewithourindustry scenario) to limit the decline in its EBITDA and OpFCF to less than -3% p.a., versus an OpFCF CAGR of -12% in a theoretical scenario with flat opex and capex.Figure 4: Potential opex and capex transformation to alleviate revenue pressure 24146204812162024282011 2015eEURbnEBITDA-Capex Online centric savings Network consolidation savingsSource: Arthur D. Little, Exane BNP Paribas estimates Importance of global stature Finally, we conclude that global scale will become more significant in the long run, both intermsofcost(globalpurchasing,globalpoolingofITinfrastructure)andasa commercial differentiator (in a few market segments). Sinceeachoperatorhasroomtooptimiseitsstrategicfootprintandpressuresonthe top-linewill not ease quickly, we predict a flurry of M&A: at the local level (fixed-fixed, mobile-mobile,fixed-mobile),vertical(acquisitionofincrementalcapabilitiestoserve adjacentmarkets),butalsocross-border(mostprobablysmallmovesratherthanbig jumps, even though large deals cannot be entirely ruled out in the medium term). Telecom Operators

6 Contributors Arthur D. Little Exane BNP Paribas Team Didier LevyRichard Swinford Laurent Barbezieux Angel Lam Arnaud SchoenmakersKarim Taga Other contributors Austria: Karim Taga, Andreas Tiefengraber, Clemens Schwaiger, Nicolai Schttgen, Lars Riegel Belgium: Ignacio Garcia Alves, Jean Fisch, Gregory Pankert Central Europe : Marcel Hominda, Michal Sladek, Radek Swoboda, Stipe Maric France: Ignacio Garcia Alves, Franck Herbaux, Bertrand Grau, Paul Desjonqures Germany: Klaus von den Hoff, Hans-Peter Erl, Michael Opitz, Ansgar Schlautmann, Christian Niegel, Simon Best, Carsten Kahner Italy: Giancarlo Agresti, Andrea Faggiano, Vincenzo Basile Japan: Shinichi Akayama Netherlands: Martijn Eikelenboom Spain: Jess Portal, Carlos Abad, David Borras, Pedro Ugarte, Pedro Fernandez Sweden/Finland: Erik Almqvist, Bjorn Thunstrom, Martin Glaumann, Michael Arnr, Niklas Sondell, Agron Lasku Switzerland: Klaus von den Hoff, Uli Prommer UK: Stuart Keeping, Richard Swinford Author Antoine Pradayrol Telecom Operators team Mathieu Robilliard Michael Williams Michael Zorko Maxime Rey William Beavington, marketing analyst Telecom Operators

7 Acknowledgments We want to thank everyone from outside Exane BNP Paribas and Arthur D. Little who contributedtothisproject.Wewouldparticularlyliketothankallthosethatwe interviewedatthecompanieslistedbelow,includingfixed,mobile,cableandsatellite operators,internetcompaniesandsoftwaredevelopers,mediagroups,equipment manufacturers and regulators. Telecom operators / Cable / Satellite 1&1, Abertis Telecom, A1 Telekom Austria,Base, Belgacom, BouyguesTelecom, BT, BT Germany, Colt, Deutsche Telekom, Easynet, ecotel, e-plus, Everything Everywhere, GTS Novera, H3G, Halebop, Iliad Free, Invitel, KBW, KCOM Group, KDG, KPN, Mnet, Mobistar, Numricable, O2 UK, O2 Czech Republic, ONO, Orange Business Services, OrangeAustria,OrangeSlovakia,OrangeSpain,SFR,Swisscom,TalkTalk,TDF, Tele2,TelecomItalia,TelecomItaliaWholesale,Telefnica,TelefnicaGermany, Telenet,TeliaSonera,T-MobileAustria,T-MobileCzechRepublic,UPCAustria,UPC Netherlands,Versatel,Vipnet,VirginMediaBusiness,VirginMobile,VodafoneCzech Republic, Vodafone Germany, Vodafone Spain, Wind Equipment, infrastructure and IT Alcatel-Lucent,Alcatel-LucentSpain,Arqiva,Cisco,EricssonGermany,Ericsson Sweden,EricssonUK,InterXion,Logica,NokiaSiemensNetworksAustria,Nokia Siemens Networks Germany, Qualcomm, Reggefiber Media, software, internet and vertical sectors Agfa Healthcare, BBVA, BMW, Canal+, Cegeka, Corporacin Cooperativa Mondragn, Endesa,Google,Iberdola,Mediaset,Microsoft,MSD(Merck),PagesJaunes,Sky, Sogecable, Vivendi, Wien Energie, undisclosed retail bank Regulators and others AGCOM, CMT, ETNO, GSMA, RTR, Swedish Post and Telecom Authority, vatm Telecom Operators

8 Contents Core revenue decline is here to stay __________________________ 9 A decade of no revenue growth __________________________________________ 9 Core market scenario: -1.8% p.a. until 2015 _______________________________ 15 Sensitivity analysis: mobile data the largest uncertainty_______________________ 28 Mobile ROCE sanity check _____________________________________________ 31 Towards an all-IP world: risks larger than opportunities? _________ 33 OTT risk on mobile voice and text: coming of age ___________________________ 34 Content OTT: more opportunity than risk, for most __________________________ 40 Key tactics to avoid the bear case _______________________________________ 50 Diversification: work hardfor the long term___________________ 60 m-payment, NFC About to take off _____________________________________ 67 Smart metering/grid Hundreds of millions of devices _______________________ 72 Smart home Room for automation and assistance _________________________ 76 Fleet and freight management Further growth ahead _______________________ 80 Connected cars Telcos search for traction _______________________________ 81 e-Health, m-Health Fitter in the long term ________________________________ 85 Cloud Attractive but substantial investment needed ________________________ 89 Increasingly diverging routes and no silver bullet ______________ 95 The prerequisites: strong infrastructure and lean opex _______________________ 96 Local scale is more and more important ___________________________________ 99 Global scale: growing benefits, in the long term____________________________ 105 Increasingly diverging strategies Anybody wins? _________________________ 107 Outcome: a flurry of deals?____________________________________________ 112 Arthur D. Little presentation _______________________________ 115 Exane presentation _____________________________________ 115 Telecom Operators

9 ICore revenue decline is here to stay We expect core revenues from European telecom services to continue decreasing until 2015e, by 1.8% per year on average, including a CAGR of -2.4% in mobile and -3.4% in fixed-line, partially offset by +5.8% in pay-TV. Expectation of a decline is consensual among industry participants but even though we expectstronggrowthinmobiledata,thesinglemostimportantgrowthdriverinthe sector, our overall forecast is more bearish than average. Indeed,we expect the 2011 trend(-2%)tocontinueinthecomingyears,forthreekeyreasons:1)theriskof cannibalisationofvoiceandtextrevenueshasincreased;2)infixed-line,broadband andpay-TVarestillfarfrombigenoughtooffsetthedeclineintraditionaltelephony; 3) the tough economic context is here to stay, with direct and indirect impacts. Forincumbentsintheirdomesticmarkets,wemodelcorerevenuesdown3.6%p.a., due to higher exposure to fixed telephony and despite their opportunity to gain market share in pay-TV. The largest uncertainty in the sector is mobile data monetisation: assuming 2015e data traffic per smartphone of 2.5GBytes/month instead of 1.9GB in our core scenario, and average revenue per GB of EUR7 versus EUR6 in our core scenario, would enable the wholesectortoreturntogrowth(+0.8%CAGR).Ontheotherhand,stronger cannibalisation of voice and text could lead to an even faster decline (-3.8% CAGR).However,ouranalysisofmobileoperatorsreturnoncapitalemployedshowsthatthe bullcaseistoooptimisticasitwouldimplyoperatorsincreasingtheirreturnsdespite the tough environment (economy, competition, regulation, network capex) conversely our bear case is probably too negative as it would see challengers ROCE significantly below their cost of capital, thereby driving massive consolidation in our view (ultimately this would prove positive in terms of market structure). A decade of no revenue growth TelecomspendinginEuropehasremainedstableasapercentageofconsumer expenditure since 2002, at around 2.8%. Figure 5: Telco spending stable as a % of consumer spending since 2003 (1.5%)(1.0%)(0.5%)0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(3%)(2%)(1%)0%1%2%3%4%5%6%7%8%% of consumer spending - LHS Telecom spending, yoy - RHSSource: Euromonitor, Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

10 Thisapparentstabilityhasmasked1)divergenttrendsindifferentsub-sectors,with goodgrowthinmobileuntil2008,offsetbyaprogressivedeclineinfixed-line;and 2) strongvolumegrowth,inmobilebutalsoinbroadband,offsetbysignificantpricing pressures driven by competition and regulation. Mobile: strong usage growth continues WithmobileSIMcardpenetrationhavingsurpassed100%since2005inWestern Europe,customergrowthhasslowedto2%peryearsince2009.Howevervolume growthhascontinuedinEuropeanmobileintermsof:1)voicetraffic(+4%in2011), 2) SMS usage, although this is now declining in some markets, and 3) data, driven now primarily by smartphone adoption. Weestimatethatattheendof2011,smartphonepenetrationinEuropestoodjust above 28% of mobile customers (corresponding to up to 38% of the population, given the 133% mobile penetration of the population), up from 20% in 2010 and 14% in 2009. The European countries with the highest smartphone penetration are the Netherlands, the UK and the Nordics (penetration >33% as a percentage of mobile customers), but the US remains more advanced (46% of customers at AT&T and Verizon Wireless). Figure 6: Smartphone penetration has doubled in the last two years Smartphone penetration in EuropeSmartphone penetration by country (% of mobile users) 17%19%21%22%26%28%31%35%38%5%10%15%20%25%30%35%40%Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11% of mobile customers % of population 0%5%10%15%20%25%30%35%40%45%50%BE PT DE IT SP FI FR DK NO UK SE NL USQ4 10 Q4 11Source: Arthur D. Little, Exane BNP Paribas estimates Smartphonepenetrationhascontinuedtogrowby2percentagepoints(ofthemobile customerbase)perquarterthroughout2011,despitetheeconomiccrisisinEurope. The majority of handsets sold in Europe are now smartphones (figures publicly quoted by operators vary between 30% and 90% in regards to Q4 11; for reference, this stood at 70-80% at Verizon Wireless and AT&T in Q4). Thegrowthinmobiledatatraffichasslowed,toanestimated35%yoy,butthisis largelybecauseoftrafficgeneratedbydongles,whichhadrepresentedupto90%of totaldatatrafficin2009-2010dependingonthecountriesandwhichisnowdeclining for several operators (notably Vodafone and Mobistar). Data traffic from smartphones is growing by more than 100% yoy, a result of growth in the smartphone base (almost +50% yoy in Q4 11) combined with growth in the average traffic per smartphone. Telecom Operators

11 Trafficpersmartphonecurrentlystandsinarangeof200-400MBytepermonthin Europebutthenewest/mostadvancedsmartphones,suchastheiPhone4S, generatemuchhighertraffic(>700MByte/month),duetothefasterspeedsofthe hardware, the wider range of applications and the richer content (e.g. video). Figure 7: Mobile data traffic growth Q4 10 Q1 11 Q2 11 Q3 11Q4 11TeliaSonera- 85% 79% 69%57%Bouygues Telecom- - - -57%O2 Europe- 65% - -46%O2 Germany- 48% - -32%Vodafone Europe57% 34% 21% 19%20%Mobistar15% - - -15%Source: Company reports, Arthur D. Little, Exane BNP Paribas estimates but the decline in voice revenues largely outpaces the growth in data Despitethiscontinuedstronggrowthinmobileusage,Europeanmobileservice revenues have been declining by 1.8% per year over 2008-2011, ending the period on a very negative note: -4.2% yoy estimated in Q4 11. The chart on the left hand side of Figure 8 below shows the contributions of voice, data andSMStothesectorstop-linetrend,reflectingthemassivenegativeimpactofthe declineinvoicerevenues,comparedtothepositivecontributionofdata.Mobile revenues represented EUR25.2/month per capita in 2011, including: EUR14.6 from outgoing voice, down 7% yoy despite the 4% yoy growth in traffic pointing to a yoy decline in the average price per outgoing minute of more than 10%; EUR2.0 from incoming voice, estimateddown more than25%yoy given the steep cuts in mobile termination rates (see below); EUR4.2 from SMS: SMS revenues still grew in the first nine months of the year but stalledinQ4,accordingtoourestimatesalthoughthepicturevariessignificantly between markets and operators; EUR4.4 from data, with data revenues up 23% in the year, a relatively steady pace of growth despite the base effect. Figure 8: European mobile service revenue trends Voice, SMS and data contributionsData revenue, yoy growth (9%)(6%)(3%)0%3%6%Q1 07Q2 07Q3 07Q4 07Q1 08Q2 08Q3 08Q4 08Q1 09Q2 09Q3 09Q4 09Q1 10Q2 10Q3 10Q4 10Q1 11Q2 11Q3 11Q4 11Voice SMS Non-SMS data 0%5%10%15%20%25%30%35%40%Q1 07Q2 07Q3 07Q4 07Q1 08Q2 08Q3 08Q4 08Q1 09Q2 09Q3 09Q4 09Q1 10Q2 10Q3 10Q4 10Q1 11Q2 11Q3 11Q4 11Source: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

12 Figure 9: Mobile voice revenue drivers: volumes and prices, impact of regulation Volume versus priceMTR impact (15%)(10%)(5%)0%5%10%15%Q1 07Q2 07Q3 07Q4 07Q1 08Q2 08Q3 08Q4 08Q1 09Q2 09Q3 09Q4 09Q1 10Q2 10Q3 10Q4 10Q1 11Q2 11Q3 11Q4 11Voice revenues Traffic Price (5%)(4%)(3%)(2%)(1%)0%1%2%3%4%Q109Q209Q309Q409Q110Q210Q310Q410Q111Q211Q311Q411Service revenue growth Adjusted for MTRSource: Arthur D. Little, Exane BNP Paribas estimates Thedeclineinvoicerevenuesisnotablydrivenbyregulation,inparticularmobile terminationrates(MTR).In2011,MTRsstoodonaverageatEUR0.041/min,down 31% yoy. This represented an estimated drag of -4% on the European mobile top-line, i.e.excludingtheseMTRcutsthesectorsrevenuewouldhavebeenflatinQ411. Basedonglidepathspublishedbynationalregulatorsforthenextfewyears,this impact will continue in 2012 and 2013, albeit at a slightly milder rate. Increasing penetration in fixed broadband Onthefixed-lineside,growthinbroadbandhasbeencontinuouslydrivenbyPC adoption, more widespread availability of broadband and the development in triple-play and new TV services: better quality (HD) and more features (e.g. catch-up TV). Figure 10: Fixed broadband penetration in Europe Fixed broadband penetration (% of households)Fixed broadband penetration by market, 2011(% of households) 30%35%40%45%50%55%60%65%70%75%2007 2008 2009 2010 2011 0%10%20%30%40%50%60%70%80%90%100%NL FR UK BE EU DE SE SP AT IT PTSource: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

13 Attheendof2011,fixedbroadbandpenetrationreached69%inWesternEurope,up 2.9percentagepointsovertheperiod,andthenumberofbroadbandcustomersin Europewasstillupalmost5%yoy.Themostadvancedmarketsshowpenetrationof more than 80% while many are still below 70%, so there is still growth potential as the lower-penetration countries catch up in the coming years. but total fixed-line revenues are declining Excluding pay-TV, which is mainly providedby satellite and cable operators, fixed-line revenueshavebeendecliningby2%peryearover2009-2011,withgrowthin broadbandrevenues(up4.5%pa.)notoffsettingthedeclineintraditionaltelephony (down 7% pa.). On a per household basis, fixed-line (excluding pay-TV) represented an expenditure of EUR49.6/month in 2011e, of which EUR26.3 is for traditional telephony (includinglinerental)andEUR23.3isforbroadband(ARPUishigheronbroadband than on fixed telephony, but penetration of fixed telephony remains higher). Traditionaltelephonyremainsthemainnegativerevenuedriverinthesectoras volumeshaveconstantlydecreasedduetothemigrationoffixedtelephonyoverthe internet(voiceoverIP)andincreasinglysocialnetworkinghasreplacedtraditional voicecalls,onthebackofbroadbandadoption.Inaddition,thetransitionfrom traditionaltelephonytobroadbandcomeswithamorecompetitivemarket,i.e. incumbentshave been losing market shareto alternative carriers and cable operators (average incumbent market share on broadband of 42% currently versus 45% in 2007). Pay-TV a growth market but small compared to telecom services Pay-TVpenetrationhasalsobeengrowing,albeitmoreslowlythanbroadband. Aggregating the total number of subscribers of cable companies, satellite operators and telcosprovidingIPTV,wecalculatethatpay-TVpenetrationofEuropeanhouseholds reached almost 52% at the end of 2011, up 1.5 percentage point yoy. Figure 11: Pay-TV* penetration in Europe Pay-TV penetration (% of households)Pay-TV penetration by market, 2011 (% of households) 42%44%46%48%50%52%54%2008 2009 2010 2011 0%10%20%30%40%50%60%70%80%90%100%NL BE FR PT DE UK EU SE SP IT* In this chart, we include all customers with pay-TV services, i.e. satellite, cable and IPTV which leads to some double counting, particularly in markets where IPTV is most advanced such as France, as many IPTV customers also subscribe to a premium pay-TV bouquet (hence are counted as customers of the satellite operator). Source: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

14 Penetrationdiscrepanciesremainlargebetweenmarkets:e.g.ItalyandSpainarestill below25%whiletheUK,GermanyandFranceareabove50%,andBelgiumandthe Netherlands are above 95% (cable markets). Pay-TV penetration in the US is 85%. These penetration figures reflect different situations in different countries. For instance pay-TV in Italy mainly reflects the premium pay-TV services offered by Sky Italia, while in France our pay-TV penetration figure includes not only cable and satellite but also all broadband customers using IPTV. Although each market must be analysed on a local basis (e.g. penetration in Germany is likely to remain below average given the attractiveness of free-to-air satellite TV), we believe that there is further penetration potential in pay-TV in Europe. Inaddition,unliketelecomservicerevenues,pay-TVrevenueshavebeengrowingby anaverageofalmost5%p.a.over2009-2011,drivenbya4%CAGRincustomer numberscombinedwithincreasingARPU.Averagespendperhouseholdonpay-TV has reached EUR12.7/month in 2011 (penetration of 52%, ARPU of EUR24.5/month). Given the rise in triple-play (pushed by telcos and cable operators across Europe, and in one particular case by a satellite operator, BSkyB in the UK), it makes sense in our view to aggregate the fixed-line and pay-TV markets (see pages 45-47 for our analysis on the importance of TV for telcos). As shown in Figure 12 on the left hand side, the total spend per household on fixed-line and pay-TV reached EUR62.3/month in 2011, down c1.5%yoy, as thegrowth inpay-TV revenues was not sufficient to offset the decline in fixed-line telecom revenues. Figure 12: Fixed-line, broadband and pay-TV trends Fixed-line, broadband and pay-TV revenuesBroadband market shares 30.428.626.321.522.523.411.712.012.70102030405060702009 2010 2011EUR/month per householdFixed telephony Fixed broadband Pay-TV 40%41%42%43%44%45%2007 2008 2009 2010 201112.5%13.0%13.5%14.0%14.5%15.0%15.5%Incumbents (lhs) Altnets (lhs)Cable (rhs)Source: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

15 Core market scenario: -1.8% p.a. until 2015 WeexpectoverallrevenuesofEuropeantelecomoperatorscoreservicestokeep declining in the coming years, by c.2.4% in 2012e and 2013e, by c.1.5% in 2014e and by c.1% in 2015e hence a CAGR of -1.8%. The two reasons for the progressive improvement are 1) the end of large MTR cuts in 2014e, and 2) our forecast of persisting growth in mobile data revenue over the whole period, as detailed below. Our overall sector forecasts reflect: on mobile, revenue CAGR of -2.4%, with -13% on voice, -8% on SMS and +23% on mobile data; onfixed-line,revenueCAGRof-3.4%,withtelephonydown10%peryearand broadband up 3%; pay-TV revenues CAGR of +5.8%. Figure 13: Central scenario Estimates for the core services of European telecom operators* EURbn20102011e 2012e 2013e 2014e 2015e2011-2015e CAGRMobile service revenues110.8107.1 103.8 99.8 97.9 97.1(2.4%)Mobile voice78.370.4 62.7 54.2 47.2 40.8(12.8%)Interconnect11.88.5 5.8 3.1 2.4 2.0(30.1%)Outgoing66.661.9 56.9 51.1 44.9 38.8(11.1%)Mobile data32.436.7 41.1 45.6 50.6 56.411.4%SMS17.217.8 17.8 16.9 15.2 12.9(7.7%)New data15.218.9 23.3 28.7 35.4 43.423.2%Fixed-line revenues95.392.9 89.7 86.7 83.7 80.8(3.4%)Fixed telephony53.349.1 44.9 40.5 36.2 31.9(10.2%)Fixed broadband42.043.7 44.8 46.2 47.6 48.92.8%Pay-TV22.523.7 25.1 26.6 28.1 29.75.8%Total revenue incl pay-TV228.6223.7 218.6 213.2 209.7 207.7(1.8%)* Excluding revenues from verticals and including mobile termination rate cuts Source: Arthur D. Little, Exane BNP Paribas estimates The industry is cautious, we are even more so Compared to a few years ago, the consensus regarding the sector outlook among the companies interviewed has deteriorated significantly. This year, the overwhelming majority expect revenues to decline between 2011 and 2015: only 20% expect revenues to remain stable over the period, and 9% expect them togrow(thoseexpectinggrowthfallintothreecategories:challengersgainingmarket share,operatorsfocusingonaspecificsub-segmentwithbetterfundamentals,and operators in specific markets such as the Nordics or Austria, reflecting local conditions). The weighted average expectation of the 79 interviewees that provided an estimate stands at -0.8% (2011-2015 CAGR). Telecom Operators

16 Figure 13: Interview feedback 71% expect the industry revenues to decline % of respondents split by their expectations for the sectors top-line over the next few years 0%5%10%15%20%25%30%35%10>10>10>10 28 Feb 12111221233466>10>10>10>10 Source: Apple, Arthur D. Little, Exane BNP Paribas estimates The charts below, which compare the number of searches in Google for WhatsApp to the well established Skype reference (and also to Viber), show the strong take-off of WhatsApp throughout 2011 in particular in the Netherlands and Spain, and to a lesser extent in the UK, and the lack of take-off in France. They also show that the interest for Viber remains far smaller. Figure 38: The growing popularity of WhatsApp according to Google Trends, depending on countries NetherlandsSpain UKFrance * Yellow lines = Skype, blue lines = WhatsApp, red lines = Viber Source: Google, Arthur D. Little, Exane BNP Paribas estimates Thecurrentdifficulteconomicenvironmentiscertainlyafactorincustomersinterestin downloading applications such as WhatsApp onto their smartphone, if they find that they can optimise their bill by using the application instead of their operators SMS service so the marketswhere it is taking off are a mix of 1) countrieswhere the economy is under strong pressure, e.g. Spain, Ireland, Greece and Italy; and 2) countries where operators SMSpricingoffersanarbitrageopportunitytocustomers,inparticulartheNetherlands, Spain,GermanyandItalyasopposedtocountrieswheretheheavySMSusershave already migrated to unlimited SMS bundles (e.g. France, the UK or Denmark). Global internet leaders all have an interest in OTT Whatever the success of specific applications such as WhatsApp, we believe that OTT isheretostay.Indeeditisanareaofstronginterestfortheworldsinternetandtech giants such as Apple, Google, Facebook, Microsoft and Amazon. Google: the group sees communication services as a key way to attract users to its websites,andtogatherdatahencetogeneratemoreadvertisingrevenues.Ithas recentlyintegratedallitsservices(search,email,messaging,socialnetwork,etc.). GoogleistheleadingforcebehindAndroid,whichcanbeleveragedfornew applications such as Google Voice, etc. Facebook: communication between usersis the social networks coreproposition, soexpandingitsservicestopuremessagingandtelephonywouldbealogicalstep. Skype voice and video calls are already integrated in Facebook. Telecom Operators

38 Microsofthasbeenestablishedinmessagingservicesforalongtime(Microsoft Messenger) and has more recently acquired Skype. Skype could be fully integrated into Windows (on fixed-line and smartphones) and into the Xbox environment. Apple: the groups core business is to sell hardware (iPhone, iPad, etc.) but it also developsservices(inparticulariTunesandtheAppStore)asanadditionalrevenue streamandasasidebenefittoitshardwareactivity.UnlikeGoogleandFacebook, ApplehasabillingrelationshipwithcustomersviaiTunessoitisabiggerthreat regarding paying services. Facetime is an example of the power of Apples platform. Amazonscoreactivityise-commerce,inparticularsellingcontent(originally books), but the group sees any means to boost its content business as an opportunity todevelopnewrevenues.Forinstance,itisleveragingitspowerfulITinfrastructure withitscloudoffering(AmazonWebServices),andpushingintothemobiledevice arena (Kindle, Fire). Like Apple, Amazon has a billing relationship with customers. Figure 39: Positioning of key internet leaders in communication services Overall strategy Digitalizationof the world to gather and monetize data Try to sustainposition in PC ecosystem Grow new revenue fields Integrated HW ecosystem ; Extension of services through SW Put users life on FBCommunication services Free services to attract users and gather data Skype buy-out probably to integrate to Office & Xbox environment HW opportunities : iPhone , iPad Still limited in services Core activity is to make userscommunicate withother usersOriginal business & main revenue driver Business: Web search Revenues: Ads Business: OS & productivity Revenues: SW licences Business: HW & OS Revenues from HW (c.30-40% margin per device) Business: Social network Revenues: Ads leveraging user data Web search Gmail(c.200m) Windows, Xbox Live, Hotmail (330m) HW devices Apple storesCustomer gateways Facebookwebsite(c.800m)Customer identity Google account United profile withWindows 8 iTunesaccount FacebookaccountBilling relationship Limited monetization ofusers Android market For business, monthly fees(Office 365) ; not regular revenue for non-corporate Credit-cardnumber for iTunes Development of virtual money ( Facebookcredits ) Selling content, getting in the cloud Leverageinfrastructure for cloud services Business: eCommerce, cloud Revenues: low margin in all businesses HW devices Website, Kindleservice Amazon account Credi-card numberof eCommerce, One-clic shopSource: Arthur D. Little, Exane BNP Paribas estimatesHow big is the revenue risk for telcos? In fixed-line, Skype has become the largest operator in the world for international traffic, with an estimated global market share having grown from c3% in 2005 to 20% in 2010 (innumberofminutes).Theimpactontelcosfixedinternationalvoicerevenueshas been significant. Indeed, we estimate that more than 85% of the growth in international voice traffic has been captured by Skype in 2010. Could cannibalisation affect mobile operators, for voice and/or for SMS? The voice and SMS revenues most at risk of cannibalisation are the out-of-bundle and prepaid parts which are directly driven by usage, unlike the in-bundle voice and SMS usagewhichcouldbeimpactedovertime,butabundlingstrategywithdatacan protectthem.Consumerout-of-bundleandprepaidrevenuesrepresentedrespectively 12% and 26% of Vodafone Europe service revenues in Q4 11 (see chart below). Telecom Operators

39 In our core scenario, mobile service revenues are expected to decline by 2.4% per year until2015ebutinabearcasewithastrongcannibalisationofvoiceandtext revenuesbyOTTapplications,weestimatethatthemobileservicerevenuedecline could more than double, to -6.7% per annum until 2015e. Figure 40: Assessing operators revenue exposure to voice and text cannibalisation Split of Vodafone Europe service revenues, Q4 11Qualitative assessment of the risk of SMS revenue cannibalisation by country Enterprise30%Consumer contract, in bundle22%Consumer contract, out of bundle12%Consumer contract, incoming5%Consumer prepaid26%Other5% 012345SP NL IT DE PT BE FR UK DKSource: Vodafone, Arthur D. Little, Exane BNP Paribas estimates Figure 41: Assessing the cannibalisation risk Bear case scenario EUR/month2011e 2012e 2013e2014e2015eCore scenario Mobile service revenues per pop.25.2 24.3 23.322.822.5Mobile voice16.5 14.7 12.711.09.5Interconnect2.0 1.4 0.70.50.5Outgoing14.6 13.3 11.910.49.0Mobile data8.6 9.6 10.611.813.1SMS4.2 4.2 3.93.53.0New data4.4 5.5 6.78.210.1 ARPU impact of using MVOIP & IM(9%) (12%) (15%)(17%)(17%)Mobile voice(11%) (15%) (19%)(23%)(28%)Interconnect(11%) (15%) (19%)(23%)(28%)Outgoing(11%) (15%) (19%)(23%)(28%)Enterprise0% 0% 0%0%0%Prepaid(25%) (31%) (38%)(44%)(50%)Postpaid in bundle0% 0% 0%0%0%Postpaid out of bundle(25%) (44%) (63%)(81%)(100%)Mobile data(6%) (9%) (10%)(10%)(9%)SMS(13%) (20%) (27%)(34%)(41%)In bundle0% 0% 0%0%0%Out of bundle(25%) (39%) (54%)(68%)(83%)New data0% 0% 0%0%0% Bear case Mobile service revenue per pop.22.9 21.3 19.819.018.7Mobile voice14.8 12.5 10.28.46.8Interconnect1.8 1.2 0.60.40.3Outgoing13.0 11.3 9.68.06.5Mobile data8.1 8.8 9.610.611.8SMS3.7 3.3 2.92.31.8New data4.4 5.5 6.78.210.1 % of pop. with smartphone38% 51% 67%82%95%% of smartphone customers using MVOIP & IM5% 16% 28%39%50%% of pop using MVOIP & IM2% 8% 18%32%48% ARPU of MVOIP customers versus average150% 140% 130%120%110% Impact on mobile service revenue(0.2%) (0.9%) (2.6%)(5.0%)(7.5%)Source: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

40 Thisisbasedonascenariowhereby50%ofsmartphoneusersi.e.48%ofthe population by 2015e would use such OTT services, and these would: reducetheout-of-bundleusageofvoiceandtexttozeroforcontractcustomers (henceincludinginternationalandroamingrevenues,butalsoalargepartofthe nationalout-of-bundlerevenues).Wehaveusedtheabove-mentioneddatapublished by Vodafone; cut prepaid voice and text revenues by 50%; havenoimpactoneitherthepostpaidin-bundlerevenues,non-SMSdata,or enterprise revenues. Interconnect revenues are assumed to be cut proportionally to voice and text. Comparedtoourcorescenario,thisbearcasewouldreducethetotalvoiceandtext revenue per inhabitant by 31% (from EUR12.4/month in our core scenario in 2015e to EUR8.6),cuttingtotalEuropeanmobileservicerevenuesby7.5%comparedtothe core scenario. Content OTT: more opportunity than risk, for most Over-the-toptelevisionpropositionsareevolvingveryquickly,bothonthehardware side(fromthePCtoboxestosmartTVsets)andontheservicesside(fromthe YoutubeoftheearlydaystoTVstationscatch-upTVpropositionsandNetflix)all made possible by ever faster broadband. For OTT providers, content is an issue but notonewhichwillblockthemfromlaunchingappealingofferstoatleastasignificant part of the market, if not to the premium football fans. Viewing habits are changing fast, with a massive generational shift occurring. The impact of OTT on pay-TV has yet to be proven a significant negative, even in the US and from the telcos perspective we believe that OTT TV is not risk free, but it is overallmorepositivethannegative:1)whatevertheimpactonpay-TV,telcoshave limitedexposuretodownsideinthismarket;2)forthem,playingtheOTTgameisan opportunitytodifferentiatefromlegacypay-TVplayers;3)lastbutnotleast,OTTTV should have a positive impact on fixed broadband, pushing towards faster speeds. Wehavenotchangedourviewthatfixed-lineoperatorsneedtoinvestmoreinFTTH networks. However this capex will not be driven by OTT TV, but rather by the need for telcos to keep up with super-fast broadband competition from cable operators. What does OTT TV offer to customers? OTT video services provide a non-linear TV experience (i.e. in theory, any programme orfilmatanytime,anywhere,onanydeviceinpracticethisdependsonaccessto content see below) combined with the ability for the customer to save on their pay-TVbill.Fundamentally,OTTserviceunbundlespay-TVcontent:thecustomercan watch (pay to watch) specific programmes rather than having to subscribe to a bundle of traditional pay-TV channels the likes of BSkyB, Canal+ and cable operators. Initially,OTTvideostartedonthePC,withtheriseofYoutubewhichwasinitially quite limited in terms of quality and type of content (mainly user generated).OTT video then evolved to boxes, including dedicated hardware such as TiVo in the US or the Apple TV (re-launched in 2010; price USD99; sold 2m units as of Nov 2011), but also gaming consoles (Xbox 360, PS3, Wii). These boxes compete with operators own boxes(e.g.OrangesLivebox,FreeboxRevolution,BTVision,etc.).Thehardware players developing these boxes have signed content deals, enabling an alternative line-up essentially focused on video on demand. Telecom Operators

41 Figure 42: Evolution of over-the-top video content services and key figures for the German market PC Set-top box Multiscreen Streams or downloads of videos directly from the web onto the PC Strongest focus on short-form videos Mainly user-generated content and other small clips Video access through set-top boxesand consoles connected to the TV Pre-installed services to watch free and paid for video Increasing focus on long-form videos Internet connectivity directly embedded into TV sets Innovative interface: 2ndscreen apps, voice, gesture Short- & long-form videos directly consumed on several screens In Germany, 79% of households have got at least one PC (Internet access 69%) 40% of German households have got a laptop In Germany, 20% of households have got gaming consoles There will be a boost in the sales of set-top boxes by the termination of analogue satellite TV in Germany in 2012 68% of Germans access online video 3m tablets sold in 2010 and 2011 20% penetration for smart TVsexpected in 20121stGeneration2ndGeneration3rdGenerationPC Set-top box Multiscreen Streams or downloads of videos directly from the web onto the PC Strongest focus on short-form videos Mainly user-generated content and other small clips Video access through set-top boxesand consoles connected to the TV Pre-installed services to watch free and paid for video Increasing focus on long-form videos Internet connectivity directly embedded into TV sets Innovative interface: 2ndscreen apps, voice, gesture Short- & long-form videos directly consumed on several screens In Germany, 79% of households have got at least one PC (Internet access 69%) 40% of German households have got a laptop In Germany, 20% of households have got gaming consoles There will be a boost in the sales of set-top boxes by the termination of analogue satellite TV in Germany in 2012 68% of Germans access online video 3m tablets sold in 2010 and 2011 20% penetration for smart TVsexpected in 20121stGeneration2ndGeneration3rdGenerationSource: Arthur D. Little, Exane BNP Paribas estimates The latest trend is the rise of connected TVs, with consumer electronics manufacturers suchasLGorSamsungnowlaunchingasecondgenerationofsuchTVs.Once connectedtoabroadbandline(withnoneedforabox),smartTVsetsaggregate contentfromavarietyofsources,includingOTTvideoservicessuchasNetflixor Youtube, but also integrate communication services such as Facebook. These players, in particular Samsung, also forge local content partnerships and havewidgets of local content producers and broadcasters in their app stores. Thenextkeystepscouldinvolve:1)alaunchbyAppleofitsownTVset,iTVas reportedbythepress,and2)afurtherpushbyGoogleontheGoogleTVconcept withthestrategicaimoflodgingitsOSandservicesinconnectedTVsets(similarto theAndroidpushintosmartphones)withforinstanceSonyhavingsigneda partnershiptolaunchGoogleTVintheUKin2012.AnothersignthatGoogleis seriously looking at the TV market is the report that the company is seeking permission toestablishasatellitedishstationintheUS,abletoreceivesatellite-basedcontent feeds from TV stations. In terms of services, beyond Youtube (which is getting content of its own, and evolving towards HD etc.), the most successful services are: AfewindependentservicessuchasNetflix(24mcustomersintheUSatend 2011),justlaunchedintheUKandothercountriesinEuropeshouldfollow.Netflixis hardwareagnostic i.e. it is available on thePC but also on the TV if connected to the PC or via the leading game consoles (Wii, PS3, Xbox360, Vita). In the UK, competitors include notably Lovefilm (owned by Amazon) and Blinkbox (owned by Tesco). ServiceslaunchedbycontentownersandTVstationssuchasHuluintheUSA, BBCiPlayerandITVPlayerintheUK,M6ReplayinFrance,maxdomeby ProSiebenSat1 and Mediathek by ZDF in Germany, or ipla in Poland. Viewing habits are definitely changing ViewinghabitsarechanginginEuropeandwebelievethatthischangeislikelyto accelerate rather than slowin the comingyears fosteredby 1) the expansion of the numberofscreensperperson,2)technologicalevolutioninparticularfaster broadband speeds, and 3) a strong generation effect. Telecom Operators

42 In Western Europe, the number of screens available per person has grown from 1.7 in 2000to3.6in2011e.ThishasmainlybeendrivenbyPCs,mobilephonesandother mobiledevices(suchastablets)whilethenumberofTVsetsgrewonlyslightly. Theseadditionalscreensareakeydriverfornewwaystoaccessvideocontent: TV viewing continues to increase in Western Europe, but Internet delivery is capturing most of the growth in terms of time spent. This is made possible by the digitalisation of content and the all-IP nature of networks anddevices,combinedwiththeincreasesinbroadbandspeeds(inparticularwiththe advent of super-fast broadband on cable, and progressively on telcos). Forexample,aUKOfcomreportin2011showedthatcustomerswhomigratedfrom classicbroadbandtosuper-fastbroadbandincreasedtheirusageofOTTcontent services:+63%forstreamingofHDTVprogrammesorfilms,+54%forstreamingof SDTV programmes or films, +35% for watching short video clips (e.g. on Youtube). Figure 43: Key trends in content consumptionHours spent per media per week (Western Europe) 13.014.813.2 12.45.35.24.9 4.74.54.03.93.88.811.312.012.314.814.215.314.5+1%48,0 48,250,646,1Television*Radio* NewspapersMagazinesInternetCAGR+5.74%-2.78%-1.98%-0.78%0.34%2010 2008 2004 2006In hours per week13.014.813.2 12.45.35.24.9 4.74.54.03.93.88.811.312.012.314.814.215.314.5+1%48,0 48,250,646,1Television*Radio* NewspapersMagazinesInternetCAGR+5.74%-2.78%-1.98%-0.78%0.34%2010 2008 2004 2006In hours per week 6312318421832033535236315140554158314415825831320111,47720101,33520051,0212000678Installed screens(in millions)PCs TVsMobile phones Other mobile devices1.7 2.6 3.3 3.6Number of screens per person6312318421832033535236315140554158314415825831320111,47720101,33520051,0212000678Installed screens(in millions)PCs TVsMobile phones Other mobile devices1.7 2.6 3.3 3.6Number of screens per person* Excluding TV and radio via the internet Source: IEAA Mediascope 2010, Arthur D. Little, Exane BNP Paribas estimates Finally, there is a strong generation effect at play: 1) in the US, consumers aged 18-34 watchtwiceasmuchvideoontheinternetthanthoseaged50-64,onaverage,and they spend 30-40% less timewatching TV, according to Nielsen; 2) in Germany,90% of the14-29yearsold access online video, versus only24%of the 50+yearsold. As under-25s grow older, they are likely to keep some key consumption habits. Overall,webelievethatEuropeisprogressivelygettingreadyfortheriseofOTTTV, with a few countries at the forefront. ThisisnotablythecaseoftheUK,wherecustomershavebeenaccustomedtoOTT content thanks to the BBC iPlayer, and the first countrywhere Netflix has launched in Europe.ThecompanyhasrecentlydescribeditsUKlaunchasverysuccessful (Were seeing faster member growth than we did when we launched [in] Canada). In CentralandEasternEurope,OTTvideohasalsoseensignificantsuccess,with multiple independent and broadcaster-backed platforms competing for audience (e.g. in Polandalonethereareatleastfiveplatformssuchasipla,andRomaniaalsohas multiple OTT platforms, amongst others dolce.tv). Telecom Operators

43 Can the content challenge block the rise of OTT? WhenOTTservicestrytomovebeyondthemarketfringesandbecomesignificant players,theyfaceadualchallenge:1)theyneedtobuildacontentline-upwhichis attractivetothemainstreamaudiencethiswilltriggeranincreaseincontentcosts, and2)theyarriveontheradarscreensofcontentproductioncompaniessuchas Hollywoodmajorsanindustrywhichismoreorganisedthanmanyintermsof protecting and maximising the value of its intellectual property. In2011,Netflix,whichhasinexcessof20mcustomersintheUS,hasfaced renegotiationofitscontentrightswithseveralmajors.Ithasendeduppaying significantlymorethaninthepastforsomeofitskeycontent.Accordingtoindustry sources, Netflix was able to renew its agreement with NBC Universal only by agreeing toincreaseitspaymentstenfold(toUSD300m/year).Also,negotiationswithStarz Entertainment failed, and the company decided not to renew its agreement with Netflix inordertoprotectthepremiumnatureofourbrandbypreservingtheappropriate pricing and packaging of our exclusive and highly valuable content (Starz CEO). In Q2 11, Netflix changed its pricing policy, proposing separate offers for streaming and DVD rental, each for USD7.99/m, versus USD9.99/month for both previously, causing a customerbacklash.ThisgeneratedsignificantchurninQ311(seeFigure44,right chart) and accelerated the transformation of Netflix into a streaming-only company. OTT players realise that they must strengthen their content portfolio: Intheshortterm,theywillprobablynotinvestinsport/massmediaentertainment but rather invest in different types of content, e.g. more niche/viral/long-tail content. MajorOTTplayerslikeNetflixandHulunotonlyacquirerightsbutalsofinance exclusive content, e.g. Hulu plans to invest USD500m in new content initiatives in 2012 andairweb-onlypremiumcontent(e.g.Battleground),andNetflixfinanced Lilyhammer. Not many OTT players will be able to do the same. InEurope,NetflixCEOrecentlyadmittedthatcompetitionwouldbetoughinthe UK, particularly against BSkyB, but he warned that Netflix would attempt to steal value-addedcontentsuchasHollywoodstudiorightsfromthiskeycompetitorwhensuch rightscomeup.AsourmembershipintheUKandIrelandgrows,wellbeableto invest more and more in content. Will content providers move to sign deals with OTT players? Generally, companies we havesurveyedhaveunderlinedthatcontentownershaveexisting,long-lasting relationshipswithestablishedpay-TVoperatorssoforthem,decidingtodealwitha new entrant OTT provider rather than with the incumbent pay-TV company represents arisk.Foracontentprovider,puttingpressureononesmainclient(theestablished pay-TV player) by signing with a new entrant is not a logical move, at least initially. However, longer term, content producersmay find it increasinglydifficult to favour the traditionalpay-TVoperatorsoverglobalOTTplayers,especiallyinsmall-sizemarkets where the local pay-TV operators may be small compared to global OTT players. Inaddition,thesituationinEuropeismadecomplexbythefactthatcontentrights legislation varies by country forcing players into country-by-country negotiations. This makestheprocessmuchslower,andreducestheadvantageofglobalorpan-European players versus local ones. Overall, we conclude that: sizewillbeakeyfactorintheOTTgame,asonlythebiggestplayersonalocal and/or global basis can maintain power in content negotiations over the long run; Telecom Operators

44 inanycase,OTTplayersarelikelytofocustheiroffersoncheapercontentrather thanpremiumcontentincludingfree-to-airTVandrelativelyinexpensivechannels, catalogues of older movies and shows, and a few high profile content propositions. This means that OTT services should position themselves in a similar way as telcos on IPTV.Despiteearlychallengesandhiccups,mosttelcoshavebeenabletogrowinto successfultriple-playproviders.Theydonotcompetehead-onwiththeveryhigh-end ofpremiumcontentsatelliteplayers,buttheydoagoodjobversusthebasic-TV offerings of cable operators. Impact on pay-TV has yet to be proven Asanalternativewayofaccessingvideocontent,theriseofOTTTVcouldtrimthe valueofthepay-TVmarketoveralleitherviaalowerpenetrationofpay-TV(e.g., customers sticking with double-play and watching OTT content via their broadband line ratherthanmovingtoafully-fledgedtriple-playbundle)orviaalowerpay-TVARPU (i.e., pressureonprovidersabilitytochargeapremiumforcontentorad-hocVOD usage) or both. TheUSmarketisbothverymatureintermsofpay-TVpenetration(85%)andvery advancedintermsofOTTdevelopment(Netflixhasmorethan24msubscribers).But at thisstage,theriseofOTThasnotledtosignificantcord-cutting(i.e.,customers cutting their pay-TV subscription). Figure 44: Limited evidence of cord-cutting in the US Pay-TV customers in the US (m)Netflix subscribers and quarterly net additions (000) 0102030405060708090Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010Q3 2010Q4 2010Q1 2011Q2 2011Q3 2011Cable (big 4) Satellite IPTV 05,00010,00015,00020,00025,00030,000Q1 2007Q3 2007Q1 2008Q3 2008Q1 2009Q3 2009Q1 2010Q3 2010Q1 2011Q3 2011(1,500)(1,000)(500)05001,0001,5002,0002,5003,0003,5004,000Subscribers Net addsSource: IEAA Mediascope 2010, Arthur D. Little, Exane BNP Paribas estimates Asshownontheleftabove,customernumbersatthetraditionalUSpay-TVplayers (the four big cable operators plus satellite players) have dipped since Q4 10. However, includingIPTVcustomers,thetotalnumberofpay-TVcustomersintheUShas continued to rise by c.1%. This is slightly down from +2% in 2009 and H1 10, but given the economic environment it is hard to attribute the slowdown to the OTT factor alone. The situation is not so advanced in Europe with pay-TV penetration at 52% so the risk of cannibalisation should be milder. We have nevertheless modelled the sensitivity of the overall sector top-line to alternative scenarios on pay-TV. A bear case assuming noincreaseinpay-TVpenetrationbetween2011and2015e(stallingat52%)and ARPUdecreasingtoEUR22/monthin2015e(comparedtoEUR27inourcore scenario)woulddeflatethetotalsectorrevenueCAGR(includingfixed+mobile+pay-TV) by 1% (-2.8% versus -1.8%). Telecom Operators

45 Figure 45: Sensitivity of incumbents top-line to the triple-play outlook2015e pay-TV penetration -1.8% 52% 55% 58%61%64%2015e pay-TV ARPU (EUR/month)22 -2.8% -2.6% -2.5%-2.3%-2.2%27 -2.2% -2.0% -1.8%-1.7%-1.5%32 -1.6% -1.4% -1.2%-1.0%-0.8%Source: Arthur D. Little, Exane BNP Paribas estimates Pay-TVplayershaveidentifiedtheriskandaredevelopinginitiativestofendoffthe OTT risk on their core business. For instance: in France, Canal+ has launched an SVOD service (subscription video-on-demand) calledInfinity,whichisavailabletoSFRandFreebroadbandcustomers(soonon BouyguesTelecomsBbox)forEUR9.99/monthwithnocommitment.Thispre-empts potential moves from OTT players and widens the potential customer base of Canal+ to all French broadband households; in the UK, as of now, BSkyBs online streaming service Sky Go is only open to Sky customers,butthecompanyplanstolaunchastandaloneOTTserviceinH112, availabletonon-Skycustomers,withnominimumcommitment.Skyannounced accessibility for a wide range of devices (PCs, tablets, mobile phones, game consoles, connectedTVs),aflexiblepricingscheme(choicebetweenunlimitedaccess,pay monthlyorpay-for-use)andselectiveaccesstoSkyscontentportfolio.Separately, BSkyB is also letting catch-up TV services from the BBC (iPlayer) and ITV onto its box, with less control over the user interface and editorial control of front pages. An opportunity rather than a risk for telcos For telcos, the downside risk associatedwith potential pay-TV cannibalisation by OTT TV services is limited, given their low starting point in terms of revenues while in our view OTT represents two attractive opportunities for them: teaming up with OTT, telcos could propose innovative triple-play offers compared to legacy pay-TV providers, and hence accelerate their penetration of the pay-TV market; the rise in OTT could accelerate the take-up of super-fast broadband by customers, potentially boosting telcos broadband revenues. Telcos have limited exposure to downside on pay-TV - As shown in the table below, incumbentstop-lineshowsrelativelylimitedexposuretobearcasescenariosonthe broaderpay-TVmarket.Iftriple-playpenetrationremainedflatat24%ratherthan increasingto40%by2015e,thetotalincumbentrevenueCAGRwouldreach-4.0% versus -3.6% in the core scenario. Also, the sensitivity is relatively low to a bear case in which IPTV ARPU would be declining rather than growing in the long run. Figure 46: Sensitivity of incumbents top-line to the triple-play outlook2015e triple-play penetration 8 0% 20% 40% 60% 80%2015e IPTV ARPU (EUR/month)13 -4.5% -4.2% -4.0% -3.7% -3.5%18 -4.5% -4.0% -3.6% -3.2% -2.8%8 -4.4% -3.9% -3.3% -2.7% -2.2%Source: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

46 OTT as an opportunity to differentiate Telcos could use the new OTT trend to be moredisruptiveinthepay-TVmarketi.e.todifferentiatethemselvesfromlegacypay-TV players. Opportunities include: striking partnerships with OTT providers and bundling their services into their triple-playpackages.Forinstance,thisiswhatTeliaSonera,OrangeFrance,KPNorSFR (France) are doing on the music side with Spotify or what Orange could do in France via its partnership with Dailymotion (in which it has acquired a 49% stake); pushingthemulti-platformanglei.e.makingcontentavailableonanydevice, anywhere,inaseamlessway.Forinstancethisisthetypeofserviceproposedby Mobistars Starpack offer in Belgium (not successful so far due to activation issues and its reliance on satellite), or by the latest Bouygues Telecom Bbox in France. Theseopportunitiestodifferentiatecouldbeespeciallyrelevant:1)inmarketswhere telcos have failed so far to grow in triple-play and where existing TV providers are well entrenched(e.g.Italy,theUKorGermany).Forinstance,intheUK,theYouviewJV couldhelpBTandTalkTalktoexpandfurtherintotriple-play;2)moregenerally,for mobile-only operators which have yet to significantly enter the triple-play market. In any case, the sensitivity of incumbents revenues to a bull case is relativelylimited. Forinstance,ifweassumedthattheywouldbeabletoseizetheirfairshareofthe pay-TVmarketi.e.thattheircustomermarketshareofpay-TVwouldinthelongrun equate their customer market share in broadband (42%e), thiswould point to revenue CAGR of -3.0% versus -3.6% in the core scenario. Indirectpositiveimpactonbroadband-Apositiveimpactfromthedevelopmentof OTTforthesector(includingbothtelecomandcableoperators)couldbetodrive broadband revenues by: 1) expanding fixed broadband penetration potentially enabling a stabilisation or even a return to growth in the number of fixed lines in the markets which have suffered most from fixed-mobile substitution (e.g. Telekom Austria growing its number of fixed lines by 21k in 2011, admittedly from a low base); 2)pushingtowardsfasterspeedsandhencepotentiallydrivingbroadbandARPUup, even if no direct pay-TV revenue is captured by telcos. As one interviewee put it, OTT content is pulling broadband, which is good. This is a similar phenomenon as that observed on mobile, with the Apple iPhone and AppStore drivingmobiledatatraffic:eventhoughmobileoperatorsarenotgettinganyrevenue fromapplications,theyaregettingabenefitfromincreasedmobiledatausageand customers moving from higher speed services. Indeed,OTTvideoservicesrequireupto3.8Mbit/sofactualstreamingspeedforHD quality video, as shown in the table below. Figure 47: Broadband speeds required by different OTT video services ServiceBroadband speed (Mbit/s) Netflix HD2.6-3.8 Netflix SD0.375-1.5 BBC iPlayer0.8-3.2 Hulu0.48-0.7 M6 Replay HD>1 SeeSawUp to 0.5 Blinkbox0.27-1.1 Source: Exane BNP Paribas estimates Telecom Operators

47 According to Akamai, the average speed of broadband access in Europe has increased by26%yoy,to5Mbit/s,buttherearestillonly29%ofcustomersgettinganaverage speedinexcessof5Mbit/sandthispercentageisbelow20%inFrance,Italyand Spain.Thisclearlyhighlightstheneedforfasterbroadbandspeedsforcustomers willing to use OTT services providing a competitive edge to operators able to provide fasterspeeds.Thisiscurrentlymainlycableoperators(e.g.intheNetherlands, BelgiumandPortugal),butasdetailedinour2011report,webelievethattelecom operators also need to accelerate the rollout of super-fast broadband services. Figure 48: Broadband speeds in Europe, according to AkamaiAverage speed (Mbit/s) Country% >5Mbit/s Q3 11 Q3 10YoYIT14% 4.0 3.322%FR15% 3.8 3.315%SP18% 4.0 2.845%AT30% 5.4 3.747%UK31% 5.1 4.026%SE31% 5.3 4.97%DE33% 5.3 4.324%FI36% 5.7 4.429%PT40% 5.1 4.029%NO40% 6.2 4.926%CZ50% 7.3 5.533%DK51% 6.3 5.025%CH51% 7.5 5.440%BE54% 6.2 4.828%NL68% 8.5 6.334% Weighted average29% 5.0 3.926%Source: Akamai, Arthur D. Little, Exane BNP Paribas estimates ThetablebelowshowsthesensitivityoftheoverallsectorrevenueCAGRto assumptionsregardingsuper-fastbroadbandpenetrationandARPUinthelongrun. Ourcoreassumptionsare20%penetrationofthebroadbandbaseby2015e(versus 4%today)andanincrementalARPUofEUR10.Massivelyincreasingthepenetration to40%ofthebroadbandbaseandassuminganincrementalARPUofEUR15would lead to a bull case scenario whereby the sectors revenue would decrease by a milder 1.2% versus -1.8% in the core scenario. Figure 49: Sensitivity of the sectors revenue CAGR to super-fast broadband 2015e penetration, % of broadband customer base 10% 20% 30% 40%50%5 -2.1% -2.0% -1.9% -1.8%-1.8%10 -2.0% -1.8% -1.7% -1.5%-1.4%2015e incremental ARPU (EUR/month) 15 -1.9% -1.7% -1.4% -1.2%-1.0%Source: Arthur D. Little, Exane BNP Paribas estimates AnotheropportunityfortelcosassociatedwithOTTcouldbetogeneratewholesale revenuesbychargingthemeitherforbandwidthorforadditionalservices(e.g.CDN, billing, etc.): we discuss these in page 57. Telecom Operators

48 Are OTT services Trojan horses about to capture the customer? OTTserviceproviderswilldeveloptheirowncustomerbaseovertimeeitherona payingbasis(e.g.Netflix)oronafree,advertising-basedmodel(Youtube).Telcos wouldcontinuechargingforaccessbutOTTplayerswouldincreasinglychargefor services (or get advertising revenues to support these services). The value chain would evolvewiththeriskthatthetelcosgetdisintermediatedovertimeandendupbeing purely commodity dumb pipes. Theriskcouldbesignificantformobile:customerscouldincreasinglyseeSkype, WhatsApp, Apple or Google as their main service provider, not just for some marginal servicesbutalsoforcorecommunicationservicessuchasvoiceandmessaging. Customers would continue paying mobile operators for an access bundle, of which the core component would be data traffic. This shift in customer ownership from operators towards OTT players is not only theoretical: there is a growing trend among customers touseOTTplatforms(e.g.Google,Facebook,etc.)tomanagetheirprimarycontact databases and diaries as opposed to storing and managing these data in the handset. Theextenttowhichsuchascenariowouldbenegativeforoperatorsdependsonthe split of value between access and services. Since the real value will increasingly be in datawhilevoiceandSMSwillincreasinglybecommoditised,operatorsrelationship with customers as a data provider will remain important. However, large OTT players do not necessarily worry about direct revenues and profits from these OTT communication services, but rather aim at boosting their core business in a different field, such as hardware sales (Apple) or advertising (Google, Facebook). Indeed,regardingpureOTTplayers,webelieveinawinnertakesallsituation,e.g.Spotify in music (already profitable), WhatsApp, in messaging, etc. (albeit with room for smaller OTT players if they manage to differentiate and provide services adapted to the local context e.g. Deezer or Dailymotion in France). TheriskfortelcoswouldbemuchmoresignificantifOTTplayersweretobecome operatorsorevenjustMVNOsi.e.wereabletocapturethewholecustomer relationship. At this stage, this risk has remained contained. IntheUK,AmazonissellingKindlee-readerdeviceswithembedded3G connectivityandnomonthlyfeeforGBP149.Thisremainssmallintheschemeof things, and this is an additional device rather than the core device/handset. Google is rolling out a 1Gbps fibre network in Kansas City (USA), but this remains a very local case. The official goal is to foster innovation and new usages through ultra-high-speed networks. Afewyearsago,AppleconsideredintroducingsoftSIMcardsinitsiPhone handsets(asopposedtoclassicSIMcardswhicharecontrolledbytheoperator),a movewhichcouldhaveledtelcostolosetheircontrolofthecustomer.However, consideringthattelcosarethemaindistributorsofiPhone,itwouldhavebeen dangeroustoconfrontthemsodirectly.Nevertheless,itsrecentassaultonSMS revenues (making iMessenger a native application in its mobile devices) was viewed as a painful precedent by some mobile operators. Telecom Operators

49 Inanycase,thisriskofdisintermediationshouldnotbeignored,notablywhen operators make strategic decisions about distribution or SIM-only. Giventheimportanceofdevicesforcustomers(thedeviceisking),theplayerin controlofthedistributionofdeviceshasastrangleholdoverthevaluechain.The balanceofpower,previouslyinfavouroftelcos,couldchangefurtheriftheywereto significantlyreducetheirretailfootprintand/ordevicesubsidiestocutcosts,while players like Apple develop their own retail networks. SIM-only leads to separatingthe handset from the service provider andcould also beastrategicriskfortelcos.Atthisstage,weestimatethatSIM-onlyrepresentsless than5%ofthecustomerbaseinEurope,andlessthan15%ofgrossadditions.But there are two types of exceptions: 1) some markets have had no subsidies historically (Italy,Belgium),and2)afewothersarecurrentlymovingawayatleastpartiallyfrom subsidies (Denmark and France). Capex risk on the fixed-line side, for super-fast broadband OTT data is the main driver of the exponential growth in global IP volumes, which are expected to quadruple by 2015, according to Cisco. Will this exponential traffic growth force telcos to increase capex massively? We stick to the views developed in our 2010 and2011reportsonmobileandfixed-linecapex,i.e.webelievethattelcosneedto increase capex in fixed-line to catch up in super-fast broadband, but notmassively so in mobile. Regarding fixed-line, we reiterate the view we expressed last year, that telcos need to upgradetosuper-fastbroadbandandthatthiswillrequirehighercapex.Thismainly relatestotheaccesspartofthenetwork,whichisalsothemostcostly.Thecore networks are scalable: capacity in the core network has always and will continue to be increased as traffic grows. Figure 50: Evolution of the global consumer* IP traffic, 20102015CAGR CAGR PB per Month2010 2011 2012 2013 2014 201535.00030.00025.00020.00015.00010.0005.0000Internet videoFile sharingWeb, email, and dataVideo callingVoice over IP (VoIP)Online gamingOthers+23%+29%+41%+43%+4%+132%+48%2010 2011 2012 2013 2014 201535.00030.00025.00020.00015.00010.0005.0000Internet videoFile sharingWeb, email, and dataVideo callingVoice over IP (VoIP)Online gamingOthers+23%+29%+41%+43%+4%+132%+48%35.00030.00025.00020.00015.00010.0005.0000Internet videoFile sharingWeb, email, and dataVideo callingVoice over IP (VoIP)Online gamingOthers+23%+29%+41%+43%+4%+132%+48% * Consumer traffic accounts for ~80% of world traffic in 2010 and ~87% in 2015F Source: Cisco Telecom Operators

50 As for mobile, we see no real concern, for several reasons: Trafficismuchmoremodestandsometimesnotgrowingasfastascouldbe expectedafewyearsago,becauseoperatorshavemanagedtocontrol/reducetraffic frommobiledongles.Forinstance,VodafoneEuropesdatatrafficgrowthhasslowed to around +20% yoy since Q2 11, with dongle traffic reported flat in Q4 11; Technologiesprovidemoreandmorecapacityforthesamecostthenextmove being LTE. Operators are already preparing the LTE rollout by swapping their networks to a single-RAN technology which is 4G ready; Thereispotentialtooffloadalargepartofthetrafficonfixed-lineviaWiFi. According to Cisco, 10% of Western Europe's mobile data traffic was offloaded in 2011; this proportion should grow to 25% by 2016. Focusing specifically on mobile data traffic originatingfromhandsetsandtablets,thefiguresare30%in2011and34%by2016. At this stage, tablets are largely connected via WiFi rather than 3G (according to GFK only23%oftabletssoldinFrancein2011were3G-enabled,whileaccordingtoPark Associates, only 29% of the 16.5m tablets sold worldwide in 2010 were 3G-enabled). Key tactics to avoid the bear case Operators attitude towards OTT-related risks has changed significantly in the past few years. As shown in the chart below, the negative approach (i.e. try to block them) was only quoted by a handful of those surveyed, and most companies articulated responses revolving around two key themes: TelcosshouldcompetewithOTTonthecustomerfrontbyleveragingexisting customerrelationshipsintheirlocalmarkets(leveragingcustomertrust,thebilling relationship, the local hero status versus the global OTT, the local language, and, on the fixed broadband side, the box). They should at the same time protect their existing revenuestreamsthroughmoreaggressivebundlingbybundlingservicesthatcanbe cannibalised(voiceandSMS)withservicesthatcancannibalisethem(data),sothat ARPU becomes insensitive to the actual usage mix; Recreating a clear link between traffic/usage and revenues, either on the customer front (tiered pricing) and/or on the OTT provider front. Many telcos envisage developing partnershipswithOTTproviders,towhomtheycanofferabetterqualityofservice, guaranteedbandwidth,etc.,forafee.Themostadvancedexampleofthiswouldbe Verizons Digital Media Services initiative (see below). Figure 51: Interview feedback Operators in constructive mode with OTT? Number of responses regarding Telcos levers to face competition from over-the-top players 0 5 10 15 20 25 30 35 40 45 50Push for regulatory changesThis is only a minor subjectBlock them and ask for moneyLeverage STB (better than OTT)It will be difficultMore price/service bundlingLeverage customer dataLaunch own OTT servicesLeverage brand, 'local hero', languageOffer them wholesale services such as CDNDevelop partnerships with themControl and monetise QoS and bandwidthLeverage customer contact, trust & billingSource: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

51 Inourviewthemosteffectiveresponsesare:1)pricebundling,whichwethinkcan basicallyhalvetheriskofcannibalisationofmobileoperatorslegacyrevenues; 2) tiered pricing, not just in mobile but also in fixed, to ensure revenues increase in line withtrafficgrowth;3)leveragingthebox,infixed-line;and4)developingwholesale revenuesfromOTTproviders,althoughthisisdifficulttoquantifyexceptfortheCDN activity, which is a relatively small opportunity. Blocking OTT: not a long-term option The initial response of many mobile operators has been to block VOIP on their networks. This is particularly the casewith many leaders. Howeverwe believe that blocking OTTs will not be a long-lasting solution. Interestingly, among those surveyed, only four (from 93 responses) mentioned blocking OTT as a possible long-term solution. Indeed,competitivepressureislikelytomakethistacticunsustainable.Inmost markets,thechallenger(s)arenotblockingVOIP,soleadersmayhavetofollow.For instance,intheUK,EverythingEverywhereisblockingSkype,Vodafoneisallowing Skype on its relatively high-end contracts but charging GBP15/month to use Skype with lower-end contracts, while 3 and O2 are allowing Skype. Similarly, in Germany, e-plus and O2 both allow VOIP, but only on higher tier data plans. Figure 52: Operators attitudes towards mobile voice over IP ChallengerMarket position (shares)LeaderPartner with VoIP providerAllow use with data planImpose a surchargeProhibit use of VoIPAction towards mobile VoIPChallengerMarket position (shares)LeaderPartner with VoIP providerAllow use with data planImpose a surchargeProhibit use of VoIPAction towards mobile VoIPSource: Arthur D. Little, Exane BNP Paribas estimates Inanycase,Europeanregulatorshavesaidthattheyareopposedtosuchblocking, citingnetneutralityrules.IntheUKOfcomhasrecentlyputpressureonoperators banning Skype. TheEuropeanparliamentpassedaNetNeutralityResolutioninNovember2011, which points to the potential of anti-competitive and discriminatory behaviour in traffic management,inparticularbyverticallyintegratedcompaniesandunderlinesthat ensuring quality in time-critical service traffic shall not be an argument for abandoning the best effort principle. On the other hand, the resolution states that as of now, there is no clear need for additional European-levelregulatoryinterventiononnetneutrality.Italsosaiditwillwaitforthe publicationofnewguidelinesbyBEREC(thebodycomprisesallEuropeannational regulators) in Q2 12 before deciding whether further regulatory measures are needed. Telecom Operators

52 Pricing response #1 = Bundling Bundling services is a great way to avoid cannibalisation of one service by another, and to enrich an operator customer proposition, hence better defending pricing. Bundling the new and the old revenue streams Thisapproachhasbeenverysuccessfullyimplementedbyfixed-lineoperatorswhen they were attacked by fixed VOIP players like Skype a few years ago. For instance, in France,telcoshaveincludedunlimitedfixedVOIPcallingintheirbroadbandoffers (alternativecarriershaveincludedunlimitedcallsnotonlytoFrancebutalsotomore than 100 international destinations), to the extent that 65% of fixed telephony traffic in FrancewascarriedviaoperatorsbroadbandboxesinQ311andonly35%overthe PSTN. This has neutralised the appeal of Skype to French consumers. In mobile, operators core response to averting voice and SMS cannibalisation by data is to bundle voice and SMS with data, i.e. to make sure that customers cannot access a largedatabundlewithoutalsopayingforvoiceandSMS.Countrieswhereoperators haverearrangedtheirtariffsthiswayincludeFrance(unlimitedSMSinallmonthly plans giving access to data), the UK (unlimited SMS from relatively low price points of GBP1520 for most operators) and Denmark (unlimited SMS in all bundles). However,therearestillmanymonthlyplansforsmartphoneswhichofferdatausage butdonotincludeunlimitedSMSinSpain(thisisthecaseinparticularatTelefnica andOrange)and,toalesserextent,inGermany(unlimitedSMSofferedinmost smartphoneplansatVodafoneandE-Plus,butonlyprogressiveSMSallowances offeredbyO2,andnoSMSincludedatT-Mobile)andBelgium(Mobistarhasbeen offeringcustomersthechoicebetweenunlimitedSMSanddata,ratherthanbundling SMS with data). VodafoneispushingthisbundlingstrategythroughoutitsEuropeanfootprint.Ithas reported that these efforts are particularlywelladvancedin the UK (68% of consumer contract revenues from integrated bundles in Q4 11) and the NL (49% in Q1 11). At the VodafoneEuropelevel,37%ofconsumercontractrevenuesaregeneratedfrom integratedbundlesacommendableachievementsincethepenetrationof smartphonesinthecontractcustomerbaseis42%,andthesetwofigureshavebeen climbing in parallel, as shown in the chart below. Figure 53: Revenue contribution from integrated bundles (as a % of consumer contract revenues), compared to smartphone penetration, in the Vodafone Europe contract customer base Vodafone Europe, evolution over timeVodafone Europe and Vodafone UK Q4 11 0%5%10%15%20%25%30%35%40%45%Q4 10 Q1 11 Q2 11 Q3 11 Q4 11Smartphone penetration Revenues from integrated bundles 0%10%20%30%40%50%60%70%80%Europe UKSmartphone penetration Revenues from integrated bundlesSource: Vodafone, Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

53 Such an approach should in our view keep the risk of revenue cannibalisation in check. Forinstance,assumingthatoperatorswouldbeabletoreducetheshareofout-of-bundle revenues from roughly a third of consumer contract revenues to less than 10% by2015e,andassumingthatprepaidtariffswouldalsobeincreasinglyintegrated(i.e. selling voice, SMS and data top-ups together), the sensitivity of operators revenue tocannibalisationwouldbedrasticallyreduced.Theimpactofourbearcase cannibalisation scenario on operators revenue would be at least halved. Adding OTT services into the bundles to add value To defend against the threat of becoming dumb pipes, another pricing response from operatorsistobundlecoreserviceswithspecificOTTserviceswithwhichtheyhave partnered.Thiswouldincreasetheperceivedvalueofthewholebundle,tobetter defend the operators core revenues. Thisapproachispopularamongindustryparticipants:of93interviewees,27talked abouttheopportunityofdevelopingpartnershipswithOTTplayers.Andthereare already many examples of such an approach, both in fixed broadband and in mobile: in mobile, the bundling of music services, for instance Deezerwith Orange France and Orange UK, and Spotify with 3UK or SFR in France; in fixed-line, the bundling of video content services such as BBC iPlayer and TiVO byVirginMedia,andalsomusicservicessuchasDeezerwithOrangeFrance,and Spotify with TeliaSonera in Sweden and KPN in the Netherlands. Thevalueaddedhere,notablyonthefixed-linefront,isthattheoffercaninclude enhancedservicequalityrelativetothatavailablefromanindependentOTToffer, becausetheoperatorcanintegratethespecificcontentinitscoreproposition(see specificpointontheboxstrategybelow).Theriskhereisthatoperatorscouldfailto convince the consumer of the value added of such service bundles. Pricing response #2 = Tiered pricing an absolute necessity Data has become the main source of traffic (and of traffic growth) both in fixed-line and mobile,somonetisingdataisessential.Thisisespeciallysogiventhatthegrowthin datatrafficisdrivenmainlybyOTTapplications,fromwhichoperatorsdonotget additional revenues, the best examples being Youtube and Facebook. In fixed-line, unlimited data usage is the norm (with caps in some markets), but in most countries, prices differ by broadband speed a simple form of tiered pricing. The move towardssuper-fastbroadband,bothoncable(withDOCSIS3.0technology)andon telecom networks (VDSL, FTTH) is an opportunity to increase ARPU. Furthermore,telcosdevelopfixedbroadbandtiered-pricingthroughextraoptions.For instance:intheUK,BTsdiscountbrandplusnetproposesaProoptionforgamers and home workers for GBP5/month (lower latency and ping, prioritized traffic, etc.) and VirginMediahastieredbroadbandpricing;inItaly,TelecomItaliaproposesaSuper InternetOfferstartingfromEUR4/monthenablingspeedincrease(upto1Mbit/sin upload, 1020Mbit/s in download). In mobile, the incremental cost of a GB of data is significant and spectrum is a scarce resource,somostoperatorshavemovedawayfromunlimiteddatapricing.Thefirst step has been to introduce fair usage policies, followed by the design of a price ladder depending on traffic. Usingawidesampleofoffersinsixcountries,andputtingthemincategories dependingonthesizeofthedataallowance(seechartbelow)wehavecalculated approximateaverageprices:EUR24perGByteforentry-levelusers (0.2-0.5GByte/month),EUR13perGByteformid-tierusers(0.5-1GByte/month),and EUR8.4 per GByte for the heaviest users (more than 1GByte), including VAT. Telecom Operators

54 Figure 54 belowshowshowwehave calculated theimplied priceof mobiledataona subset of mobile contract pricing examples in France, the UK and the Netherlands, by comparing the price of bundleswith equivalent voice and text allowances but different data allowances. Figure 54: Mobile data pricing examples from six European markets EUR per GByte, including VAT 05101520253035404550556065700.25-0.5GB >0.5-1GB >1GBEUR13EUR24EUR8Source: Arthur D. Little, Exane BNP Paribas estimates Figure 55: Mobile data does not come for free Examples of mobile offers with different amounts of data, and calculation of implied price of data OperatorOffer 1PriceData Offer 2Price Data EUR/GBOrange FranceStyle 120*290.5 Zen 12021 016.0Star 120372 Style 12029 0.55.3Star 180452 Zen 18029 08.0Star 300552 Zen 30037 09.0 SFR (France)Web 120371 Connect 12024 0.2517.3Web 180432 Connect 18034 0.56.0 Bouygues (France)Relax 120220.35 Classic 12018 011.4Smartphone 120351 Classic 12018 017.0Smartphone 120351 Relax 12022 0.3520.0Smartphone 180391 Relax 18031 0.516.0Smartphone UL691 Relax UL64 0.510.0B&You381 B&You25 0.114.4B&You381 B&You33 0.510.0 Orange UKPanther 10020.50.5 Dolphin 10015.5 0.112.5Panther 400310.75 Dolphin 40026 0.2510.0Panther 600361 Dolphin 60031 0.256.7 Vodafone UK300 min20.50.25 300 min15.5 020.0600 min260.5 600 min20.5 011.0900 min310.5 900 min26 010.0900 min360.75 900 min26 013.3 T-Mobile UK300 min25.50.5 300 min15.3 020.4600 min30.60.5 600 min20.4 020.4900 min35.80.5 900 min30.6 010.2 KPN NL100 min/SMS300.1 100 min/SMS20 0100.0200 min/SMS37.50.25 200 min/SMS28.5 036.0350 min/SMS47.50.75 350 min/SMS40 010.0450 min/SMS57.51 450 min/SMS50 07.5 Vodafone NL125 min/SMS28.50.3 125 min/SMS20.0 028.3225 min/SMS36.50.5 225 min/SMS29.3 016.1325 min/SMS44.50.7 325 min/SMS39.0 08.5* Origami Style 120 includes unlimited access to Deezer Premium (EUR4.99/month), which generates data consumption. Source: Arthur D. Little, Exane BNP Paribas estimates Telecom Operators

55 In our industry revenue model, we have used an average revenue per GByte of EUR26 for 2012e, with the figure falling to EUR6 for 2015e. In the long run, average traffic per smartphone is expected to reach 1.9GB/month, so the revenue per GByte of EUR6 that we have used actually assumes only a limited price decline compared to todays offers for the heaviest users (EUR8.4 per GByte). However,theadoptionoffullytiereddatapricingisnotagiven,giventhecompetitive pressures in many mobile markets. For instance, thewell structured tiers launched by UK and French operators could be disrupted by the respective push on unlimited data pricingfrom3andT-MobileintheUK(e.g.T-MobilesFullMontybundleincluding unlimited texts and unlimited internet with no fair usage policy), and from Free Mobile in France (EUR19.99/month for unlimited voice, unlimited SMS and 3GBytes of data). Product response #1 = The box Onthefixedbroadbandside,anumberofoperatorsaretryingtoleveragetheboxto offerasuperiorservicecomparedtothoseavailabledirectlyfromOTTplayers. ExamplesincludeIliadinFrancewiththeFreeboxRevolution,VirginMediaintheUK with its BBC iPlayer partnership and the successful launch of the TiVo box. Compared to OTT, the advantages of integrating services into the box are: theabilitytoprovideasuperiorqualityofservice.IPTVorcableTVissuperiorto internetTVandislikelytoremainso,becausetheTVstreamisprovidedviaa dedicatedchannel(orsetofchannels).UnlikeTVsignalscarriedoverthebroader internet, the quality of the delivery can be ensured; the ability to bring a wide variety of services together on the customers screen, i.e. the power of aggregation. Whilewith OTT the customer may (at least initially) have to gotodifferentwebsites/serviceproviders(andpotentiallytosubscribetomultiple services)togetallthecontentdesired(e.g.intheUK,oneneedstogoontheBBC iPlayerwebsitetogetBBCcontent,usetheITVPlayertogetITVcontentand subscribe to Netflix for specific drama series or movies, etc.); theabilitytogetspecificlocalcontentthatOTTplayersdonothave.Asignificant partofwhatTVuserswanttowatchislocalorregional,includingnews,sports (football), series, etc. the ability to bundle all this with the management of the users personal content i.e. theroleoftheboxasamulti-mediastoragedevice.Operatorscanexploittheusers trust in its local provider for the storing of personal pictures, movies, etc., and make it possibletowatchthemonseveraldevices,e.g.theFreeboxRevolutionorthe Bouygues new Telecom Bbox Sensation. Importantly,suchaboxstrategyisveryspecifictothefixed-line:mobileoperatorsdo not control the device, especially now that the key element has become the operating system, dominated by Apple (iOS), Google (Android) and potentially Microsoft (notably supported by Nokia). However,thelong-termsustainabilityofsuchaboxstrategyinfixed-linecanbe questioned.Contentismovingintothecloudanyway,andTVsetsarebecoming increasinglysmarti.e.abletodirectlyconnecttoOTTservices.Assuch,some interviewees believe that the box will soon become an irrelevant piece of hardware. Inourview:1)theboxwillstillactasthegatekeeperinthenextfewyears,mainly because it is provided by a trusted operator and enables a simple and rich experience, and, 2) in the longer term, operators can prolong the life of the box by ensuring that the hardwareandOSremainup-to-dateandbyenrichingthecontentofferingvia partnerships with OTT players. Telecom Operators

56 Product response #2 = Own OTT services? A few operators have mentioned launching their own OTT services as a way to counter the threat from the OTT pure plays. Examples of such a strategy follow. Onthemobileside,TelefnicasacquisitionofthemVOIPplayerJajahisthe boldestexample.ThecompanypaidEUR145min2009,withtheintentionofusing JajahscommunicationplatformandR&Dexpertise,andleveragingittocreatenew servicesandattractinnovativedevelopers.Sincethennewproductsandpartnerships have indeed been created, consistent with Telefnicas broader strategy. Figure 56: Jajahs new developments with Telefnica Further development of Jajahplatform (web, PC, mobile, set top) Cooperation with Microsoft for Lync / Office (for SMEs) New products launched: Phone a Friend (DE), Calling cards (UK) Product launch follows TEF footprint: Europe: SP, GE, UK Latin America: 6 countries plannedNew products & partnerships Further development of Jajahplatform (web, PC, mobile, set top) Cooperation with Microsoft for Lync / Office (for SMEs) New products launched: Phone a Friend (DE), Calling cards (UK) Product launch follows TEF footprint: Europe: SP, GE, UK Latin America: 6 countries plannedNew products & partnerships Integration to social networks Facebook calling on Androidplatform Twitter calling(@call@) Importance of social network integration: Re-integrated social network communications in Telefonicanetwork These communications are not free: drive revenuesIntegration to social networks Facebook calling on Androidplatform Twitter calling(@call@) Importance of social network integration: Re-integrated social network communications in Telefonicanetwork These communications are not free: drive revenues Source: Arthur D. Little, Exane BNP Paribas estimates InanattempttoemulatethesuccessofSMS,Telefnica,Vodafone,Orange, Deutsche Telekom and Telecom Italia recently announced the launch of an initiative to createanewstandardforadvancedcommunicationservices,basedontheexisting RCS(RichCommunicationSuite)technology.Serviceswillincludeenhancedcontact management,messaging,videocallsandfilesharing.Orangehasannouncedthatit targets20mRCShandsetsinitscustomerbaseby2015.Ithighlightedthatthemain benefitofRCSwouldbethat,unlikeOTTservices,RCSserviceswouldbe interoperable between different handsets. On the fixed broadband/content side, the TV Everywhere concept launched by US cable operators and by BSkyB in the UK (see page 45) Even though suc