Date: 11 October 2013 To: Mr. Cesar Alierta Izuel, President & CEO TELEFONICA (TE) From: Oscar Olivo Fuentes Corporate Strategy Group RE: Strategic Analysis Introduction.

In response to the current economic situation or as vd and forward in the shareholders' meeting where they presented the results of the company's past financial year 2012, please allow me to convey to strategic analysis exercise where you can pick up some tips. Without going to make an assessment of the company's overall corporate, I would focus the analysis on line mobile phone business in Spain (Movistar trademark). 2012 has been characterized by heterogeneity in the growth of the world economy, in which the differences between developed and emerging countries continued to widen. The markets in which Telefónica presented different behaviors with a Latin American economic growth of 3%, while Europe's GDP declined by 0.2%. In particular, in the Eurozone, there were substantial institutional progress not only reflect a high commitment to the continuity of the process of European integration, but also with a reform agend that lays the foundation for strong growth in the near future. Specifically, in Spain, there have been significant advances in 2012, where commitments have the dual purpose of ensuring debt sustainability, and to implement an ambitious reform plan relaxing the economy and result in more growth potential the medium term. In spite of the unfavorable conditions in some markets, both economic and competitive and regulatory Telefónica revenue stood at the whole year EUR 62.356 million, 0.8% lower than in 2011. As a result of significant customer impulse contract and fixed and mobile broadband, the customer base grew 3% year on year, reaching almost 316 million customers in our markets.

Competitive position

Focusing on data changes in the number of mobile phone lines in Spain in the period 2000-2013 (millions of lines)

According to June 2013 figures, the number of mobile phone lines for personal communication was 51,927,748, with the penetration rate of 112.4 lines per 100 inhabitants. Total lines telemetry services (M2M) was 2,969,232, making a total of 54,896,980 operating line. In personal lines, corresponding to 16,300,065 prepaid billing system, 33.40443 million postpaid (also called contracts), and 2,223,253 to Datacards. There are four operators with their own network (ie, they manage their own mobile phone masts), although the last to arrive (Yoigo / Telstra), has an agreement to use movistar network also, because it still is deploying its own network. There are also a number of mobile virtual network operators of around twenty. The mobile phone market in Spain in December 2011 it formed the following list of operators. 53,066,828 total active lines. With home network • Movistar (Telefonica subsidiary), 38.24%; • Vodafone Spain (subsidiary of Vodafone), 28.42%; • Orange Spain (subsidiary of Orange), 20.21%; • Yoigo (TeliaSonera subsidiary), 5.19%; OMVs The Spanish OMV had a December 31, 2011 a total of 3,592,757 lines (6.76% of total). The most important, in terms of customers, are: • LycaMobile, operating under Vodafone coverage, with 646 014 lines. • Symi Orange operates under coverage, with 558 949 lines. • Lebara Mobile, operating under Vodafone coverage, with 460 358 lines. • Llamaya, operating under Orange coverage, with 270 842 lines. • Digimobil operating under Movistar coverage, with 263 339 lines. • Euskaltel, operating under Vodafone coverage, with 251 888 lines.

Currently, Spanish subscribers use the GSM digital standard, used by all European operators. It is also in use the UMTS standard for 3G mobile telephony, for which license have all operators, and since June 2013, the various operators are progressively introducing LTE 4G mobile phone. All operators have implemented in their networks, with greater or lesser extent of coverage, the various existing standards for data transmission known as GPRS and EDGE mobile 2G and W-CDMA and HSPA in 3G mobile. Spain is among the European Union countries with greater extent and quality of coverage, according to a study by the Ministry of Industry, 2006, 98% of Spanish territory has GSM coverage, ahead of countries like France, Italy or Germany After much uproar in 2013, the 4 major Spanish companies (Vodafone, Orange, Movistar and Yoigo) to deploy the first 4G services first among the large urban cities In May we started a "war" between Yoigo and Orange to see who throws the line faster 4G. The big surprise was Vodafone, who said nothing , to the first week in May said it would implement the 4G service for 7 large cities in June of this year , making it the first operator to offer 4G mobile speeds to 150Mbps Spain . The cities to enjoy 4G from June are: Madrid , Barcelona , Valencia , Bilbao , Seville , Malaga and Palma de Mallorca . Adapting to new lines in these 7 cities 4G has cost an investment of 12,000 million euros by Vodafone , Movistar and Yoigo recently announced an agreement between the two companies roaming extension and use of technologies for each other , giving the possibility Movistar users use Yoigo 's 4G network , and Telstra users using optical Friba network Movistar , thus Movistar offer 4G services from 2013 as well as its other competitors. Orange will launch its 4G network and Yoigo July 8 July 18 , while Vodafone is available from June 3 . Moreover, in 2000 the CMT also regulated the number portability process by which a subscriber can change his company keeping their phone number and completely free. Since the launch of the procedure until April 2007, more than 9 million customers have switched operators, as much of the entire European Union. Reference Serve the importance of this procedure the number of customers who switched operator between June 2006 and 2007: 3,957,556 lines, about 10% of the total, according to the annual report of the CMT. Market Commission (CMT) has approved a Circular Reference Entity established mobile network, which handles portability in fixed network, through which all mobile operators can access a number of interfaces common and will be responsible for recording the portability requests, incidents occurring during the process and transactions. In this architecture, the CMT will have a monitoring interface, allowing you to access all the information stored in the Reference Entity (ongoing processes, statistics, state of the numbering) and ensure that procedures are developed properly portability.

Personal Lines imported and exported, according to November 2008. Source: CMT

Operator Exported (lost) Imported (won)

Movistar 110.663 106.721

Vodafone 100.997 79.480

Orange 74.517 86.546

Yoigo 7.699 15.243

Omv´s 9.629 15.515

You could say that this is the period of most rapid change in the history of our industry. Just as an example to mention that in 2012 mobile penetration reached 90% worldwide, with growth of Smartphones users 42%. Despite this rapid growth, only 17% of mobile customers have smartphones, which shows the enormous growth potential presented ahead. Figure 2

Industry Analysis.

The Spanish market of mobile phones has been historically characterized by reduced competition, especially at the price of calls, as evidenced by its history (it was monopoly until 1995) and of the statements made on numerous occasions by consumer associations, the own regulatory body, the Commission for the Telecommunications Market and even the National Court in one of its decisions has called the market "tight oligopoly".

Spanish Market sharing by total personal lines, according to February 2011. Source: CMT.

Spanish market increase by total number of new personal lines, according to March 2009.

Source: CMT.

But the current trend shows that competitors are gradually gaining more market share due to regulatory changes, expansion and operation spectrum primarily due to aggressive publicity campaigns and make the customer, so far faithful to brand, is silvered change Mobile phone operator. No doubt, many of these consequences are the terminal funding policies. Telefonica and Vodafone decided to stop economic assistance in the purchase of these devices. Orange, as

the third largest company in the market, decided to maintain the policy and has been a big winner on this decision the best results for customer acquisition portability. Figure 1 and 4 Very to consider is the entry into the MVNO market with very competitive prices that make your customer acquisition focus especially on the younger population. For business lines, Telefónica maintains its leadership role by conducting customer loyalty policy, either by adjusting prices, with discounts or company providing global solutions.

Conclusion

As a leading company in the telecommunications sector, Telefónica is and should be leveraged engine of the economy and the industry in which it operates. But we should not miss the opportunity to secure this position. Quite the contrary should go for ambitious business strategies that make them attractive commercial offers to continue gaining market share. Must use its corporate capabilities, organizational and funding to maintain and even improve their position. Figure 3 However, it is unquestionable stiff competition and consumer demand for lower prices posed a problem for Telefónica in the future. It should make a strong commitment to customer acquisition and invest in 4G coverage this infrastructure deployed throughout the national territory. The alliance with Telstra in this regard must be secured and more so narrow. Considering the life cycle analysis of Figure 5

Also you should bet to preserve the competitive advantage by offering a broad portfolio, but simplified, high-value services that make differentiate themselves from competitors in quality service delivery. Given its position, Telefonica to be a benchmark company and market differentiation. Figure 6 As described above the competitive advantage that has taken advantage may be at serious risk if you opt for strategic shift aimed at simplifying basically commercial, making this a great value choice for customers and drive cultural change that puts the customer at the center of daily work, feeling this fundamental maxim for the Company. This process must be the result of the belief that only through customer satisfaction and building strong relationships of trust can achieve the growth objectives that the Company be dialed.

Figure 1 Competitor positions

What drives the competitor What the competitor is doing

or is capable of doing

Competitor positions.

• Objective: Gain market share in Mobile Telephony as well as provide value-added services.

• Enlarge the smartphone market

• Strategy: Establish a competitive quotation.

• Capturing market through attractive advertising campaigns

• Assumption: Competitors wish to stand as an alternative operator service withportfolio and highly varied quality

• Assumption: Competitors have technological resources to provide the services offered by themselves

• Assumption: Competitors are able to offer the same range of services with lower prices

• Resources and capacities: Large financial backing of multinational

• Orange: trade policy of financing the purchase of mobile terminals.

• Yoigo: heavy investment in infrastructure to provide 4G network coverage..

• OMV, s: Strategic Business Plans tight on money

Figure 2 Enviroment Analysis

Industry Analysis

Figure 3 Capabilities Analysis

Figure 4 Five Forces Analysis

Figure 5. Competitive Life Cycle Analysis

• Known and predictable barriers without changes in the telecommunications market..

• Procurement and sale of services through Internet

Entry

Suppliers

• New distribution channels through department stores.

• Settlement of the distribution chain and sale nationwide

• Global agreements to exploit information technology suppliers to ensure service delivery, developing new technologies and SW and maintaining the same

Rivalry

• High rivalry in an industry overexploited

• Large number of small companies in addition begin to take market share from larger companies

• Telefónica maintained in recent years the market leadership position, and is the main objective of its competitors to detract customers

Buyers

• Although the saturation of the market, customers are always willing to answer a good shopping.

• Customers, especially the younger ones, want to be always aligned with the latest trends in technology “state-of-the-art”

Substitutes and Complements

• Free smartrphones Sale

• Multibrand Services Sale

• Overall operating agreements, cloud computing, ...

Figure 6. Distribution of number of lines in strategic map

REFERENCES..

1. www.telefonica.es 2. www.telefonica.com 3. www.cmt.es. Informe trimestral 2013 4. www.cnmv.es 5. www.vodafone.com 6. www.orange.com 7. www.yoigo.es 8. Observatorio Red.es 9. ://www.cincodias.com/articulo/empresas/telefonia-movil-espana-sufrio-abril-

mayor-caida-historia/20120616cdscdiemp_1/

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Oscar Olivo Fuentes

Service Manager Consultoría TI

Móvil: +34 638 495 74

oolivo@aventia.com

www.aventia.com