1. Future transformation and integration
of Telecom and Media
Dr. Sören Grabowski
Moscow, June 8th, 2011

2. Agenda
 Evolution of the consumption patterns and Internet value chain
 Selected trends 2020: Net Neutrality, Social Communications and Media
 Redistribution of the revenue streams and new partnership models
 Russian realities and a word of caution
A.T. Kearney 05.20110 2

3. Industry trends and uncertainties point towards three likely
scenarios of how the communication industry could evolve
Industry Scenario Approach
Major industry trends Global
communications
industry scenarios
Device and
New neighbors,
Stagnant core Data explosion service
new threats
integration
Integration New business
Size matters LTE All cloud: Commodity pipe
finally happens models
Major industry uncertainties
Share and role of Customer
Regulatory Delivery service user generated preferred Mobile Play: Status quo
role paradigm content relationship
Full service world:
Pipe Dream
Source: A.T. Kearney analysis A.T. Kearney 05.20110 3

4. Industry scenarios range from a high value-added role for
MNOs to a fully commoditized, web-payer-dominated world
Industry scenarios
Global communications market scenarios
All cloud: Mobile play: Full service world:
Commodity pipe Status quo Pipe Dream
• Mobile industry evolves along • Mobility as all encompassing • Operators integrate the value
same path as fixed – operators service chain, driving convergence
provide access with no value • Industry definitions stay stable across content, delivery and
add – dumb pipe device
• Limited additional convergence;
• Operator split between evolution is incremental • Acquire online players and
wholesales and fixed media firms
• Each player leverages its assets
• OTT players capture service for revenue sharing • Disintermeditate OEMs by going
revenues direct to ODMs – use subsidies
• Handsets commoditize like PCs to control device
(OEMs that transform into all-
out web-players win, e.g.,
Apple)
Source: A.T. Kearney analysis A.T. Kearney 05.20110 4

5. Each scenario results in a different value chain
configuration with a specific set of winners and losers
End state value chain configuration by scenario
Device Service Distribution
Service
Platform Applications & Network
OEM Media provider
software online services operator
(MVNOs)
Online services Fixed operator
Mobile operator
Devices
All cloud
Online services Online services Fixed operator
Mobile operator
Mobile
Devices
operator
Mobile play
Online services Online services
Fixed operator Fixed operator
Devices
Full service Mobile operator
world Mobile operator
All cloud Mobile play Full service world
• Software and online services players • No major changes in value chain • Operators consolidate and converge. They
succeed in the online services battle thus • More activity for media players starting to control distribution and contact points along
capturing major part of profit pools provide online services the value chain
• OEMs and operators driven out of new • OEMs still have a significant role, specially • Operators provide online services and
income sources integrated OEMs like Apple become a dominant players
Source: A.T. Kearney analysis A.T. Kearney 05.20110 5

6. Agenda
 Evolution of the consumption patterns and Internet value chain
 Selected trends 2020: Net Neutrality, Social Communications and Media
 Redistribution of the revenue streams and new partnership models
 Russian realities and a word of caution
A.T. Kearney 05.20110 6

7. Ten trends will shape the telecommunications industry till
2020 creating a rich, but horizontal segmented environment
Telco trends 2020
1 6
Fragmented Infrastructure – Personal Advertising –
Network of Networks Internet ads take over the ad world
2 7
End of Net Neutrality – Augmented Reality –
Natural evolution of QoS in networks Sensor, machines and data ease life
3 8
Social Communications – Cloud commodity –
Disaggregating largest community IaaS is commodity, SaaS grows
4 9
N-Screen Environment – Lean operations –
Content anywhere on all devices Simple and reduced to the bone
5 10
New TV – Consolidation in distance –
The end of any schedule limited synergy effects
Source: A.T. Kearney analysis
A.T. Kearney 05.20110 7

8. 2 Due to massive traffic increase, net neutrality will end –
one way or the other as the invest is not sustainable
End of net neutrality Europe1)
Massive Data Increase Massive Add‘l Investments Options for Change
Additional Capex Required
Fixed Fixed Capex Trendline
- PB/month - 14611 - €bn/year -
YoY Modification of
+35% €9.8 bn retail price schemes
2,7 3,0 add‘l
0,3 1,5 2,4
8409 CAPEX
+
5,2 5,2 5,2 5,2 5,2 5,2 €116bn Traffic-dependent
3236 4,4 for FTTx charges for all traffic
(50% HH)
YoY Enhanced quality services
Mobile Mobile
- PB/month - +107% 1217 - €bn/year - 5 €21 bn over the public internet
6 6 5
add‘l
764 CAPEX
399 13 11 12 12 13 13 14 Enhanced quality services
185 (LTE not based on bilateral
1 3 11 32 77 incl.)
agreements
06A 07A 08A 09A 10 11 12 13 14 08A 09A 10 11 12 13 14
If congestion hits the Internet, QoS-based services (via CDNs) are in demand by OTT providers
1) Data included for Western, Central and Eastern Europe, for Consumer and Business users
Source: A.T. Kearney Whitepaper “A Viable Future for the Internet”
A.T. Kearney 05.20110 8

9. 3 Social networks like Facebook internalize inter-personal
communications, crowding out telcos
Social communications
Facebook: Google:
• 250 mn mobile users using • 1.5 mn Google Voice users 7
200 service providers in 60 months after launch
countries
• 150 mn mobile users for Google
Chat Ads Coupons Status Maps alone
Apps/Gaming Sharing
VoIP Calls Messages
Places Wall Posts
While telcos have always focused on providing connectivity to their subscribers,
social networks are serving the communication needs of their communities
Source: Facebook; Google; A.T. Kearney
A.T. Kearney 05.20110 9

10. 4 Media, personal content & services are accessible any-
where from any device – stored distributed in a cloud
N-screen environment
Home Cloud Enterprise
Video Conf.
Smart TV
NAS Server & Server & Server &
Storage Storage Storage
Audio Set-top Box Consumer Cloud Enterprise Cloud Desktop
Internet
Laptop Router Router Servers
On-the-Move
Tablet Smartphone Electronic Paper Car Laptop Smartphone Tablet
Source: A.T. Kearney
A.T. Kearney 05.20110 10

11. Agenda
 Evolution of the consumption patterns and Internet value chain
 Selected trends 2020: Net Neutrality, Social Communications and Media
 Redistribution of the revenue streams and new partnership models
 Russian realities and a word of caution
A.T. Kearney 05.20110 11

12. Giving the unsustainable economics for carriers, new
commercial models need to evolve to handle the traffic
Net Neutrality – Alternative Commercial Models
Option 1: Increase average retail prices Option 2: Standard termination charges for all
traffic
Traffic flow
Additional payment flow
Retail Connectivity Provider End Users
Traffic flow
Additional payment flow
Retail Connectivity Provider End Users Last mile
Online Connec- Internet Aggregation
Last mile Service tivity Core / Backhaul
Online Connec- Provider Provider
Internet Aggregation
Service tivity RAN
Core / Backhaul
Provider Provider
RAN
€ € €
€ Payment is passed down to the ‘last mile’ providers via
termination charges factored into wholesale prices at each
Access charge: Increase in level/handover point
retail prices supported by
differentiated pricing
Option 3: Enhanced QoS over Public Internet Option 4: Enhanced QoS based on bilateral
agreements
Traffic flow
Additional payment flow
Traffic flow Services Retail Connectivity Provider End Users
Additional payment flow
Retail Connectivity Provider End Users Public Internet
Last mile
Last mile Online Connec- Internet Aggregation/
Online Connec- Internet Service tivity
Aggregation Core Backhaul
Service tivity Core Provider Provider
/ Backhaul
Provider Provider RAN
RAN
€ € € Private network
Commercial agreements to Technology Enabler e.g. Akamai
Differentiated pricing for
guaranteed QoS distribute additional revenues for
end-to-end services Content Delivery Services Managed Services Delivery
€
Probably a combination of models is necessary
Source: A.T. Kearney
A.T. Kearney 05.20110 12

13. New Value Capture: In a changed ecosystem new MNO
business models will need to evolve
Evolution of MNO revenue models Illustrative
(Mature Markets)
2006 2010 2014
Access Services Access Services Access Services
(voice & data) (voice & data) (voice & data)
High F
usage F F T F
segment
F
U U F P A P
+ + +
U
Low usage U
segment U U
0% 100% 0% 100% 0% 100% 0% 100% 0% 100% 0% 100%
• Revenue for mobile voice and data and • A higher share of subscribers – primarily • For some subscribers, third party-
services are primarily transaction-based, high-volume users – pays flat-rate access advertising pays for (part of) the access –
i.e., subscribers pay by units consumed, tariffs, especially for data plans mostly in the low usage segment
either for every single unit or for bundles • VAS still primarily transaction-driven • MNOs create revenue-share models with
with a specified number of units (e.g., service providers
minute, SMS, MB) – only few high-volume • MNOs widely adopt tiered pricing models
users have flat fees for data access to better monetize high
volume users
MNO business models need to evolve to capture new revenue sources
through new pricing structures and partnerships
F = Revenues from flat-rate tariffs; P= Revenue share from partnerships; A = Revenue from advertising revenue sharing;
T = Tiered-pricing based revenues; U = Usage / transaction based revenues
Source: A.T. Kearney
A.T. Kearney 05.20110 13

14. Agenda
 Evolution of the consumption patterns and Internet value chain
 Selected trends 2020: Net Neutrality, Social Communications and Media
 Redistribution of the revenue streams and new partnership models
 Russian realities and a word of caution
A.T. Kearney 05.20110 14

15. Russia’s current data consumption trend is already on a
surging slope with data ARPU doubling over a period of
just two years
Data ARPU evolution in Russia Data contribution as % of ARPU,
(EUR, Q1 2009-Q4 2010) (June 2010, %, global examples)
Data ARPU ARPU 35%
31%
28% 27% 26% 25%
24% 23% 23%
19%
1,3 1,4
1,2
1,1
0,9
0,7 0,7 0,7
Norway
Germany
Spain
Sweden
Switzerland
Portugal
Russia
Austria
Netherlands
Belgium
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009 2009 2009 2009 2010 2010 2010 2010
Customers are increasing their non-voice consumption irrespective of
operators’ access technology and capacity
Source: Global Wireless Matrix, A.T. Kearney analysis, Client data
A.T. Kearney 05.20110 15

16. And there is no fundamental difference in Russia neither in
device preferences nor in the user behavior
Smartphone Sales statistics Top 10 Countries for Social Networking
(mln. units) (August 2010, Total Worldwide Audience1))
Russia Worldwide 296,6 Average time spent by visitor, hours per month
Russia 9,8
Israel 9,2
Turkey 7,6
172,4 United Kingdom 7,3
139,3 Philipinnes 6,2
122,3 7,0
Canada 5,8
80,0 Indonesia 5,3
4,4
3,4 Finland 5,0
37,4 2,7
1,2 Spain 5,0
0,7
Puerto Rico 4,9
2005 2006 2007 2008 2009 2010E
Russian players are likely to join worldwide value chain trends
1) Age 15+ - Home and Work Locations, excludes traffic from public computers or access from mobile phones or PDAs
Source: Gartner, MForum Analytics (2011), comScore Media Metrix (2011), A.T. Kearney analysis
A.T. Kearney 05.20110 16

17. Media and Telecom integration
Critical factors for Russia
1 • Russia offers a attractive field for operators to extend activities and to
Individual model the market according to their own needs
operators and
providers • However, new value chain will rather lead to the redistribution of the
revenue streams among the players and to less extent to the increase of
customer spending
• Efficient execution, access to state-of-the-art know how, lean operational
models and sound partnership strategies are key for the defending
profitability
• Existing regulation in Telecommunications lags behind technology trends,
2 the entrance of the new players (e.g. internet service providers) leaves
Regulators even less options for traditional technology-based regulation
• With further evolution of the value chain the role of cross-industry
(telecom, media, finance, antimonopoly) regulatory cooperation will
increase
• Thus, a broader understanding and consensus should be reached for the
success, the right balance has to be found to ensure healthy competition
and sustainable industry development
Source: A.T. Kearney
A.T. Kearney 05.20110 17

18. Dr. Sören Grabowski
Principal
Head of Communications, Media &
High Tech-Practice – Moscow & Kiev
Soeren.Grabowski@atkearney.com
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Copyright ⓒ 2011 by A.T. Kearney
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A.T. Kearney 05.20110 18