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Brussels, May 17, 2004

@. TV & Video over DSL Latest Perspective from the Battlefield. Brussels, May 17, 2004. KEY MESSAGES. European Telcos need to capture “new” broadband revenues to get back on the growth track In Europe, TV / Video-over DSL is moving from trial to commercial stage

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Brussels, May 17, 2004

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  1. @ TV & Video over DSLLatest Perspective from the Battlefield Brussels, May 17, 2004

  2. KEY MESSAGES • European Telcos need to capture “new” broadband revenues to get back on the growth track • In Europe, TV / Video-over DSL is moving from trial to commercial stage • Profitability is challenging “stand-alone” but TV/VoDSL can create value for a Telco primarily through protection of core voice/internet • Local market dynamics will drive near term opportunities for telcos

  3. MAKING A SUCCESS OUT OF BROADBAND IS A MUST FOR EUROPEAN TELCOS TO GET BACK ON THE GROWTH TRACK… Average European household telecom spending • Key challenges for incumbents: • Secure market share in broadband (competition likely to intensify) • Protect voice revenues (expected rise of VoIP) • Manage fixed-to-mobile substitution (voice value increasingly migrating from fixed to mobile) • Capture revenue from new services (through access and/or entering new industries) As a % of GDP 1 Early 90s (Fixed Telephony) 1.6% 2 Late 90s (Fixed + Mobile Telephony) Mobile revolution 3 3.1% BB revolution? Early XXI Century 4 1 2 >3.1% ? 3 4

  4. GOING FORWARD, TELCOS SEEM TO BE CONVERGING ON A RICH VISION OF SERVICES TO THE HOME IN WHICH VIDEO WILL BE A CENTRAL PIECE Source: Presentation by T. Breton and P. Danon to Idate, December 2003

  5. KEY MESSAGES • European Telcos need to capture “new” broadband revenues to get back on the growth track • In Europe, TV / Video-over DSL is moving from trial to commercial stage • Profitability is challenging “stand-alone” but TV/VoDSL can create value for a Telco primarily through protection of core voice/internet • Local market dynamics will drive near term opportunities for telcos

  6. TV OVER DSL IS NOW MOVING FROM TRIAL TO COMMERCIAL PHASE • STATUS AS OF JANUARY 2004 • SELECTED EUROPEAN COUNTRIES •  •  • Commercial offer • Trial • Services tested / offered • Country • Player • TV • VoD • Short description • France •  •  • Launched "TPSL" in December 2003 in Lyon in a joint offer with satellite bouquet TPS • Extension to Paris and other big cities in 2004 •  •  • Launched Free television offer in December 2003 • Available in 175 cities, including Paris • Germany •  • VoD streaming offer available since 2002/03 (PC based) • Soft commercial launch of true VoD November 2003 (Fujitsu-Siemens set top box) • Italy •  •  • Fastweb TV service launched in 2002, initially based on FTTH, now both FTTH and ADSL • Coverage: Milan initially, extending to top 10 Italian cities • Belgium •  •  • Broadway project • Small in-house trials of video-over-DSL • Announced Fiber-to-the-Cabinet ("VDSL-ready") local loop upgrade • Investigating hybrid model of satellite/ADSL for TV • Switzerland •  •  • Offering Stream-it, PC-based VOD + thematics bundle, with goal of 10,000 subscribers by end 2003 • Announced wider TV-based roll-out in combination with 1 billion CHF network upgrade

  7. IN FRANCE, THREE COMMERCIAL OFFERS ARE OUT SINCE APRIL 2003 • 2003 • 2004 • 2005 • Q4 • Q1 • Q2 • Q3 • Q4 • Q1 • Phased deployment • 18/12 • Q2/04 • 2005 • 2 video channels per line (MPEG4 deployment) • TVoDSL commercial launch in Lyon • TVoDSL commercial launch in Paris • 01/12 • Phased deployment • TVoDSL commercial launch (175 towns) • Phased deployment • Q1/04 • Q2/04 • Forecasted commercial launch in Marseille • Extension to Paris Since December 2003, 2 TVoDSL commercial offers accessible to >20 million pop.

  8. FT AND FREE HAVE RADICALLY DIFFERENT GO-TO-MARKET APPROACHES… • AS OF JANUARY 1, 2004 Product • TV: 50 channels available • VoD: catalog of films • TV: 32 channels available - >100 channels announced • VoD: not launched Price • Basic TV • 37€/month excl. internet or telephony, i.e. 16€/ month for Ma ligne TV (DSL line) + 21€/month for TPS L (50 channels incl. TPS Cinéstar, RTL9, Eurosport, ESPN) • Basic TV • 29,99€/month tax included, includes: • Broadband internet (1 Mb) • Free telephony* • 23 Free channels (e.g. France 2, RTL9, Fashion TV) • VOD • VOD programs available for 0,5€ to 7€ / view (VOD content from Movie System, TPS, TF1, …) • Additional TV Options • Pay per channel for a monthly price of 0,49 / 0,99 / 2,99 / 5,99€ depending on the channel** Coverage • Lyon city and suburbs i.e. or approx. 450.000 households • In all zones where Free proposes unbundling (175 cities, >20 millions pop. coverage claimed) Distribution • Available through FT agencies and hypermarkets • Direct ordering via the Internet * Free national calls ** e.g. 0,49 €/m: Weather Channel, MTV Base; 0,99 : Sailing channel; 2,99: TéléMelody; 5,99: pack Cine Box, pack AB (incl. adult movies)

  9. FASTWEB PROPOSES A FULL-FLEDGED OFFER SINCE Q3 2003 • 2002 • 2003 • 2004 • Q3 • Q4 • Q1 • Q2 • Q3 • Q4 • Q1 • Launch of video telephony over DSL • Launch of VOD service over DSL • Launch of TV over DSL and PVR service • (Launch of DSL service in Q3 2001) • Gradual • deployment of DSL service. Migration of DSL customer to fiber infrastructure when possible

  10. FASTWEB CURRENT COMMERCIAL TV OVER DSL OFFER • AS OF JANUARY 1, 2004 Product • TV: 30 channels available today • Video on Demand: catalog of 3 500 films Price • Basic TV • 30 €/month*, VAT included, includes : • Pay-as-you-go 2Mb/s internet access • Pay-as-you-go voice line • 8 digital channels • Remote PVR service • Options • RAI Click, access to RAI program on demand, pay per view of full access subscription for 6,9€ per month • Various digital TV packages from 6 to 15€ per month (including CALCIO, other sport, premium cinema) • VOD : 3 500 films Coverage • Fastweb covers the 10 main Italian cities via its fiber and ADSL networks Distribution • Available through their website and shops * Currently promoted at 25€/month ; plus one-time installation fee of 95€ Source: Fastweb company website

  11. Residential clients • EoY IN ITALY, FASTWEB TV AND VIDEO OFFERS ARE A COMMERCIAL SUCCESS 15% of clients requested video telephony • Telephone • Mega Internet • Free phone calls among Fastweb clients • Possibility to close Telecom Italia subscriber line • Number portability • Access to internet up to • 10 Mbit/s (FTTH) • 4 Mbit/s (DSL) • Fastweb TV • Videocomm. Of which 97,000 TV clients (incl. 35,000 on ADSL) • TV streaming of Sky and RaiClick • E-mail and internet surfing in broadband • Remote PVR • Videocommunications from TV (requires FTTH) or from PC (FTTH or DSL) • Videomessaging • 70% of new clients request TV/video services • Average VoD ARPU 10 € • Average Pay-TV channels ARPU 12.5 € in Sept. up to 17€ in Dec. 03 • 2000 • 2001 • 2002 • 2003 ARPU increased from 56 €/month in 2001 to 65 in 2002 to 72 in Q3 2003 Source: Fastweb company website,e.Biscom analyst presentations

  12. KEY FINDINGS FROM LATEST TVoDSL DEVELOPMENTS • Wide variety of go-to-market approaches and no clear emergence of winning combinations (offer, price, bundling with other services...) ; still, more early positive signs on all-inclusive offers (Fastweb, Free) than on TV single play offers (France Telecom) • DSL not yet as economically competitive as cable/satellite but cost going down very fast, and emerging strong case for core business protection • Technology is sufficiently mature to move to commercial launch (it works and it works well) – however, it remains a limitation in terms of reach (distance to central office) and convenience (home configuration if PC/TV not in same room in house)

  13. KEY MESSAGES • European Telcos need to capture “new” broadband revenues to get back on the growth track • In Europe, TV / Video-over DSL is moving from trial to commercial stage • Profitability is challenging “stand-alone” but TV/VoDSL can create value for a Telco primarily through protection of core voice/internet • Local market dynamics will drive near term opportunities for telcos

  14. Definition THERE ARE 3 SOURCES OF VALUE FOR TELCOS BEHIND VIDEO • Direct value from video services, i.e. present value of services direct cash flows • Cash in: subscription revenues, one-time revenues (pay-per-view, installation fees) • Cash out: incremental investments, operational costs, content costs • Value from protecting telcos’ core business • Gain in broadband acquisition market share • Reduction of churn (broadband and voice) • Gain in voice market share (video customers returning to telco’s voice) • Economies of scope and scale • Shared broadband acquisition costs (economies of scope) • Improved broadband business case due to accelerated take-up (economies of scale) • Shifts of value due to unforeseen changes • Technology major improvements • Increase in advertising revenues • Much higher penetration than expected today • Direct Value • Indirect Value • Option Value

  15. WE HAVE MODELED VIDEO OVER DSL ECONOMICS TO ASSESS DIRECT / INDIRECT / OPTION VALUES… IN FRANCE • Key assumptions • 24 million residential lines • Broadband coverage 79% of HH by end 2003, 90% by end 2005 • 10 million broadband HH by 2007 • TV enabled DSLAMs only in large towns, resulting in addressable TV market of 60% of DSL subscribers by end 2007 - ~6 million HH • Pay-TV penetration already high at 34% of HH end of 2003 • Expected pay-TV penetration of 9 million HH by end 2006 (37% of HH) without DSL • Growth boosted with DSL (reaching 40% of HH in 2007) AddressableBB market Addressable TV market for DSL TV market specifics Source: Company website, analysts reports, McKinsey analysis

  16. VIDEO (OVER DSL) CAN BE PROFITABLE AS AN “INCREMENTAL OFFER” • Potential total value of video for telco and content aggregator • NPV; EUR Millions ILLUSTRATIVE REFERENCE CASE PRELIMINARY • Key assumptions • Combined offer of premium pay-TV, thematic pay-TV and VOD • Monthly ARPU of 46 EUR for combined offering, 15 EUR for thematic only and 11 EUR for VOD only • Gross margin on content of 50% for combined offering and VOD, and 60% for thematic only • Acquisition cost of 130 EUR per gross add*; no set-top box subsidy • Penetration by 2007**: 10 % for combined offering, 10% for thematic only and 10% for VOD only , i.e. around 720.000 users • Churn of 11% Equivalent to an NPV of 300 EUR per user but only 10 EUR per residential line (on the basis of 24 million lines) • ~250 • Direct value * For combined offering; lower for thematics only (~100 EUR) and VOD only(~25 EUR) ** Penetration of addressable TV households i.e. 10 million lines x 60% TVoDSL coverage x 40% pay-TV penetration x; no increase after 5 years Source: McKinsey video-over-DSL model

  17. Key assumptions • Preservation of existing business • Broadband churn reduced from 15 to ~6% amongst video subscribers • Voice churn reduced from 3 to ~2% amongst video subscribers • Upside on existing business • 30% of video subscribers would not have taken broadband from telco • 50% reduction in broadband subscriber acquisition cost (at 115 EUR per gross add) • 5% of video subscribers come back to telco for voice STILL INDIRECT VALUE IS THREE TIMES AS BIG AS DIRECT VALUE • Potential total value of video for telco and content aggregator • NPV; EUR Millions ILLUSTRATIVE REFERENCE CASE PRELIMINARY Equivalent to an NPV of 40 EUR per residential line (on the basis of 24 million lines) • Indirect value • ~400 • Preser-vation of telco's core business • ~350 • ~250 • Upside on telco's core business • Direct value Source: McKinsey video-over-DSL model

  18. VIDEO PROVIDES AN OPTION ON POTENTIAL ADDITIONAL UPSIDE ILLUSTRATIVE REFERENCE CASE • Potential total value of video for telco and content aggregator • NPV; EUR Millions PRELIMINARY • Key assumptions • Unforeseen technological improvements • Addressability increases by 15 percentage points (over 5 years) • Technological costs decrease faster than foreseen (additional 10% per year) • Coverage increases by 50% (from 50% to 75%) as improved addressability makes it interesting • Advertising • Television advertising amounts to 160 EUR per household • Video offering captures 25% (over 5 years) of this amount for households subscribing to the service • Higher penetration • Penetration of addressable households increase by 10 percentage points • Higher consumption • ARPU increases by 100% • Option value* • 0-100 • Adver-tising revenues • 0-600 • 0-1700 • Higher pene- tration • 0-700 • Indirect value • 0-300 • Higher consum-ption • Unfore-seen techno-logical improve-ments • 400 • 1000 • Preser-vation of telco's core business • 350 • 250 • Upside on telco's core business • Direct value Up to 100 EUR NPV or more per residential line (on the basis of 24 million lines) * Excluding positive interaction between the different sources of option value Source: McKinsey video-over-DSL model

  19. KEY MESSAGES • European Telcos need to capture “new” broadband revenues to get back on the growth track • In Europe, TV / Video-over DSL is moving from trial to commercial stage • Profitability is challenging “stand-alone” but VoDSL can create value for a Telco primarily through protection of core voice/internet • Local market dynamics will drive near term opportunities for telcos

  20. LOCAL MARKET DYNAMICS WILL LIKELY DRIVE TELCO STRATEGIES • Potential upside in broadband • Proportion between narrowband and broadband penetration (index) • "Fight like a lion" • innovative offer at low price point, to attract new video subs • pre-emptive roll-out • "Fast follower" • watch rivals and offer innovative bundle at moderate price point • slower roll-out • Italy • U.K. • "Preemptive defense" • "me-too" offer at low price point, to maximize penetration • pre-emptive roll-out • France • Germany • Spain • Switzerland • Netherlands • "No hurry" • watch rivals and offer "me-too" bundle at moderate price point • slower roll-out • Sweden • Defensive value of video • Market share of competitors in broadband internet access (%) • Belgium Source: McKinsey analysis

  21. AND TELCOS STILL HAVE PENDING QUESTIONS, FOR INSTANCE ON BUSINESS MODEL… • Questions • Range of options • Early thoughts • No clear winner • Gradual approach possible (e.g., start with distribution to move to mixed) • All models require new skills for telcos • In-going position in pay-TV market will, in most cases, be detrimental to telco – • A possible ambition, however, may be to get exclusivity on DSL platform Role vis a vis content partners • Distributor: • Telco only distributes existing bouquets and co-brands (e.g., FT) • Mixed : • Telco distributes aggregated content + designs own bundles (e.g., Noos) • Content aggregator: Directly deals with channels (e.g., Fastweb, Free) Target ? Should telco seek exclusive deals? • Telco is the exclusive distributor of Media-co channels • Telco is the exclusive distributor of Media-co channels on DSL platform Today ? • Telco has no exclusivity • Media-co exclusive provider of content to Telco for all content • One or several exclusive content providers for specific categories (e.g., sport) • Telco is not tied up to any exclusive contract

  22. …OR ON CAPABILITIES • TV specific • Value drivers in Pay-TV • Skills required • Ability to attract customers: • Branding • Pricing • Distribution • Ability to retain customers / up-sell • Time watching TV • Satisfaction with program • Branding • Consumer marketing • Product marketing • Distribution sales • CRM • Advanced consumer marketing Revenues The nature of the product and the importance of buying require skills telcos do not have Value Cost of content • Ability to buy at best price • Ability to manage cost of distribution • Negotiation • Legal • Sales & Distribution Costs Other costs (distribution/co-mmercialization)

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