There cannot be only elephants in the jungle: A practitioner's view on NGA

Xavier Rodrguez-Martn, Chairman & CEO, Oni Communications

: : Different approaches to investing in NGA : : Onis distinctive business model to maximise RoI : : The global challenges ahead

Introduction to Oni

www.oni.pt/indexUK.htm

Single next generation Portuguese operator focused exclusively on th corporate B2B market, with a 22% l i l the t k t ith market share 130 M in revenues, 2/3 IP-based data services 27 M EBITDA, 2 M net profit
d 400 M i invested i NGN 10,000 km of fibre routes, 2nd t d in NGN: 10 000 k f fib t European IP-MPLS network, 1st Iberian soft switches

: : Different approaches to investing in NGA : : Onis distinctive business model to maximise RoI : : The global challenges ahead

Two forces: while networks want to converge...

A single IP trunk network Access through different means: fibre, copper, g , pp , coax, radio Supporting a l S ti large number of di it l services: b f digital i voice, data, Internet, video Interaction and customization facilitated by IT

... business models tend to diverge

Dominant convergences
Carriers

Telecom + IT
Corporate

Clients with heterogeneous needs

Fixed Fi d + mobile bil

SME

Broadcast + telecom

Residential

Specific technologies, systems and processes to offer broadband in each segment

The two forces provoke dilemmas

Network convergence favours an integrated approach; business model divergence favours a segmented approach t d h Most operators are network operators (scale favours efficiency) and service providers (focus favours effectiveness)

Which force weights more when deciding on NGA strategy depends upon several factors
1. History and size 2. Degree of market maturity 3. Regulation 4. Politics

1. History and size

Starting point
existence of several national networks copper and cable incumbents

Market h M k shares of the diff f h different operators Q Quality of the past liberalization process y p p

2. Market maturity: segmentation

Operator 1.0: Gain Penetration Addressing all the market Building a large company structure Operator 2.0: Gain Maturity Addressing part of the k t ith t t l market with cost control Building a slim company structure Positioning!

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2. Market maturity: strategic implications

Operator 1.0: destructive competition, zero-sum game
Single form of competition Me-too strategies Similar products and services Permanent price deflation Difficult financial performance p

Operator 2.0: towards segmentation-based, strategic competition

Different ways to compete More innovation Several companies can be successful, in different ways, in the same market

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2. Market maturity: telecoms 8 management traps

1. 1 Focus on the biggest segments 2. Growth at any price 3. Fixed cost allocation 4. Strategic optimism 5. Potential synergies 6. Growing market 7. Portfolio 7 P tf li 8. Activity
debt piles require growth-based BPs (residential) growth based instead of sustainable profitability lack of robust management accounting systems g g y hides inconsistencies in cost allocation waiting for the next big thing different traffic profiles, technologies, skills everybody running after the same ball crosscross subsidization confusing activity with results

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3. Regulation
Degree of vertical separation Protection of investment in fibre networks Alignment of ex-ante regulator (ie telecoms regulator) with ex-post regulator ( ) (ie competition authority)

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4. Politics
Telecoms are politically relevant Innovation leadership Economic relevance Industrial dynamism Portugal: opportunity to leapfrog historical underg pp y p g performance

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: : Different approaches to investing in NGA : : Onis distinctive business model to maximise RoI : : The global challenges ahead

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Oni: applying the operator 2.0 model

In business, the majority is always wrong. The future is not j y y g logic. The stone age did not end by lack of stones The most forward thinking comes from years of doing Anticipation is key: 3.5 years ago we exited the residential business and f b i d focused on corporate and carriers carrier d d i i Profitability is directly associated with focus and differentiation y y

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What a business model is

Value proposition p p
target segment, P&S offering and revenue model

Operating model
value chain, cost model and organization

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Oni: a distinctive value proposition

2/3 of total revenues are IP-based services, including , g 20% of telco-based IT and managed services Meta-operator with 2 specialized NG subsidiaries: p p
Hubgrade for network integration, Knewon for telco-based IT

Tailored approach to each clients and unique service experience obliged us to insource part of what we outsourced 6 years ago

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and a different operating model

40% of revenue on fibre access Cost leadership through mass customization and selective network build up Processes, systems, skills and culture customized for corporate clients (10th best compan to work in Port gal company ork Portugal, Heidrick & Struggles) Telco-IT integrator model based on partnerships

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: : Different approaches to investing in NGA : : Onis distinctive business model to maximise RoI : : The global challenges ahead

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The challenges ahead are huge

Certainties and uncertainties for decision making : : Technology : : Economics : : Regulation

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Certainties

A brilliant f t b illi t future f t l for telecoms Short-term Short term challenges are significant NGA is the driver for change

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Certainties: a brilliant future for telecoms

A key driver for the next generation economy nextEven more critical for Europe and Portugal NGA will fuel dematerialization of value chains

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Certainties: short-term challenges are significant

Liberalization Liberali ation failed in E rope Europe Current business models have accumulated a lot of tension and can be leapfrogged Capital needs (and debt pile) are enormous The telecoms industry has a short memory
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This is a short-memory industry

The Internet bubble in 2000
drivers leadership consultants + manufacturers + (investors + investment bankers) engineers economists lawyers

NGA, NGA the fibre explosion that the crisis helped to cool down
drivers leadership consultants + manufacturers + (politicians) lawyers economists engineers. Fiberpolitics!
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Certainties: NGA is the driver for change

NGA i at th cross road of macro-trends is t the d f t d demographic ( g p (i.e. health) ) social (i.e. education, justice) economic (i.e. mobility, logistics) (i e mobility

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certainties: NGA is the driver for change

NGA will reshape the whole industry Value in the network and not only above level 2 (IP and beyond) Infrastructure is only the first step to mobilize the ecosystem. New apps will allow to escape from broadband hyper-competition yp p
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Uncertainties
U ba a ced s e u binomial: o Unbalanced risk-return b o a how to move from o e o poetry to maths without loosing motivation

Technological hypercompetition and broadband revenue gap increase the risk on RoI Difficulty to anticipate regulatory issues will give extra work to competition authorities

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Managing time is crucial

Right timing Anticipation Procrastination

what we usually refer as luck allows to create temporary monopolies the worst management sin

Long-term approach b i L t h businesses are marathons, not th t sprints

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A few last observations

Cycles are consequence of human condition: from greed to panic...and from panic to greed (coming soon) Valuable i f V l bl information is not considered a commodity ti i t id d dit any more. Ideas are scarce...and we have to make money from them Strategy is back. Execution is not the only important gy y p thing any more

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Vision without action is a

daydream. Action without vision is a nightmare i ht
Japanese proverb

There cannot be only elephants in the jungle: A practitioner's view on NGA

Xavier Rodrguez-Martn, Chairman & CEO, Oni Communications