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NTNUApril 13, 2007

Telecom Industry

1

CONTENT

• Overview of industry

• Trends/basic beliefs within Telecom

• Digital Content Services

2

Internet service providers

1515161717171718181919212223232324262730303334353539

4750535561

697273

82107110

140180

246China Mobile Ltd Vodafone Group Plc Verizon Comm Telefonica Sa NTT DoCoMo Inc Nippon T&t Deutsche Telekom France Telecom America Movil Sa De Cv Sprint Nextel Corp Telecom Italia Spa BT Group Plc Telstra Corp Ltd TeliaSonera Ab Saudi Telecom Co KDDI Corp Singapore Telecom Bharti Airtel Ltd Telenor Asa

AT&T Inc

Softbank Corp Bouygues Sa BCE Inc Telmex Mtn Group Ltd Alltel Corp Telekomunikasi Indonesia Rogers Comm Chunghwa Telecom Ltd Swisscom Ag China Unicom Ltd Telus Corp China Netcom Group Corp Telefonica De Argentina Sa Qwest Communication American Tower Corp Carso Global Telecom China United Telecomm Vimpel Communications

KPN

Telecom operators by far outweigh the equipment manufacturers and internet service providersMarket capitalization*, USD billions

* As of March 31, 2007Source: McKinsey CPAT

79101217232729343742

5770

92156Cisco Systems

Nokia Qualcomm Ericsson Motorola Corning Abovenet Alcatel Lucent Research In Motion Foxconn Intl American Tower Juniper Networks Nortel Networks Crown Castle Intl. Harris

Telecom operators

112223356678

2042

107Google Yahoo Yahoo Japan Akamai Techs. Nhn Tencent Holdings Iliad United Internet Getin Holding Freenet Digital River Access Tiscali Telecom Italia Media Mixi

Telecom equipment manufacturers

3

IN THE LAST DECADE, THE TELECOM INDUSTRY HAS BEEN OUTPERFORMED BY THE GLOBAL MARKETTotal Return to Shareholders. Base: January 1997

* DS Global Market Index in USD** DS World Telecom Index in USD

Source: Datastream, McKinsey analysis

TRS CAGRIn percent

0

100

200

300

1997 1999 2001 2003 2005 2007

Global telecom industry**

Global market*

2003 - 20072000 - 20021997 - 19991 2 3

22.3

-16.122.0

46.6

-32.220.3

Telecom

Market

7.7

9.3

4

CONTENT

• Overview of industry

• Trends/basic beliefs within Telecom

• Digital Content Services

5

TRENDS/BASIC BELIEFS

1. Huge demand growth and substantial revenue growth within communication services driven by• Emerging markets• Mobile data/internet• Fixed data (e.g., Broadband and ICT services to SME/Business)

2. More M&A expansion and consolidation to be expected

3. Regulatory development most important value lever for most telcos –termination rates, llub, licensing and mvnos

4. Media convergence and devices/CPE innovation most important technology development

5. Closing performance gaps short-term huge lever for most operators

6

1. DEMAND IS EXPLODING

*Asia Pacific excluding China and India *** 69 countriesSource:Ovum 2006; Telegeography 2007

Voice trafficBillion minutes, worldwide per region

International used Internet bandwidthWorldwide**, Terabyte

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

2000 2005 2006 2007 2008 2009 2010 20150

5

10

15

20

25

30

35

40

45

2002 03 04 05 06 07 08 09 10 11 2012

Asia Pacific*MEA

Eastern EuropeChina-India

Latin AmericaWestern Europe

North America

CAGR 2002-06:

+53%

CAGR 2006-12:

+26%

CAGR 2006-10:

+8%CAGR

2000-06:+7%

7

1. TELECOM REVENUES GROWTH EXPECTED TO CONTINUETotal revenues, USD billions in nominal terms (constant USD**); CAGRs in percent

The telecom industry is still growing, but revenue growth is slowing down

220

715

935

2002

306

857

1.163

2005

543

1.015

1.558

2010

EmergingMarkets*

DevelopedCountries*

Key assumptions behind growth expectations

* Developed markets defined as WE , NA, Japan, Hong Kong, Singapore, Korea, Australia, Israel, South Africa and U.A.E. Emerging as rest of the world** Currency exchange assumed constant at projection date

Source: IDC Blackbook 2006; Global Insight; McKinsey analysis

CAGR (%)02-05 05-10

7.9 6.2

11.6 12.2

6.2 3.4

• No major technology disruptions, rather evolutionary steps

• No major changes in regulation policies compared to today

• No major changes in industry structure compared to today

Nominal GDP growth (%)

6,8 6,4

9,5 8,9

4,9 4,8

8

2. THERE COULD BE UP TO € 400 - 670B CASH AVAILABLE FOR ACQUISITIONS IN THE INDUSTRY OVER THE NEXT 3 YEARSEstimate of available cash for M&A*. EUR billion

* Extrapolation of free cash flows and committed interest and dividend payments based on a sample of 39 international players representing 64% of world telecom revenues in 2005.

** Additional debt capacity less excess cash, assuming net debt/ EBITDA ratio range of [2.0 to 3.6] for all companies with above BBB+ ratingSource: CF&T database

ESTIMATE

50-70

Excess cashin 2005

500-600

2006-2008 Free cash flow generation

250-300

Committed interest and dividend payments

300-370

Cash available to shareholders

100-300

Additional debt capacity**

400-670

Total available cash for M&A

9

2. TOP 5 PLAYERS CONCENTRATE 40-50% OF “M&A FIRE POWER”M&A firepower*. EUR billion

* Based on current excess cash, accumulated cash generated between 2006 and 2008 plus additional new debt from leveraging up to target net debt/EBITDA of [2.,0-3.6], and deducting committed dividend and interest payments

Source: CF&T database

Top 5 players

185 - 405

Rest of players

215 - 265

Total "M&Afire power"

400 - 670

Decisions taken by these players will largely influence the fate of the industry

30 - 3560 - 80

45 - 55

45 - 55

35 - 40

10

2. M&A LEVELS ARE AT HIGH LEVELS FUELED BY TELCOS LOOKING FOR GROWTH, EXCESS CASH FLOWS AND PRIVATE EQUITY PLAYERS ENTERING THE INDUSTRYTotal equity deal value*. US$ billion

* Includes all completed transactions (majority interest or outright purchase) where acquirer in a Telco with equity value greater than US$ 25 millionSource: Dealogic; McKinsey analysis

Telcos searching for growth

Private Equity players entering the industry

• Incumbents experiencing limited organic growth in their home markets

• Window for entry into new/emerging markets seems to be closing 122,8

82,472,8

19,3

2003 04 05 2006

+85%

Cash-flow generation

• Strong cash-flow generation, especially for largest players

• Already improved debt ratings providing for renewed financial flexibility

• Telecom and Media increasingly targeted by PE firms and among largest deals

• ~$50bn in 2005 in Telecom equity deals with participation of PE firms

11

3. REGULATORY – HUGE VALUE LEVER

Early 90-ties: Regulatory bodies „creating“ the industry (Digitilaztion, GSM)

Late 90-ties/ Regulatory bodies „destroying“ huge value Early 2000: (LLUB, 3G licences)

Recent years: „Friendly“ regulation past 3G and LLUB

Future: Tougher regulation – more cash than ever generated by telcos. From telecom regulation to industry regulation

Spectrum, Termination, rates, MVNO, Network

separation

12

• Already more music-enabled Nokia and Sony Ericsson phones than iPods

• More Nokia camera-phones than cameras from any other camera manufacturer

• Higher growth potential estimated for the phone-based GPS products than for stand alone ones

From … … to … … to

?

4. DEVICE/CPE ENHANCEMENTS

13

4. MEDIA CONVERGENCE IS HAPPENING, BUT VALUE STAYS WITH TELCOS

Source: McKinsey

Portals

Content creators

Fixed Telcos/Cable/DBS providers

Device manufacturers

Attackers

Revenue/value shift

Key questions

• What is most likely to materially impact consumers?

• Who will extract value from DCS?

• Who will enter the connectivity space?

• Where are new pools of revenues and value to be created?

Traditional aggregators

<_____> <___>

Mobile Telcos

Content crea-tors move down value chain

Aggregation Connectivity/ transport

Consumer devices

42 3Content generation

1

Advertisers5

Enablers (e.g., DRM, payment, authorization)6

MNOs move into content

Device makers expand into networks and services

Portals develop content/user generated content

Portals expand into networks/WiFi/ telephony

• MSOs and satellite providers provide telephony

• ILECs enter content distribution (IPTV)

Attackers deliver-ing content via new wireless networks

14

39.2Topquartile

27.5Averageplayers

14.4Lowquartile

5. LARGE POTENTIAL FOR PERFORMANCE IMPROVEMENT IN THE INDUSTRY2006E. Industry ROIC margin distribution. Percentage

Source: CF&S Database; McKinsey analysis

Cost-base and capexmanagement

Cost-base and capexmanagement

Frontline managementFrontline management

• Pricing• Channels efficiency• Customer retention• Innovation & Product development

• “Lean” telco concept– Procurement and offshoring– Network sharing/ outsourcing– Call center operations

Regulatory managementRegulatory management

• Access regulation• Spectrum regulation for new services• Interconnection costs

Key margin improvement levers

There are large differences in performance amongst players in the industry…

While some of these differences are explained by market conduct, there some levers that players can pull to improve performance

Financial disciplineFinancial discipline

• Excess cash-flow management• Financial leverage

15

CONTENT

• Overview of industry

• Trends/basic beliefs within Telecom

• Digital Content Services

16

Currently, telecom players get more than their fair shareof the EBITDA and FCF pool

* Calculated from the average EBITDA margin and CAPEX of major players in 2005Source: PricewaterhouseCoopers LLP, IDC, Gartner, ITU, Credit Swiss, Data stream, Yankee, Data monitor, Jupiter

16 13 16

9

16 10

910

10

15

31

25

2

3

1

3

1

22

43

30

343

Operating FCF*(EBITDA-CAPEX)

56

4

21

18

EBITDA*

515

Handsets

2

Fixed

Others

Internet

Print

Mobile

TV

Others

100% =

Radio 2

2,014

Revenues

3

Contentgenerators

Aggregators

Connectivity providers

Device makers

GLOBAL 2006Percent, EUR billions

ESTIMATEContentConnectivityDevices

61%43% 55%

17

A relatively small share of revenues accrues to internet players, and most of them are from access

* Magazines, books, and newspapers** TV and Radio

*** Includes access fees, paid content, and advertising

Breakdown of the internet market

Communication market breakdown

46 38 39

42 48 48

5

7

335

Glo-bal

4

10

128

US

7

6

100

WE

Other

Print*

Broad-casting**

Internet

100% = 100% = EUR 147 billion

21 25 16

21 1924

49 49 52

10

1,548

Glo-bal

7

584

Broad-casting**Internet

100%

US8

477

WE

Other

Print*

7

77

Internet access

16Adverti-sement

Paid-contentsand services

Global, 2006E

Advertisement market breakdown

Source: PricewaterhouseCoopers LLP, IDC, ITU, Yankee, Data monitor, Jupiter

Percent, EUR billions Percent, EUR billions Percent

Global, 2006E

18

648

4160

67

39

72

1823

4916

4696

652

148

8752

139

104122

The market is betting on the internet killer brands

EUR BILLIONS, 2005, BY PLAYER GROUP

EXAMPLES

Net enterprise value*Category Multiples**Company

NokiaMotorola

Time Warner Inc,Disney (Walt) Co,

Amazon.com

Washington Post

Yahoo Inc.Google Inc.

eBay.com

New York TimesNRJ group

B Sky B Grp.ITV Plc.

British telecom group

TelenorTelia Sonera Mobile

AT&T

Comcast

Vodafone

Verizon

China Mobile

Nintendo Co, Ltd.HP

Sub category

Handset vendors

Fixed operators

Mobile operators

Internet

Radio/Print

TV

Other intelligent devices

Film

Cable companies

Contentgenerators

1

Aggregators2

Connectivityproviders

3

Device makers

4

1012

1012

11

59

5

5877

323336

47

91110

1112

712

Revenues

27.137.0

3.25.9

0.52.93.0

5.24.57.23.9

9.38.6

42.725.5

28.437.263.7

18.9

34.231.2

3.773.5

EBITDA

4.312.1

0.61.3

0.20.50.6

2.11.30.51.5

3.22.7

16.314.0

8.011.924.2

6.2

5.14.1

0.76.2

19

Time spent communicating is growing and shifting towardstime-/place-shifted formats, one-to-many, and free

4

2002

111

19

317

55

107

2003

5

3

21

3

20

58

118

2004

16

11

24

3

25

58

138

2005

Blog/ CommunitiesIM

E-mailMobilemessaging

Mobile voice

Fixed voice

070

37

51

1995

0713

09

48

78

2000

08

11

154

13

51

91

2001

011

17314

53

99

Source: CTIA, Pyramid Research, Strategy Analytic, Pew Internet, Comscore Media Metrix, Team

Minutes per day

US EXAMPLE

20

Minutes per day per person, 200518~34 yrs old+34 yrs old

Daily time spent with media/ communication of 18-34 yrs old group

Looking at the young generation, media is used differently

* Does not include other media usage Source: Ball state University report 2005, Team

Percent, 2005

3334

7

10

13

14

15

30

PrintMobileWireline

Game ConsoleTV

Internet

Music

Software

Radio

Video

100% = 650 minutes*

Comparison of media usage by age group (18~34 yrs old vs. +34)

66

7

35

47

6

23

93

51

87

283

88

18

18

19

25

47

64

83

95

193

Mobile

Wireline

Print

Game Console

TV

Internet

Music

Software

Radio

Video

US EXAMPLE

21

If Telcos decide to play the question is how and where

Mobile Operator Controlled Community

Identity and Advertising engine

Payments engine

Verticalsearch

Multi-player

gaming

Friendfinder/dating

M-Com-merce

Horizontalsearch

News &traffic

3rd party controlled

communities

… …

Presence engine

Location engine

….

Telco as Community ?

Telco as aPlatform ?

Telco as Content Provider ?

22* Does not include cost of last mile and cost of content

Source: PD Over-The-Top – Impact of new applications, team analysis

Current IPTV model

1

Portable

2a

STB-based

2b

PC-based

2c

Device-based model

Description

• Telecom carrier provides service end-to-end• On-demand video is streamed from local

servers onto carrier-owned set-top-boxes• Customer service and provisioning same as

in DSL

• The portable device (e.g., iPod) is sold to the user

• The device downloads or streams content from the Web onto the device (directly or through PC)

• No provisioning needed; no customer service is provided

• Similar to above, but based on fixed device mostly STB (set-top boxes) instead of a portable device that connects to TV

• Content downloaded or streamed

• PC and browser are used • No dedicated customer device• Content can be downloaded or streamed

(caching and best-effort)• No provisioning, basic customer service

ExampleService providers Users

Content Network Last mile

Set top box

The relaunch of IPTV 2.0 also coincides with the rise of over the top digital video services

Network centric model

Owned and supported by IPTV operator

TV set

Dumb device (TV)

STB

Smartdevice

IPTV delivery model

Content Network Last mile

Perspective on WiMax

CONFIDENTIAL

Presentation NTNU

April 2007

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

1

KEY MESSAGES

Latest on thetechnologyLatest on thetechnology

WiMax versusHSDPA/EVDOWiMax versusHSDPA/EVDO

Economics and opportunitiesEconomics and opportunities

• WiMax is a recently standardized family of technologies, whose performance can compare with 3G or low-end DSL performance.

• WiMax enjoys strong industry support driven by Intel. For fixed WiMax, end-user equipment is now available and deployed widely.

• Since first WiMax d certifications in early 2006 we are starting to see a growing number of WiMax deployments, especially in Europe driven by new entrants

• In the US, the leading player is Clearwire, which is already present in many tier-2 cities using proprietary pre-Wimax technology and Sprint which announced a nationwide WiMax deployment.

• Many traditional mobile operators are currently upgrading their 3G networks to higher speeds through HSDPA/EVDO, partially to capture part of the fixed and nomadic broadband markets. In developed countries, this limits the WiMax opportunity.

• In theory, WiMax can offer more throughput than 3G+, mainly due to the broader channel spacing (5Mhz) and spectrum availability. However, there is not “one WiMax”making global comparison difficult. Limited experiments show that real-life performance is comparable, however WiMax d is constrained to fixed usage.

• WiMax deployment opportunities depends on several local parameters, primarily current fixed infrastructure, competitive intensity, current assets owned by the player (spectrum, towers, sites…), spectrum available

• WiMax can offer an economically competitive model for a brownfield player aiming at fixed broadband replacement at moderate speeds (<4 Mbps).

Recent WiMaxdeploymentsRecent WiMaxdeployments