Industry disconnect

Presentation to

September 27, 2005

James Enck
Daiwa Securities SMBC/Daiwa Institute of Research

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 Who I am and what I do

• European Telecom
Analyst/Global Telecom
Strategist (whatever that is).
• Three years ago I started to
focus on the bear case for
the incumbents – changes in
technology and consumer
behavior which would/will
challenge their business case
assumptions.

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 For more information…

james.enck@dir.co.uk
http://eurotelcoblog.blogspot.com

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 Whose market is it anyway?

Source: RetroGrafix
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 Not Main Street, Wall Street
STOXX Telecom relative to STOXX 600 industry groups
0.0% 18
17 17
16 16
-5.0%
14 14
13
-10.0% 12 12
11
10
-15.0%
Relative performance (L) 8
-20.0% 6
Industry ranking (out of 18)
4
-25.0%
2
-30.0% 0
1 month 3 months 6 months 1 year 2 years 5 years YTD

Source: Daiwa, from Bloomberg data

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 Forces of change

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 Voice – “Attack from Cyberspace”

• Voice is being
redefined by people
with unfamiliar
agendas and a proven
ability to innovate
• Rather than the
“free/not free”
argument, let’s think
about where voice is
really going, and why
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 Today: same game, new technology

•VoIP is indeed a way

to deregulate the last
mile, but the business
model is still based on
subscription and
termination markups
on mobile and out of
bundle international
calls.

Source: Daiwa, from a major European VoIP player, actual values rebased

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 IP-led investment frenzy

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 Public Enemy No. 1, or Catalyst?
“…you mention an ‘anti-Skype
backlash.’ I'm pleased to see a
company forcing issues like
improved quality and ease of use.
It makes all of our companies
become accountable for
delivering truly quality features. I
need Microsoft to value VoIP
enough to fund it appropriately,
and Skype is making that
happen.”

---- Email received in July from

Microsoft VoIP developer on
MSN Messenger team
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 No longer ignorable
Approaching 20% of global population

1200

975
1000
Roughly 1/3 in Europe
800
C.2.5m concurrent
600 users, c.6 - 7m total
on a given day –
400 that’s 4% of
broadband users -
200
170 GLOBALLY
54

0
World internet users Broadband connections Skype users

Source: Verisign, Point Topic, Daiwa

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 Substitution or incremental?
400
350 Minutes per month
300
250
Skype MoU trends 200
150
100
50
0
Minutes per day (on-net)

Me )

M
r
(Pr er

IRC
e
ICQ
ary

nge

Lit
g

AI
AI ssen

Ya priet

sse

ICQ
e

o
NM

o!
60,000,000

ho
MS
50,000,000
40,000,000
30,000,000
20,000,000 48m minutes/6 - 7m
10,000,000 users = c.8min./user/day
0
Nov-04

Jun-05

Jul-05

Aug-05
Sep-04

Jan-05

Feb-05

Apr-05

May-05

Sep-05
Oct-04

Dec-04

Mar-05

Source: Daiwa, Skype, Nielsen//NetRatings

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 The new breed?
We’re going to *%^k*ng
kill telecom.
Yeah.

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 The new breed?
Actually, guys, WE will
destroy telecom – but
NICELY.

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 The new breed?
What are we, chopped liver?
We can destroy telecom too-,,,,,,,

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 The new breed?
WE can destroy telecom, and
that’s our final offer!

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 You’ve got mail!

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 What’s old is new?

Hmmm…

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 Left on the shelf?

Put “Destroy
Telecom” on
my wish
list…

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 Meanwhile, change is afoot

Telcos Consumers

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 My two favorite quotes – part 1
“While we are doing a decent job at keeping our eyes on the ball
I am increasingly concerned that the end-users are already off
playing something else than ball…” - Anonymous industry friend

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 My two favorite quotes - part 2
“Lesson 9: You may compete with everybody, but not with
your customer” – Richard Stastny

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 No time for business as usual

• This is ultimately not a battle for minutes of

traffic (packetized or otherwise)
• It’s not even really about voice as a service
• It’s about voice as a feature…
• … and your share of the consumer’s attention

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 The power of the network

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 A dangerous game?
Total MMOG Active Subscriptions (All MMOGs)

10,000,000 2
R = 0.98
9,500,000
9,000,000
8,500,000
8,000,000
7,500,000
7,000,000
Total Current Subscribers

6,500,000
6,000,000
5,500,000
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05

Source: MMOGChart
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 The power of the network
Top global P2P movie downloads, global, week of 1st September, 2005
Ranking Movie Number of downloads
1 Wedding Crashers 814,143
2 War of the Worlds 799,369
3 Charlie And The Chocolate Factory 768,630
4 The Dukes Of Hazzard 767,066
5 Constantine 755,596
6 Fantastic Four 744,863
7 Sin City 730,279 Top 10 global P2P movie downloads, weekly and monthly
8 The Pacifier 710,286
35,000,000
9 Hitch 699,259
Weekly total
10 Star Wars, Episode 3: Revenge Of The Sith 684,001 30,000,000
Monthly run rate

25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

0
Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05

Source: Daiwa, from P2Pnet data

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 Decentralized media

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