Leveraging 4G to thrive in new market conditions

Marcelo Abdo Strategic Planning Manager

November 5th, 2014

Index

• New Trends are reshaping our market

• Several challenges arise from these trends

• How the world is addressing these challenges

• Why Brazilian specificities pose additional difficulties

• Technology: embedded in our strategy

New Trends are

reshaping our

market

CHANGING The world is

Pope Benedict XVI

2005 Pope Francis I

2013

Smarts (phones, grid, wearables, toys) will PREVAIL Shifting voice and SMS paradigm to drive data traffic growth

2016

52%

48%

2015 2014 2013 2012 2011

15%

85%

Featurephones

Smartphones

Source: Ericsson Mobility Report

2011 2012 2013 2014 2015 2016

Featurephones

Smartphones

15%

52%

85%

48%

Source: Ericsson Mobility Report

29% 53%

> 50% of traffic will come from video Video traffic will grow 13X in the next few years

Video traffic’s share of total traffic

2011 2019

Mobile data traffic will EXPLODE Networks will be under pressure across the world

+46,4%

2018 2019

20 EB/m

2016 2017 2014 2015 2013

2EB/m 3

5

8

11

15

Source: Ericsson Mobility Report

2013 2014 2015 2016 2017 2018 2019

Mobile PC/ Router/ Tablet

Smartphones

2 EB/m

20 EB/m

~50%

Several

challenges

arise from

these trends

Revenue growth rate is DECELERATING Traditional pricing strategies no longer suffice

Customer Revenues

Traffic Volume

Decoupled

Networks demand different solutions Simultaneous users are expected to increase

2013 2014 2016 2015 2017

X2

2013 2014 2015 2016 2017

Projected simultaneous users evolution

Therefore, we need to LEVERAGE LTE It will allow us to offer the required bandwidth controlling costs

Source: Booz&co, LTE: Delivering the future of Wireless

4G

3%

3G

14%

2G

100% Relative Cost¹

per Mbps

1: Total Cost of ownership

100%

14% 3%

2G 3G 4G

Relative Cost¹ per Mbps

How the world

is addressing

these challenges

Traffic growth DIFFERS among markets North American data consumption is soaring

119%

54%

North America Western Europe

Source: Analysis Mason, Wireless network traffic worldwide forecasts

Mobile Data Traffic Growth 2012-13

Consumer HABITS differ significantly Americans consume more data traffic than Europeans

Source: Cisco, Visual Networking Index Mobile Forecast Highlights, 2013 - 2018

1.2

GB

0.5

GB

Monthly data traffic per smartphone, 2013

Asymmetrical STIMULI to MBB growth American environment stimulate operators to invest in 4G

Source: Financial Times, Digital divide exacerbates US inequality; BofA Merryl Lynch, Global Wireless Matrix and Analysis Mason, Wireless network traffic worldwide forecasts

1: Fixed Broadband

2: Removed in 2003

Consumption occasion On the go At home

FBB¹ Penetration (%) 73% 88%

ARPU (USD/m) 49 18

Monthly Mobile Churn (%) 1,7% 1,9%

Spectrum Cap No2 Yes

Mudar action title para variáveis que levam a diferenças no desenvolvimento da BLM

Para as notas de speech, incluir dado sobre spectrum e Market share

Changing technological evolution PACE

55% % of US mobile

traffic in 4G

in 2013

% of European

mobile traffic in 4G

in 2013 11%

Few Vodafone’s

European

customers use a

4G capable device

The bulk of AT&T’s

postpaid

smartphone

customers use a 4G

capable device

Source: Cisco, Visual Networking Index Mobile Forecast Highlights; 2013 – 2018; AT&T Annual Report, 2013; Vodafone 4G Webinar

US subscribers are embracing 4G faster than Europeans

Why Brazilian

specificities

pose additional

difficulties

Deployment started with 2,5 GHz The 700 MHz is crucial to maximize CapEx efficiency

0 2 4 6 8 10

5.800

2.100 850

700 <700 MHz

Cell Radius

(km)

Source: GSMA, Mobile Broadband Spectrum Roadmap

10 1

Cells

Required

• Ajustar título.

• Tem como incluir o 2,5GHz neste esquema gráfico?

• Fazer check de raios.

Low FBB penetration, continental country MBB will be predominantly substitutive to FBB, adding pressure on NW

36%

62%

59%

68%

76%

Source: TIC Domicílios e usuários 2013

73%

88%

Price-sensitive, lower value customers Making more challenging the return on invested capital

Brazil US

49 USD/m

9 USD/m

Source: BofA Merryl Lynch, Global Wireless Matrix

26 USD/m*

* 48 country average

9

49

26

Brazil US

USD/m

USD/m

USD/m*

A huge base remaining in 2G Increased migration efforts to 3G and 4G

Source: Anatel; McKinsey, Connecting Brazil to the world: A path to inclusive growth; Ericcson Mobility Report and AppleStore

28%

1%3%

Brazil

62%

37%

Western

Europe

27%

70%

North

America

32%

40%

2G 3G 4G

8%

2013 Technological Mix

1%

𝑖𝑃ℎ𝑜𝑛𝑒′𝑠 𝑝𝑟𝑖𝑐𝑒

𝐺𝐷𝑃 𝑝𝑒𝑟 𝐻𝑒𝑎𝑑

USA Brazil

32% 27%

62%

40% 70%

37% 28%

3% 1%

NorthAmerica

WesternEurope

Brazil

2G 3G 4G

iPhone 5S

Price (USD) 549 871

GDP per

Head (USD) 54,920 10,860

And a starting point with fewer sites The major cities are lagging regarding base stations

London São Paulo Berlin Rio de Janeiro

5,000 5,500

13,000

19,000 3G Equipments/inhabitant¹

1,00 0,91

0,26 0,38

London Berlin Sao Paulo Rio de Janeiro

1: Normalized to London

Technology:

embedded in

our strategy

Focus on high-value to speed up evolution The highest ARPU in the market benefits us

Source: 2Q14 Operator Reports

18

23

+32%

Vivo 2nd highest ARPU

R$ 23

R$ 18

Vivo 2nd Highest ARPU

+32%

We are broadening our 4G spectrum The 700 MHz acquisition will allow us to:

Source: Teleco

Increase indoor 4G signal quality

Increase network

capacity saving costs

Offer cutting edge products like VoLTE and

IoT

We will INVEST to meet growing demand We will build more sites and connect them with fiber

Total Base Stations

Source: Telefônica’s Strategic Plan

Fibered Base Stations

2013 2014 2015 2016 2017

~x2

2013 2014 2015 2016 2017

~x10

We need to DIVERSIFY our solutions… It is important to address local challenges at a micro level

Source: Telefônica’s Strategic Plan

...will require tailor-

made network strategies

encompassing:

Demand differences

among geographies...

• Wi-Fi offload

• Small Cells

• 4G acceleration in

largest cities

… COUNTING on technology evolution Helping us to sell more 4G devices and conceptualize our NGN

• Affordable and

compatible 4G devices

• Flawless HetNet

deployment

• IP transformation

• Convergent network

elements

• SON, SDN, NFV, 5G, etc...

• Bullet points. Preço? Ajuste em tecnologia? Algo de 5G? Descobrir o que dizer.

• Me preocupa este slide: citamos nomes bacanas, mas não temos claro o que estamos pedindo para a

audiência (do we really know what they mean?). Como falamos há alguns dias, precisa buscar mais

fundamento para esta parte (talvez com o pessoal de redes), pois o público entende disto, este é o

fechamento da apresentação, e sobre estes pontos devem vir as Q&As.

• Deliver superior return to

shareholders

• Enhance users’ Quality of

Experience

• Increase spectrum

efficiency

What we want How you can help

Thank you! marcelo.andrade@telefonica.com