RBCCapitalMarkets UKTelecomConvergence Oct 19 2016

RBC Europe Limited
EQUITY RESEARCH
Jonathan Dann (Analyst) Julio Arciniegas (Analyst)
+44 20 7429 8462 +44 20 7429 8461
jonathan.dann@rbccm.com julio.arciniegas@rbccm.com
Wilton Fry, ACA (Analyst) Irina Idrissova, CFA
+44 20 7429 8463 (Associate Analyst)
wilton.fry@rbccm.com +44 20 7029 0789
irina.idrissova@rbccm.com
October 20, 2016
UK Telecom Convergence
Prisoner's dilemma
Convergence has been a key industry driver of "challenger" growth and incumbent mobile
revenue loss in many European markets. The UK and Germany have largely escaped
these pressures in recent years. However, the industry structure in the UK with three
largely wireless-only players and three predominately broadband-only players creates the
conditions for a significant value transfer. Our analysis suggests a substantial wealth transfer
from wireless (-23bn) to broadband (+12bn) and the consumer (+0.51bn). While the
bulk of listed market capitalisation is skewed to broadband (BT, Sky, TalkTalk, Liberty Media/
Virgin Media) vs. mobile (Vodafone and Telefonica), the risks remain to the downside.
Quantifying the risk using proprietary market data. We have used proprietary customer preference
data from Kantar Worldpanel (which conducts monthly samples of c15k respondents) showing mobile
customers by broadband provider. We can in this way estimate which of the UK mobile operators are
most exposed to bundling, and match mobile operator risk to broadband operator strategy. Intuitively,
we think O2UK and Vodafone UK are at most risk, the latter insulated by its weak consumer presence
and higher enterprise exposure.
The European precedents. The European precedents paint a bleak picture for incumbent mobile
operators and a robust growth opportunity for challengers. Most European challengers have succeeded
in attracting high numbers of mobile SIMs to their broadband businesses. For the mobile operators,
cutting prices (bundling) to respond meant significant revenue and EBITDA loss.
Applied to the UK the prisoner's dilemma starts. The UK has to date seen only modest attempts
at fixed-mobile convergence, with both Virgin Media and TalkTalk attracting only modest numbers of
customers, in contrast to the success of challengers elsewhere in Europe. Historically high prices in
Europe are cited as one explanation, but UK contract prices now sit in the mid-20s and operators
have substantial portions of their bases paying 3040 and 40+ per month as proprietary data (Kantar
Worldpanel) demonstrates. We believe Sky will attempt to leverage its strong presence in PayTV/
broadband into mobile (see Buy Sky - Cell Phones).
Wealth transfer 12bn. Within this note, we assume convergence takes hold as we have seen in
European countries (60% of broadband base converges, with two SIMs per converged customer). We
also reflect the wholesale/Partner arrangements between EE/Virgin Media and O2UK/Sky and TalkTalk.
Our analysis suggests that 1bn of industry revenues are at risk (equivalent to 20% of mobile EBITDA)
with a significant value transfer from O2UK (-1.5bn) and Vodafone/EE/3UK (-0.5bn each) to Sky (+
1.0bn) and Virgin Media/TalkTalk (+0.5bn each) over the next three years. Of course, the challengers
may choose not to drive growth via mobile, or execute badly and all will sit well for UK Mobile Inc.
Priced as of prior trading day's market close, EST (unless otherwise noted).
Disseminated: Oct 20, 2016 00:40ET; Produced: Oct 20, 2016 00:40ET All values in GBP unless otherwise noted.
For Required Non-U.S. Analyst and Conflicts Disclosures, see page 31.
Prisoners dilemma
Bundling of fixed and mobile has been a key feature of European telecom markets for the
last three to four years. For country-specific reasons, both the UK and Germany have been
largely immune from the aggressive bundling and hence mobile revenue loss seen in
Southern Europe, France, and The Netherlands. However, with three largely broadband-only
operators and now BT owning the largest mobile operator EE, the incentives have changed.
BT can grow its mobile revenues by promoting bundling and multi-SIMs in its own homes,
while Sky, TalkTalk, and Virgin can also benefit from the value-transfer. The lessons from
other markets provide a poor read-across for UK mobile.
In this note, we use a proprietary customer survey to identify the current overlap between
mobile customers and their preferred broadband providers. We then take lessons learned in
Europe and apply these to the UK (in terms of the likely extent of fixed-mobile bundling that
will occur, as well as likely impacts on ARPU). We thus deduce both the subscribers at risk, or
potentially to be gained, and the amount of profit (revenue) at risk. There is a clear value
transfer likely to take place from mobile to broadband. Finally, we look at lessons that
Telefonica may have learned in Germany and assess whether these are appropriate in the
UK.
Key conclusions
Vodafone and O2UK are overweight in both BT and Sky homes
Convergence is nascent in the UK, with Virgin Media (Liberty Global) and TalkTalk having
limited success to date. While a small sample, EE with its broadband base has shown the
way.
Substantial ARPU at risk. O2UK has the largest portion of its customers and revenue with
customers spending between 2030 and 3040 per month. Vodafone is more
protected, with fewer low-spending customers and more >40, reflecting its higher
exposure to the corporate market.
The UK could lose as much 1bn in mobile revenues, with pure-play operators such as
O2UK (->1bn), Vodafone, EE, and 3UK (-0.5bn) losing revenues to Sky (+>1bn), Virgin,
and TalkTalk (combined c0.75bn).
Clearly, the exact magnitude of the impact may differ, and investors may question the
success of any individual operator; however, directionally high UK contract ARPUs are at
risk. The precedent from European markets was more negative than the scenarios
presented below.
Exhibit 1: Exposure to UK telecoms and UK mobile (%)
Operator Price Target Currency UK, % of revenues UK mobile, % of revenues EV % UK

Telefonica 11.0 13 13 9.4
Vodafone 280 p 20 14 7.8
Liberty Global 41 $ 35 5 40
TalkTalk 260 p 100 5 100
BT 550 p 95 21 94
Sky 1125 p 65 0 64
Source: Company reports and RBC Capital Markets estimates
October 20, 2016 2

UK deep dive
Ahead of convergence
With BT recently acquiring mobile operator EE and Sky to launch mobile (most likely at its
th
Capital Markets Day on Thursday 20 October), the overlap between broadband customers
and mobile customers and likely risks and opportunities faced will come to the fore, in our
opinion.
Market data provides insights into these risks and opportunities. Kantar Worldpanel
routinely conduct polls of its 15,000 survey participants in the UK each month. It asks
participants questions about their current mobile and broadband providers, prices paid, and
intentions around switching to other operators. Below, we discuss in detail three findings of
relevance to UK mobile and broadband, in our view.
The market data suggests that O2UK and Vodafone are particularly at risk with stronger
market shares in BT and Sky homes compared with market averages. For Vodafone, low
market share at the low-end of the market (<20 per month) and high market share in the
high-end (40+ per month), which we take to represent a proxy of the business market,
should insulate it compared with O2UK, whose strong market shares are in the mid-market
2130 per month and 3140 per month price segments.
Strong market presence

O2UK remains a popular brand with customers, reflecting its strong focus on customer care
including its popular customer loyalty schemes (including O2 Priority Moments) and steady
advertising. Its net promoter score (NPS) sits above peers.
Exhibit 2: O2UK remains popular with its customers
9.0
8.0
7.0
6.0
5.0
Source: Kantar Worldpanel (NPS Total Market vs. O2 1 m/e 30th Sep 2015); NPS measured out of 10
Mobile share in broadband homes

Vodafone and O2UK have strong market shares in both BT and Sky homes, reflecting their
current brand position and historical strengths in having the lions share of low-frequency
spectrum, which typically meant better voice coverage (and attendant brand reputation). EE
in contrast has a neutral weighting in both BT and Sky homes and is less underweight Virgin
Media and TalkTalk homes, reflecting the history of its predecessor brands T-Mobile and
Orange, which were positioned at the lower end of the value proposition.
While bundling has been so far in the UK only a minor driver of competitive behaviour, it is
no coincidence that all mobile operators have below-average market shares in TalkTalk and
Virgin Media homes, where both do cross-sell mobile into their broadband/TV bases.
October 20, 2016 3

While seemingly a stretch, the strong market share of EE mobile in EE broadband base (close
to two SIMs per broadband home) is more akin to the take-up of convergence seen in other
countries that would pose a threat to stand-alone mobile operations.
Exhibit 3: O2UK and Vodafone are overweight in Sky and BT homes
Source: Kantar Worldpanel (Fixed Broadband Provider Share by Mobile Network 1 m/e 30th Sep 2015 % Subscriptions)
Mobile per broadband base

The data above shows the percentage of each mobile operators (for the big three: O2, EE,
and Vodafone) customers spread across the various UK broadband operators. As can be seen
below, O2 is the market leader in Sky, BT (tied with EE), and Virgin Media homes and a close
second in TalkTalk homes.
Exhibit 4: UK mobile customers by broadband provider
Source: Kantar Worldpanel, Company reports, and RBC Capital Markets estimates . For Sky/BT/TalkTalk homes with Sky DTH are counted as broadband
provider
October 20, 2016 4

How significant could convergence be?

Convergence has been pushed as a strategy with varying degrees of success across Europe,
from Spain and Portugal, where more than 60% of a broadband operators customers take its
mobile SIMs (higher with the smaller challengers such as Jazztel, which achieved c2 SIMs per
broadband customer), to Netherlands and Germany in the mid-30s%.
Below, we have identified the key operators promoting converged broadband and mobile
offerings across Europe. UK and Germany rank as new to convergence, while Southern
Europe, France, and The Netherlands have substantial take-up of converged offers.
While levels of convergence continue to grow, the European experience has been that
around 50% of the broadband base takes converged offers three to four years after launch,
with more than 1.5 SIMs per converged offering. Mobile service revenues suffer
substantially.
Exhibit 5: Convergence across Europe
Mobile SIM per broadband Converged as % of broadband Converged as % of fixed

DT 1.9 11 7
VOD 2.0 13 13
TalkTalk 0.2 18 18
KPN 1.5 35 30
Virgin Media 0.5 46 46
NOS 2.4 56 56
Orange 1.3 67 39
Bouygues* NA 70 70
Telefonica 1.5 71 43
United Internet 0.9 NA NA
Iliad 1.9 100 100
Jazztel 1.2 100 100
Wealth transfer is clear Mapping customers and flexing risks

If we map the above data (broadband customers and their choice of mobile network), we
have a matrix of mobile customers and their broadband provider, as shown below.
Exhibit 6: Mapping Mobile SIMs to UK broadband homes (m)
O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile Total

BT 9.3 9.5 6.8 3.1 0.0 0.0 0.0 28.6
Sky 6.8 5.2 4.3 1.8 0.0 0.0 0.0 18.1
VMED 4.2 4.0 3.0 1.7 0.0 2.6 0.0 15.5
TalkTalk 3.3 3.7 2.5 1.4 0.7 0.0 0.0 11.6
Other 1.3 1.7 1.5 1.0 5.6
Source: Company reports and RBC Capital Markets estimates. Our forecasts make adjustments for M2M and Partner brands as appropriate
If we take some of the lessons from Europe, specifically we assume that 60% of homes
choose a converged bundle in the medium term (Germany and Spain are there now, while
challengers often exceed 100%) and the average SIM in a converged home is 2 (we flex this
assumption later). We assume that in non-converged homes, broadband customers choose
October 20, 2016 5
their mobile operator based on scale. So, as an example in BT homes, our base case is that
60% of BT broadband customers choose EE and have two SIMs. The remainder (40% in this
case) choose a mix of O2, Vodafone, and 3UK in the ratio of 40/40/20, reflecting relative
scale. In Sky homes (and also Virgin, TalkTalk), 60% of customers choose the own brand
mobile operation while the residual 40% of broadband customers choose their mobile
operator (in this case O2, Vodafone, EE, and 3UK) in the ratio of 30/30/30/10, reflecting
scale. These assumptions assume 3UK attracts a smaller share of adds, skewing findings in
favour of the three large operators (O2, Vodafone, and EE).
Exhibit 7: Ultimate dispersion of mobile SIMs in a fully converged UK (m)

BT 6.6 12.0 6.6 3.3 0 0 0 28.6
Sky 2.6 2.6 2.6 0.9 0 0 9.6 18.1
VMED 3.0 3.0 3.0 1.0 0 5.4 0 15.5
TalkTalk 2.2 2.2 2.2 0.7 4.2 0 0 11.6
Other 1.3 1.7 1.5 1.0 0 0 0 5.6
Redistribution of Longer-term this means that EE will gain share in BT homes (including Plusnet), Virgin in
customers Virgin, Sky mobile in Sky, etc. while Vodafone and O2UK are net losers. The 15.9m contract
customers that are redistributed from O2, EE, Vodafone, and 3UK equate to around one-
third of the current contract base of the UK market.
Exhibit 8: Impact on current operators (m)
O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile

BT -2.6 2.5 -0.2 0.3 0.0 0.0 0.0
Sky -4.3 -2.7 -1.8 -1.0 0.0 0.0 9.6
VMED -1.2 -1.0 0.0 -0.7 0.0 2.8 0.0
TalkTalk -1.1 -1.5 -0.3 -0.7 3.5 0.0 0.0
Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net impact (000) -9.1 -2.6 -2.1 -2.1 3.5 2.8 9.6
EE and O2UK will regain some of the retail revenue lost through wholesale fees charged to
partner brands, Virgin Mobile in the case of EE/BT, Sky and TalkTalk in the case of O2UK.
We assume that lost customers have ARPUs of 20, while wholesale revenues are recovered
at c10.
Redistribution of wealth In this way, convergence leads to a loss of more than 1bn to UK mobile industry revenues.
We note that Telefonica alone lost 2.4bn in wireless customer revenues in the four years
between the launch of convergence (Fusion tariffs) and today.
Exhibit 9: Redistribution of ARPU and wealth (m)

BT -631 607 -37 62 0 0 0 0
Sky -510 -636 -420 -228 0 0 1,152 -642
VMED -280 -116 8 -168 0 336 0 -220
TalkTalk -128 -352 -64 -167 420 0 0 -292
Total impact -1,549 -497 -514 -501 420 336 1,152 -1,154
October 20, 2016 6

BT should push multi SIM, or hope Sky cant add mobile

Below we flex our assumptions for rate of convergence (i.e., what proportion of broadband
homes take a converged bundle) and how many SIMs are combined per broadband home.
Exhibit 10: UK total market impact no convergence (aka status quo) is best
SIMs per converged home

m 1.00 1.5 2.0 2.5 3.0 3.5
Converged (%) 20 190 56 -79 -213 -347 -482
30 56 -146 -347 -549 -751 -952
40 -79 -347 -616 -885 -1,154 -1,423
50 -213 -549 -885 -1,221 -1,557 -1,893
60 -347 -751 -1,154 -1,557 -1,960 -2,363
70 -482 -952 -1,423 -1,893 -2,363 -2,834
80 -616 -1,154 -1,691 -2,229 -2,767 -3,304
Flexing the number of SIMs per home, there is a clear advantage for EE/BT to promote multi-
SIMs at the expense of O2, Vodafone, and Three. Vodafone has a disproportionately low
share of SIMs in UK homes and therefore benefits from low levels of convergence.
Exhibit 11: Impact per operator of no SIMs per converged home (with converged homes fixed at 60% of base)
m O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile Total

1.00 -531 -1,343 754 17 168 12 576 -347
1.50 -1,040 -920 120 -242 294 174 864 -751
2.00 -1,549 -497 -514 -501 420 336 1,152 -1,154
2.50 -2,059 -74 -1,147 -760 546 498 1,440 -1,557
3.00 -2,568 349 -1,781 -1,020 672 660 1,728 -1,960
3.50 -3,078 772 -2,414 -1,279 798 822 2,016 -2,363
Flexing the number of homes that are converged (while holding SIMs per home constant at
2.0) shows a clear advantage for EE/BT to promote convergence at the expense of O2,
Vodafone, and Three. Vodafone has a disproportionately low share of SIMs in UK homes and
therefore benefits from low levels of convergence.
Exhibit 12: Impact per operator of percentage of converged homes (with SIM per home fixed at 2.0)
m O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile Total

20 -191 -1,625 1,176 190 84 -96 384 -79
30 -531 -1,343 754 17 168 12 576 -347
40 -870 -1,061 331 -156 252 120 768 -616
50 -1,210 -779 -91 -328 336 228 960 -885
60 -1,549 -497 -514 -501 420 336 1,152 -1,154
70 -1,889 -215 -936 -674 504 444 1,344 -1,423
80 -2,229 67 -1,358 -847 588 552 1,536 -1,691
October 20, 2016 7

Exposure by ARPU
Both Vodafone and O2UK are underweight in the 20 and under, reflecting the survey
composition (it covers the Vodafone and O2 brands and excludes the sub-brands) and both
operators historical premium positions.
Exhibit 13: O2 outperforms in the 2140 categories; Vodafone 40+
55 55 50
63 72
Others
19 18 26
15 Vodafone
11
22 18 26 27 24 O2
Total 20 & 21-30 31-40 40+

PAYM under
Market
Source: Kantar Worldpanel (Mobile Network Share by PAYM Tariff Agreement Total PAYM Market 1 m/e 30th Sep 2015 % Subscriptions)
October 20, 2016 8

Lessons from Telefonica Deutschland choose partners wisely

Telefonica Deutschland has managed to report broadly stable, albeit declining in low single
O2DE experience likely
digit, service revenues since the successful merger of O2 and EPlus in 2014. TEF Deutschlandt
skews TEF thinking
has managed to achieve this while experiencing considerable price-led competition at the
low end of the market and seeing its post pay base fall by 3m since the end of 2014. This
has been offset by strong growth in partner (aka Drillisch and United Internet) revenues.
Exhibit 14: Telefonica Deutschland Partner revenues

Customers Postpay, Prepay, and Partners (000) Service revenues Postpay, Prepay, and Partners (m)
50,000 1,600
45,000 1,400
40,000
1,200
35,000
30,000 1,000
25,000 800
20,000 600
15,000
400
10,000
5,000 200
0 0
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
Postpay Prepay Partner Postpay Prepay Partner
Source: Company reports, RBC Capital Markets estimates
However, whereas in Germany contract ARPUs were around 20 per month and pre-pay
around 4, in the UK contract ARPUs are 23 (30) per month and prepay 6 (8), implying
considerable scope for cannibalization.
Exhibit 15: Telefonica German contract ARPU was already low, UK high
TEF DE ARPU - Postpay, Prepay, and Partners () TEF UK ARPU Postpay and Prepay ()
25.0 30.0
25.0
20.0
20.0
15.0
15.0
10.0
10.0
5.0 5.0
0.0 0.0
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
Postpay Partner Prepay Contract ex M2M Prepay
Like Germany, Telefonica UK should be able to offset some of the pressure on its mobile base
with Partner revenues from Sky and TalkTalk. However, high current ARPU when compared
with Germany two years ago makes this challenge steeper.
October 20, 2016 9

Exhibit 16: Telefonica UK Partner revenues from Sky and TalkTalk should offset some, not all, of declines
Customers Postpay, Prepay, and M2M (000) Service revenues Postpay, Prepay, and M2M (m)
25,000 1,200
1,000
20,000
800
15,000
600
10,000
400
5,000
200
0 0
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
Prepay Contract ex M2M M2M
Prepay Contract ex M2M M2M
October 20, 2016 10

UK convergence to date
Limited convergence to date
Sky has more than 10m UK homes taking its PayTV service and has upsold 7m of these with
broadband. The European precedent would suggest that Sky can sell enough mobile SIMs to
a ratio of 50100% of its broadband (or customer) base. For Sky, this would imply between
five and ten million SIMs. UK peers Virgin Media and TalkTalk have been less successful with
mobile SIMs of 50% and 25% of the base, respectively. For Vodafone, Telefonica O2 UK and
Hutchisons 3UK this presents a clear risk. For EE, while it faces a risk in non BT (including
Plusnet and EE broadband homes), by bundling it can drive up penetration in BT homes to
offset mobile losses in Sky and TalkTalk homes.
Key highlights
Bundling has been successful in most European markets
UK has lagged (given success seen at Virgin Media and TalkTalk
The European precedent would suggest closer to 10m SIMs as a medium-term target.
BT should promote multi-SIMs in BT homes to offset any cannibalisation of EE customers
in Sky, TalkTalk, and Virgin homes.
The more bundling (i.e., discounts), the larger the value transfer from mobile to
broadband, principally from O2UK and Vodafone to Sky.
UK bundling limited to date

VMED modest success in Virgin Media has been steadily repositioning Virgin Mobile from a predominately pre-pay
mobile operator over the last ten years to its current predominately postpaid base (2Q16). In 2006,
there were 4.3m prepay and 0.2m postpaid customers; now, at 2Q16, there are 2.4m
postpaid customers and 0.7m prepay.
Exhibit 17: Virgin Media Relatively limited fixed-mobile bundling to date

Subscribers Broadband and mobile (000) Mobile SIM per broadband customer
8,000 0.5
7,000 0.5
0.4
6,000
0.4
5,000 0.3
4,000 0.3
3,000 0.2
0.2
2,000
0.1
1,000 0.1
0 0.0
2011
3Q13
2009
2010
2012
1Q13
2Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
1Q13
2009
2010
2011
2012
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
Broadband subscribers Mobile subscribers Mobile per Broadband
Source: Company reports, RBC Capital Markets estimates (Note: includes Ireland from 1Q14)
TalkTalk mobile an TalkTalk launched mobile in 2011, but for most of the last five years mobile has been
afterthought promoted less aggressively than European peers. The 0.7m mobile customers at 2Q16
(calendar, 1Q17 financial) with a total broadband base of 4.1m is one of the lowest ratios of
mobile over broadband in Europe.
October 20, 2016 11

Exhibit 18: TalkTalk Mobile light

6,000
0.5
0.5
5,000
0.4
4,000 0.4
0.3
3,000
0.3
0.2
2,000
0.2
1,000 0.1
0.1
0
0.0
2011
2012
2013
2014
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2011
2012
2013
2014
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
Source: Company reports, RBC Capital Markets estimates (Note: includes Ireland from 1Q14)
October 20, 2016 12

European Precedence
What happened in Europe
Operators in Spain, Germany, France, The Netherlands, Portugal, and others have used
convergence-based tariffs to defend market share (in the case of the incumbents) and steal
market shares (in the case of challengers). With the exception of the UK and most cable
operators where organic convergence has so far underwhelmed, challengers have succeeded
in adding discounted mobile to their broadband bases, while incumbents have cross-sold
converged bundles to more than 50% of their broadband bases, attaching typically 1.5x
SIMs per broadband/converged customer.
Spain
Jazztel Jazztel launched an MVNO in late 2009 but it was not until 2012 as Telefonica started to push
its Fusion fixed mobile bundles that marketing from Jazztel and hence take-up accelerated.
By mid-2015 (when Jazztel was acquired by Orange), Jazztel had 2.3m mobile SIM customers
with ARPUs of 14 per month over its total customer base of 2.3m broadband customers
(including both voice line and resold DSL).
Exhibit 19: Spain Jazztel 201015

4,000 1.4
3,500 1.2
3,000
1.0
2,500
0.8
2,000
0.6
1,500
0.4
1,000
0.2
500
0 0.0
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
Mobile subscribers Broadband subscribers Mobile per Broadband
Telefonica Fusion Telefonica launched Fusion, its triple- and quad-play offer, in mid-2012. The tariff tended to
come with between one and two mobile SIM cards, leaving Telefonica with a rapid take-up of
SIMs per Fusion customer. Now four years after launch, Telefonica has 4.3m Fusion
customers out of total retail broadband base of 6.0m (i.e., two-thirds of broadband
customers are converged) and retail fixed line base of 9.9m for c43% take-up. The c6m
mobile SIMs in the Fusion contract compare with 14.5m contract customers and 17.1m total
mobile subscriptions. The Fusion ARPU (per home) of 79.8 per month is slightly more than
double the non-Fusion ARPU of 36.7.
October 20, 2016 13

Exhibit 20: Telefonica Fusion has been a success

Subscribers Fusion and non-Fusion homes (000) Mobile SIM per Fusion customer
12,000 1.5
1.5
10,000
1.5
1.5
8,000
1.4
6,000 1.4
1.4
4,000
1.4
1.4
2,000
1.3
0 1.3
3Q13A
4Q12A
1Q13A
2Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
1Q13A
2Q13A
3Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
Fusion homes Non Fusion homes Mobile SIM per Broadband
Mobile revenues fell from 6.5bn in 2011 to 3.7bn in 2015, a drop of 2.9bn; adjusting for
the cumulative negative impact of MTRs (640m) implies that mobile revenues fell by
2.3bn, approximately one-third over a four-year period. Over the same period, fixed service
revenues (retail consumer and business revenues from access lines, broadband, and calls) fell
from 7.6bn to 4.9bn, with broadly stagnant broadband lines (6.0m 2015 from 5.6m 2011)
and retail lines falling to 10.0m from 12.3m.
Exhibit 21: Telefonica Significant customer and revenue loss

Mobile service revenues (m) Fixed service revenue (m), broadband subs (000), and access lines (000)
8000
14,000
7000
12,000
6000
5000 10,000
4000 8,000
3000 6,000
2000
4,000
1000
2,000
0
2011 2012 2013 2014 2015 0
2011 2012 2013 2014 2015
Mobile service revenues MTR impact cumulative Fixed service revenues Broadband subs Incumbent lines
Vodafone and Orange each Vodafone and Orange in Spain each saw revenues fall by c1.31.4bn between 2011 and 2016
lost c1.4bn in wireless once adjusting for MTR drag over that period. While Orange added 1.7m customers (ex
service revenues over Jazztel acquisition), Vodafone lost 4.9m (one-third of its base) customers over the period,
period of convergence mainly amongst its prepay base (adjusted for Ono acquisition).
Details
Vodafone Spain saw mobile service revenues fall from 5.2bn in 2011 to 3.0bn 2016E,
with the cumulative impact of MTRs of 800m meaning that underlying revenues fell by
1.4bn.
Orange Spain saw mobile service revenues fall from 3.2bn in 2011 to 2.6bn 2016E,
with the cumulative MTR impact of 350m meaning that underlying revenues fell by
1.3bn.
October 20, 2016 14

France
th
Iliad launched its mobile offering on 10 January 2012 with two offers: 2 per month for an
essentially prepay killer (60 mins and 60 SMS at the time, now 200 mins and SMS and 50 MB
of data) and 20 per month (unlimited mins and calls, 4GB of data, now unlimited mins, calls,
international destinations and 50GB of data), with each being discounted for Iliad broadband
customers (0 and 15, respectively).
Exhibit 22: Iliad Aggressive tariffing has driven market wide growth, not just convergence on its broadband base
20,000 2.5
18,000
16,000 2.0
14,000
1.5
12,000
10,000
1.0
8,000
6,000
0.5
4,000
2,000 0.0
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
2Q13A
3Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
0
2011A 2012A 2013A 2014A 2014A 2015A 2016E
Broadband Mobile Mobile per Broadband
Iliad now has 12.1m mobile customers, c50% on the higher 15/20 per month tariffs
compared to its fixed line base of 6.3m broadband customers. Revenues have nearly
doubled, with 1.7bn mobile service revenues and 2.5bn broadband service revenues
expected for 2016E.
Exhibit 23: Iliad Mobile has been a raging success

Service revenues Mobile and Broadband (m) EBITDA and capex (m)
5,000 1,800
4,500 1,600
4,000
1,400
3,500
1,200
3,000
1,000
2,500
2,000 800
1,500 600
1,000
400
500
200
0
2011A 2012A 2013A 2014A 2014A 2015A 2016E 0
2011A 2012A 2013A 2014A 2014A 2015A 2016E
Broadband service revenues Mobile service revenues EBITDA Capex
Bouygues Bouygues launched its broadband offers in 2008 and has steadily grown its base to 3m
customers, adding between 15% (2009, 2013) and over 40% of yearly net adds of market
broadband lines (2012, 201416). It flirted with a converged broadband offering called
Idea between 2009 and 2012 (offered discounts for customers taking both mobile and
fixed), with the bulk of customers opting for converged offering.
October 20, 2016 15

Exhibit 24: Bouygues Has taken share each year, but late launch has been an issue
Subscribers Broadband and mobile (000) Convergence customers (000)
18,000 2,000
16,000 1,800
14,000 1,600
1,400
12,000
1,200
10,000
1,000
8,000
800
6,000
600
4,000 400
2,000 200
0 0
2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2009A 2010A 2011A 2012A
Mobile Broadband Broadband non-converged Broadband converged "Idea"
Bouygues has seen mobile service revenues fall from 4.7bn in 2011 to 3.0bn 2016E,
(4.0bn including fixed service revenues) implying close to 1bn net revenue loss since Iliads
launch in 2012.
Exhibit 25: Bouygues Launch of Iliad has been punishing

Service revenues Mobile and Broadband (m) EBITDA (m)
6,000 1,600
1,400
5,000
1,200
4,000
1,000
3,000 800
600
2,000
400
1,000
200
0 0
2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E
Mobile service revenues Fixed service revenues EBITDA
Orange was one of first to Orange launched Open, its converged offering, in the middle of 2011. It now has 7.4m
converge Open customers out of a total broadband base of 10.9m (total fixed lines of 19.0m). Open
customers have 1.3 SIMs per Open subscription. Orange now has 68% of its broadband
customers on converged tariffs; 39% of its total fixed line base.
October 20, 2016 16

Exhibit 26: Orange Convergence has been taken up aggressively

Converged Open vs non-Converged customers (000) Mobile SIM per Open broadband customer
20,000 1.4
18,000 1.3
16,000 1.3
14,000 1.3
12,000 1.3
10,000 1.3
8,000 1.2
6,000 1.2
4,000 1.2
2,000 1.2
0 1.2
4Q13A
1Q13A
2Q13A
3Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
3Q13A
1Q13A
2Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
Open Non-Open Mobile per Broadband
Orange mobile service revenues fell from 9.8bn in 2011 to 7.2bn today, a fall of 2.8bn. Of
this, 1.5bn can be attributed to the cumulative impact of MTRs; however, Orange also
benefits from an anticipated 0.5bn of Iliad roaming revenues in 2016, meaning a net fall of
1.9bn in the five-year period spanning Iliads launch in 2012. EBITDA over this period fell
from 8.7bn to 7.0bn.
Exhibit 27: Orange Revenue and EBITDA suffered

Service revenues Mobile and Broadband (m) French EBITDA (m)
18,000 9,000
16,000 8,000
14,000 7,000
12,000 6,000
10,000 5,000
8,000 4,000
6,000 3,000
4,000 2,000
2,000 1,000
0 0
2011A 2012A 2013A 2014A 2015A 2016E 2011A 2012A 2013A 2014A 2015A 2016E
Mobile service revenues Fixed service revenues Cumulative MTR, annual Iliad net EBITDA
SFR saw 1.5bn net revenue SFR saw mobile revenues fall from 7.9bn in 2011 to 6.0bn in 2015, with the cumulative
impact impact of MTRs of 0.5bn meaning that underlying price related competition meant
revenues fell by 1.5bn.
October 20, 2016 17

Germany
United Internet
United Internet has had a mobile operation since early 2010; however, marketing of the
product accelerated in 2010, leading to rapid growth during 2011. At 2Q16, United Internet
had 3.9m mobile customers and a broadband base of 4.4m; while United Internet does not
explicitly promote fixed-mobile bundles, it does benefit from cross-promotion across the
online brands, such that it now has 0.9 mobile SIMs for every broadband customer.
Exhibit 28: United Internet Approaching one SIM per broadband customer, although limited explicit cross-selling
9,000 1.0
8,000 0.9
7,000 0.8
6,000 0.7
0.6
5,000
0.5
4,000
0.4
3,000
0.3
2,000
0.2
1,000
0.1
0
0.0
2009
2010
2011
2012
2013
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
2009
2010
2011
2012
2013
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
Drillisch Prior to 2011, Drillisch was predominately a service provider for DT and Vodafone; the
combination of disagreement with DT and improving economics of MVNOs saw it switch
business models. In 2014, Drillisch was the beneficiary of remedies in the merger of
Telefonicas O2 and KPNs e-plus. It now has an MBA (mobile broadband agreement) which
essentially provides it with a share of O2s traffic for agreed payments. As near as possible,
this gives Drillisch higher levels of certainty over its ongoing and future network costs. From
launch and with a predominately online strategy, Drillisch has amassed more than 2.8m total
mobile customers at June 2016.
Exhibit 29: Drillisch close to 3m mobile and no broadband to cross-sell

Customers Mobile service provider and MVNO/MBA subscribers (000) MVNO and MBA customers (000)
3,000
3,000
2,500
2,500
2,000
2,000
1,500
1,500
1,000
1,000
500
500
0
0
2008
2009
2010
2011
2012
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
2010
2011
2012
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
Service provider subscribers MVNO/MBA subscribers MVNO/MBA subscribers
October 20, 2016 18

DT a late bloomer DT revamped its fixed-mobile bundle offers in 2014 MagentaEins offering a permanent 10
per month discount to customers combining its broadband and mobile offers. DT now has
1.3m (2Q16) MagentaEins customers (accesses) in Germany, 11% of the broadband base (of
12.4m), and 7% of the total fixed line base (20.0m). Given the relatively late launch (end
2014) compared to peers two to three years earlier, performance is encouraging.
Exhibit 30: DT late to launch convergence, but take up (SIMs per home normal)
Converged MagentaEins and non-converged Mobile SIM per broadband customer
20000 2.0
18000
16000 2.0
14000
12000 1.9
10000
8000 1.9
6000
4000 1.8
2000
0 1.8
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
MagentaEins Non MagentaEins Mobile SIM per Broadband
DT has been fortunate in that mobile service revenues have been broadly stable despite
modest negative MTR impacts, reflecting the competition levels before 2011 and low prices,
while in fixed, service revenues have fallen 1.5bn over the last five years. EBITDA also has
been robust, falling only 700m since 2011, again reflecting as much the competitive
situation in prior to 2010.
Exhibit 31: Germany service revenues and EBITDA (m)
12,000
10,000
8,000
6,000
4,000
2,000
0
2010 2011 2012 2013 2014 2015 2016
Fixed service revenues Mobile service reveunes German EBITDA
October 20, 2016 19

Vodafone Germany Vodafone Germany had wireless service revenue of 6.8bn in 2012, 6.1bn 2016E, with only
modest MTR impacts. Vodafone promotes its own bundled tariffs Red One and now has
1.5m customers out of 5.9m cable and xDSL broadband customers, i.e., around 25% of its
broadband base, similar to DT and its MagentaEins.
TEF DE relies on Partner Telefonica Deutschland has managed to report broadly stable, albeit declining in low single
revenues digit, service revenues since the successful merger of O2 and EPlus in 2014. TEF Deutschlandt
has managed to achieve this while experiencing considerable price-led competition at the
low end of the market and seeing its post pay base fall by 3m since the end of 2014. This
has been offset by strong growth in partner (aka Drillisch and United Internet) revenues.
Exhibit 32: Telefonica Deutschland Partner revenues

Customers Postpay, Prepay, and Partners (000) Service revenues Postpay, Prepay, and Partners (m)
50,000 1,600
45,000 1,400
40,000
1,200
35,000
30,000 1,000
25,000 800
20,000 600
15,000
400
10,000
5,000 200
0 0
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
Postpay Prepay Partner Postpay Prepay Partner
October 20, 2016 20

Portugal
NOS best-in-class bundler NOS is the renamed merger of cable operator Zon and mobile operator Sonaecom that
closed in 2014. As a result of aggressive bundling of one and two mobile SIMs with
broadband and TV offers, NOS has more than two mobile SIMs per converged home. It has
also retained a substantial mobile-only base.
Exhibit 33: NOS Mobile and Broadband success story

Subscribers Broadband and converged mobile (000) Mobile SIM per broadband customer
4,000 2.0
3,500 1.8
1.6
3,000
1.4
2,500 1.2
2,000 1.0
1,500 0.8
0.6
1,000
0.4
500 0.2
0 0.0
2012
2013
2Q15
3Q15
4Q15
1Q16
2Q16
1Q12
2Q15
1Q12
1Q14
2Q14
3Q14
4Q14
1Q15
2012
2013
1Q14
2Q14
3Q14
4Q14
2014
1Q15
3Q15
4Q15
2015
1Q16
2Q16
Source: Company reports, RBC Capital Markets estimates (Note: NOS reports converged SIMs as well as traditional pre-pay; the above data combines both consumer and business broadband and converged SIMs)
Digging deeper, NOS discloses the customers on its broadband/cableTV platform that take
one of its bundled broadband/PayTV/mobile offers; it calls them unique convergent
customers, and it also discloses the number of SIMs per unique customer. With 56% of its
customer base taking a converged triple-, quad-, or five-play offer, NOS is one of the more
successful converged operators in Europe. This has been supported by a strong value
proposition including discounted mobile SIMs (currently 2.2 SIMs per converged customer).
Exhibit 34: NOS Success driven by convergence

Subscribers Unique customers (000) SIMs per unique customer, converged customers as percentage of base
1,400 60.0 3.5
1,200 50.0 3.0
2.5
1,000 40.0
2.0
800
30.0
1.5
600
20.0
1.0
400
10.0 0.5
200
0.0 0.0
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
0
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
SIMs per unique customer (RHS) Convergent customers, %
Convergent customers Non convergent customers
October 20, 2016 21

The Netherlands
KPN has been promoting converged offers since the middle of 2013. It now has
approximately one-third of its broadband base taking converged offers and an average SIM
per converged home/customer of 1.4x.
Exhibit 35: KPN Modest success

Subscribers Unique customers (000) SIMs per unique customer, converged customers as percentage of base
3,000 50.0 1.8
45.0 1.7
2,500
40.0 1.7
35.0 1.6
2,000
30.0 1.6
1,500 25.0 1.5
20.0 1.5
1,000
15.0 1.4
10.0 1.4
500
5.0 1.3
0 0.0 1.3
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
Convergent customer Non convergent customer SIMs per converged customer (RHS) Convergent customers, %
October 20, 2016 22

UK wireless: Competitive market but inflationary price increases and M&A

Historically, the UK mobile market has been tough for operators with price competition from
Hutch and numerous MVNOs with relatively large scale. However, more recently, operators
have started to push through inflationary price increases. Despite this, subsidy levels remain
high compared to other European markets. Sky is set to announce details of its mobile
th
offering by the end of 2016, most likely at its CMD on October 20 .
Exhibit 36: Subscriber market share and cumulative net adds

Subscriber market share, % Cumulative net adds (000s)
100.0% 4.8 5.4 4.9 5.5 4.8 5.0 5.6 6.5 6.7 5,000
90.0% 4,000
80.0% 3,000
70.0% 27.5 27.2 27.4 28.0 28.7 2,000
28.8 29.4 29.4
60.0% 1,000
50.0% 0
40.0% 33.3 32.9 31.9 -1,000
30.6 29.9 28.8 28.4 28.4
30.0% -2,000
20.0% -3,000
23.6 23.7 23.5 23.2 23.7 23.4 -4,000
10.0% 21.6 21.2
3Q10A
2Q13A
3Q15A
1Q16A
4Q10A
1Q11A
2Q11A
3Q11A
4Q11A
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
3Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
4Q15A
2Q16A
0.0%
4Q13A
1Q14A
2Q14A
1Q11A
2Q11A
3Q11A
4Q11A
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
2Q13A
3Q13A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
VOD EE O2
VOD EE O2 Hutch VMED MVNO's Hutch VMED MVNO's
Note: Numbers for EE include BT mobile subs starting Q1/16. Source: Company reports, RBC Capital Markets estimates
Exhibit 37: Post-paid subscriber market share and cumulative net adds
Postpaid subscriber market share, % Postpaid cumulative net adds (000s)
100.0% 7,000
10.7 11.0 12.0 12.4 12.5 12.8 12.8 12.8 12.3
90.0%
6,000
80.0%
29.5 29.3 28.3 28.5 28.9 29.0 29.6 29.9 31.0 5,000
70.0% 30.7
60.0% 4,000
50.0% 3,000
40.0% 33.4 33.3 33.2 32.8 32.5 32.2 32.1 32.0 32.3 2,000
30.0%
1,000
20.0%
26.3 26.5 26.5 26.4 26.0 26.0 25.6 25.4 24.4 0
10.0%
0.0% -1,000
2Q12A
3Q12A
4Q12A
1Q13A
1Q10A
2Q10A
3Q10A
4Q10A
1Q11A
2Q11A
3Q11A
4Q11A
1Q12A
2Q13A
3Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
1Q12A
2Q13A
3Q10A
4Q10A
1Q11A
2Q11A
3Q11A
4Q11A
2Q12A
3Q12A
4Q12A
1Q13A
3Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
VOD EE O2 Hutch VOD EE O2 Hutch
Numbers for EE include BT mobile subs starting Q1/16. Source: Company reports, RBC Capital Markets estimates
October 20, 2016 23

Exhibit 38: Service revenue analysis

Reported service revenue growth (%) Underlying service revenue growth (%)
8.0 12.0
6.0 10.0
4.0 8.0
2.0 6.0
0.0 4.0
-2.0 2.0
-4.0 0.0
-6.0 -2.0
-8.0 -4.0
-10.0 -6.0
2Q10A
2Q14A
1Q15A
1Q10A
3Q10A
4Q10A
1Q11A
2Q11A
3Q11A
4Q11A
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
2Q13A
3Q13A
4Q13A
1Q14A
3Q14A
4Q14A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
2Q10A
3Q12A
2Q14A
1Q10A
3Q10A
4Q10A
1Q11A
2Q11A
3Q11A
4Q11A
1Q12A
2Q12A
4Q12A
1Q13A
2Q13A
3Q13A
4Q13A
1Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
VOD EE O2 VOD EE O2
On a postpaid basis, O2 has seen an improved recent performance in terms of net adds,
whilst VODs share remains under pressure from EE, which is taking share. In 1Q16, O2s
Refresh campaign drove rotation from prepaid to postpaid, with O2 reporting +835k net
adds in postpaid, offset by -921k in prepaid.
Exhibit 39: UK postpaid net adds by operator (000s)

1,200
1,000
800
600
400
200
0
1Q11A
2Q11A
3Q11A
4Q11A
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
2Q13A
3Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
-200
Vodafone EE O2 Hutch
Source: Company websites and RBC Capital Markets estimates
October 20, 2016 24

UK Fixed Telephony BT and Sky sharing broadband growth

The UK fixed line market is seeing price inflation, with all four large operators (BT, Sky, TALK,
and VMED) raising pricing levels multiple times in 2014 and in 2015. From a market share
perspective, BT and Sky continue to gain share in broadband, with VMED and TALK seeing
little subscriber growth. The promotional environment was again relatively tough in calendar
2Q, but price increases from all operators (either implemented or announced) provided a
good underlying backdrop. BT continues to see the benefit of increasing fibre penetration.
Exhibit 40: BT ABC revenues, fixed line, and implied ARPL growth (%)
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
3Q13A
3Q15A
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
2Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
4Q15A
1Q16A
ABC rev growth Fixed line growth Implied ARPL growth
Exhibit 41: Incumbent fixed line analysis UK

Incumbent line loss, (000s) Incumbent fixed line market share, %
0 48.0
-50 46.0
-100 44.0
-150 42.0
-200 40.0
-250 38.0
-300 36.0
-350 34.0
4Q13A
1Q15A
2Q16A
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
2Q13A
3Q13A
1Q14A
2Q14A
3Q14A
4Q14A
2Q15A
3Q15A
4Q15A
1Q16A
4Q13A
1Q15A
2Q16A
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
2Q13A
3Q13A
1Q14A
2Q14A
3Q14A
4Q14A
2Q15A
3Q15A
4Q15A
1Q16A
Source: Company reports, RBC Capital Markets estimates. Incumbent fixed line market share improved for BT with the acquisition of EEs lines
October 20, 2016 25

Exhibit 42: UK Broadband market analysis

Share of broadband net adds, % Broadband subscriber market shares, %
100.0% 100.0%
90.0% 19.9 19.8 19.8 19.5 19.3 19.1 19.2
80.0%
80.0%
60.0% 70.0%
19.6 22.1 22.4 22.6 23.3 23.6
60.0% 17.7 18.4
40.0%
50.0%
19.8 19.4 18.7 18.4 18.3 18.0 17.3 16.4
20.0% 40.0%
3.3 3.5 3.8 -
30.0% 3.5 3.5 3.2 3.2
0.0%
20.0%
29.8 30.0 30.4 30.7 31.8 32.2 32.5 36.6
-20.0% 10.0%
0.0%
-40.0%
1Q16A
2Q16A
2Q11A
3Q11A
4Q11A
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
2Q13A
3Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q14A
1Q15A
1Q12A
2Q12A
3Q12A
4Q12A
1Q13A
2Q13A
3Q13A
4Q13A
2Q14A
3Q14A
4Q14A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
BT Orange TALK Sky (UK only) O2 Other ISPs VMED BT Orange TALK Sky (UK only) O2 Other ISPs VMED
UK Telecoms Per Pop Analysis

Exhibit 43: UK service revenue/pop/month EBITDA and opex split (, 2009A2025E)
70.0
60.0
50.0
40.0
39.4 39.8 38.9 39.2 40.4
36.0 35.5 36.3 36.0 35.5 34.7 35.3 36.0 36.8 37.5 37.6 37.9
30.0
20.0
10.0
15.0 15.5 13.7 13.6 13.7 15.0 15.6 15.5 14.8 15.4 15.5 16.0 16.6 18.1 18.0 18.3 17.7
0.0
2023E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2024E
2025E
2009A
2010A
2011A
2012A
2013A
2014A
2015A
EBITDA revenue per pop per month Opex revenue per pop per month
October 20, 2016 26

Exhibit 44: Pay-TV market analysis

Pay-TV subscribers Pay-TV market share, %
20,000.0 100.0
18,000.0 90.0
16,000.0 80.0
14,000.0 70.0
12,000.0 60.0
10,000.0 50.0
8,000.0 40.0
6,000.0 30.0
4,000.0 20.0
2,000.0 10.0
- -
1Q11
1Q12
4Q13
2Q11
3Q11
4Q11
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
1Q11
4Q12
3Q14
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
Sky (DTH & Now TV) VMED TALK BT Sky (DTH & Now TV) VMED TALK BT
Source: Company reports, RBC Capital Markets
Exhibit 45: Pay-TV growth and penetration

Pay-TV subscriber growth Pay-TV penetration, %
8.0 Growth (%) 70.0
7.0 60.0
6.0
50.0
5.0
40.0
4.0
30.0
3.0
20.0
2.0
1.0 10.0
- -
1Q13
1Q14
1Q15
1Q16
1Q12
2Q12
3Q12
4Q12
2Q13
3Q13
4Q13
2Q14
3Q14
4Q14
2Q15
3Q15
4Q15
2Q16
1Q11
1Q15
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
3Q15
1Q16
Source: Company reports, RBC Capital Markets
October 20, 2016 27

Exhibit 46: Pay-TV net adds

450.0
400.0
350.0
300.0
250.0
200.0
150.0
100.0
50.0
-
-50.0
-100.0
3Q13
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
Sky (DTH & Now TV) VMED TALK BT
Size matters
Exhibit 47: Total revenue and EBITDA by company (2015A, DKKm)
Revenue, GBPm EBITDA, GBPm
25,000
Talk
VOD Hutch Talk
20,000
15,000
O2
10,000
BT/EE VMED SKY
5,000
0
VOD
O2
BT/EE
Talk Talk
SKY
Hutch
VMED
0 2,000 4,000 6,000 8,000 10,000
Source: Company reports and RBC Capital Markets
October 20, 2016 28

RBC Comps
Exhibit 48: RBC Comps
P/E EV/EBITDA EV/OpFCF Equity FCF Yield Dividend Yield Net debt/EBITDA
Company Share price 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E
Cable 38.9 40.1 17.0 8.0 7.4 6.8 17.1 13.6 12.8 4.8 8.4 8.6 0.0 0.0 0.0 4.2 3.5 3.4
Altice 16.8 NM 97.4 22.0 7.9 7.1 6.4 15.2 12.3 10.5 8.4 9.0 13.9 0.0 0.0 0.0 5.4 4.8 4.3
Com Hem 83.6 38.9 25.6 19.0 9.3 8.2 8.0 14.5 13.6 13.1 7.8 8.8 10.0 2.1 4.8 5.0 4.1 3.5 3.4
Liberty Global 31.5 NM NM NM 8.0 8.6 8.1 17.1 19.0 16.8 2.1 4.3 6.0 0.0 0.0 0.0 4.5 4.9 4.6
LILAC 27.8 NM 23.5 14.7 10.9 7.4 6.8 21.3 14.1 12.8 0.1 4.1 5.2 0.0 0.0 0.0 5.0 3.3 3.0
NOS 5.8 26.4 19.4 15.0 6.5 5.9 5.5 21.0 11.6 10.0 4.0 8.4 8.6 4.0 6.0 8.5 1.7 1.4 1.2
SFR 24.1 100.9 73.9 9.7 5.9 5.4 4.8 13.1 10.8 8.7 6.5 10.7 11.1 0.0 0.0 0.0 3.7 3.3 2.9
Telenet 47.2 NM 54.6 24.7 9.1 8.4 7.7 18.7 16.7 13.3 4.8 4.5 8.4 6.4 8.5 10.6 4.2 3.9 3.5
EM 15.5 13.2 12.7 5.3 5.1 4.8 11.0 11.3 9.5 2.9 7.6 8.9 3.9 4.2 6.4 1.9 1.6 1.3
America Movil 11.6 13.6 10.9 11.1 5.1 4.8 4.5 10.8 10.0 9.1 16.4 10.7 12.1 2.7 2.8 3.2 2.1 1.9 1.7
Millicom 427.9 26.8 25.8 19.6 5.3 5.1 4.8 11.0 10.7 9.3 0.4 6.5 8.2 5.2 5.2 5.2 2.0 1.9 1.7
Oi 0.9 NM NM NM 5.8 6.7 7.0 9.3 11.5 11.2 NM NM NM NM NM NM 6.2 7.1 7.3
OTE 7.8 27.3 17.5 17.3 4.2 3.8 3.5 9.5 8.6 6.1 15.3 9.4 13.6 1.9 3.2 8.9 0.3 0.1 -0.3
TIM Brasil 13.2 46.2 50.4 32.8 4.8 4.7 4.3 44.6 25.7 14.0 NM NM 0.6 0.8 0.7 1.2 0.9 1.0 0.9
Turk Telekom (cons's) 5.6 8.7 8.1 7.7 5.4 5.3 5.1 12.9 11.3 9.6 4.5 7.6 9.6 10.5 11.3 11.8 1.9 2.0 1.9
Turkcell (cons's) 9.8 8.6 8.2 7.5 5.3 5.2 4.8 13.8 11.7 9.5 2.2 4.4 7.1 7.0 8.0 9.4 1.0 1.3 1.2
Vimpelcom 3.2 9.5 10.6 8.3 4.3 4.0 3.7 7.8 7.3 6.5 0.9 17.9 18.3 1.2 1.2 1.2 1.9 1.6 1.3
Vivo 13.6 17.3 15.5 14.4 5.5 5.2 4.8 15.4 12.2 10.5 2.9 5.2 6.8 6.5 7.0 7.5 0.3 0.3 0.3
Towers and Satellites

Cellnex 15.6 46.7 31.0 25.5 17.0 14.2 12.7 21.9 18.5 16.2 5.5 6.1 6.1 0.5 0.8 1.1 3.7 2.6 1.9
Inwit 4.2 26.3 22.9 20.7 16.7 14.7 13.1 20.1 17.4 13.6 1.6 2.8 4.8 3.0 3.4 3.9 0.6 0.6 0.4
Inmarsat 703.0 17.1 19.4 14.9 9.0 9.1 8.0 30.2 38.3 22.6 3.3 1.6 3.2 6.2 6.5 6.9 2.9 3.0 2.8
Intelsat 2.7 NM 10.3 1.4 9.1 9.4 9.4 16.9 16.5 13.6 NM NM 81.8 0.0 0.0 0.0 8.9 9.2 9.2
Eutelsat 17.5 16.5 15.7 14.2 7.1 7.1 7.0 11.7 11.4 11.2 7.2 8.3 8.9 6.3 6.3 6.5 3.5 3.5 3.4
SES 20.4 9.7 19.7 15.7 9.2 8.6 8.2 20.9 16.5 14.1 8.3 5.3 6.4 7.0 7.7 8.5 3.0 2.9 2.8
Source: Company reports, RBC Capital Markets estimates, Datastream. Prices as of 18 October 2016 (4.30pm GMT)
October 20, 2016 29

RBC Comps
Exhibit 49: RBC Comps
P/E EV/EBITDA EV/OpFCF Equity FCF Yield Dividend Yield Net debt/EBITDA
Company Share price 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E
EURO & EM MEDIAN 18.6 17.5 14.6 6.5 6.4 6.0 14.2 12.5 11.1 4.8 6.7 7.7 4.1 4.8 5.1 2.0 2.0 1.9
Incumbents 15.1 15.0 14.3 6.6 6.6 6.2 14.2 13.5 11.9 6.1 5.8 6.4 4.3 4.7 5.0 2.1 2.1 2.0
BT 384.7 14.6 12.2 10.3 6.7 6.3 6.0 10.9 10.4 9.5 7.7 7.8 9.1 4.0 4.4 4.8 1.1 1.0 0.8
DT 14.6 12.3 16.0 13.5 7.1 6.4 6.1 13.0 13.8 12.2 6.3 7.4 8.2 4.1 4.5 4.8 2.6 2.3 2.1
Elisa 32.3 20.7 19.5 18.6 11.1 10.4 10.0 17.3 16.4 15.4 3.9 4.9 5.6 4.3 4.6 5.1 1.8 1.6 1.5
KPN 2.8 28.0 24.2 18.6 7.0 6.7 6.4 14.2 13.4 12.6 9.6 7.0 8.5 3.5 6.3 7.0 2.7 2.5 2.3
Orange 14.1 8.3 15.3 14.1 5.5 5.3 5.2 12.1 11.7 10.9 NM 4.8 5.9 4.2 4.5 4.7 2.0 1.9 1.9
Proximus 26.1 16.1 14.7 14.4 5.9 5.8 5.7 13.3 12.4 11.7 6.1 5.5 6.0 5.8 6.1 6.2 1.1 1.1 1.1
Swisscom 454.0 15.0 14.2 14.4 8.1 8.2 8.1 18.8 18.5 17.6 4.1 4.2 4.6 4.8 4.8 4.8 1.9 2.0 2.0
TDC 38.1 15.3 18.7 15.9 6.5 6.2 5.9 12.9 11.7 11.0 6.3 7.5 8.4 0.0 2.6 3.9 2.9 2.6 2.4
Telecom Italia 0.7 13.5 23.2 21.0 5.5 5.2 5.0 15.8 14.2 13.0 2.0 4.5 5.7 0.0 0.0 0.0 3.4 3.2 3.1
Telefonica 8.9 15.8 12.6 11.1 7.2 6.7 6.4 14.2 12.7 11.6 4.2 5.7 6.6 8.4 8.4 8.4 3.1 2.8 2.7
Telekom Austria 5.1 12.7 13.4 10.8 5.0 4.7 4.4 11.4 11.1 10.2 9.7 8.3 8.8 1.0 1.0 1.0 1.8 1.6 1.4
Telenor 134.4 19.8 13.3 12.5 6.5 6.7 6.6 16.7 53.9 10.4 3.6 3.0 3.9 5.8 6.0 6.1 1.3 1.4 1.5
Telia 38.7 13.2 11.9 11.9 6.6 7.4 7.3 17.1 14.4 13.8 4.3 5.8 6.1 7.7 5.2 5.2 2.3 2.9 2.8
Vodafone 226.2 48.3 38.2 28.7 6.8 6.7 6.4 15.0 13.6 12.0 6.7 7.5 9.6 5.9 5.9 6.0 2.5 2.5 2.4
Altnets 26.3 22.9 19.0 7.6 7.1 6.7 13.1 14.3 11.1 6.8 6.4 7.6 4.9 5.2 5.6 1.8 1.6 1.4
Bouygues 30.1 25.3 14.2 13.0 5.1 4.7 4.5 16.1 11.9 10.4 -1.1 5.3 5.9 5.3 5.3 5.3 1.1 1.0 1.0
SKY 842.5 13.1 14.5 12.3 8.8 8.9 7.8 14.1 15.9 12.9 7.2 8.2 7.7 4.0 4.0 4.3 2.4 2.2 1.8
Sunrise 68.0 48.5 33.5 26.4 7.8 7.4 7.0 11.9 11.6 10.9 8.3 7.8 9.9 4.4 5.2 5.9 2.7 2.5 2.2
Iliad 181.4 27.3 26.1 26.8 7.5 6.9 6.6 35.5 31.5 44.4 0.2 1.0 0.2 0.2 0.2 0.2 1.0 1.0 1.1
Orange Belgium 21.0 21.6 22.9 20.6 5.6 5.2 4.9 11.1 12.7 11.3 6.4 7.1 7.6 3.2 3.1 3.4 1.2 0.9 0.6
TalkTalk 211.0 18.6 12.7 9.5 9.2 7.7 6.8 12.2 17.8 10.8 9.5 5.7 9.5 7.5 8.4 8.0 2.3 2.1 1.8
Telefonica DE 3.6 225.4 NM 122.2 4.7 5.1 5.0 9.1 10.3 10.0 8.6 7.3 7.6 7.0 9.4 11.2 0.3 0.4 0.4
Tele2 77.3 71.9 29.2 17.3 10.5 9.3 8.3 61.9 28.3 18.4 -0.1 2.1 5.5 7.6 8.4 8.8 2.4 2.4 2.3
Source: Company reports, RBC Capital Markets estimates, Datastream. Prices as of 18 October 2016 (4.30pm GMT)
October 20, 2016 30

Companies mentioned
Bouygues SA (NXT PA: EN FP; 29.91; Underperform)
BT Group PLC (LSE: BT/A LN; GBp380.00; Outperform)
Deutsche Telekom AG (XETRA: DTE GR; 14.42; Outperform)
Iliad SA (NXT PA: ILD FP; 183.95; Outperform)
Koninklijke KPN NV (NXT AM: KPN NA; 2.82; Outperform)
Liberty Global PLC (NASDAQ: LBTYA; $31.56; Outperform)
Nos SGPS SA (LIS: NOS PL; 7.90; Outperform)
Orange SA (NXT PA: ORA FP; 14.02; Outperform)
SFR Group SA (NXT PA: SFR FP; 24.05; Top Pick)
Sky plc (LSE: SKY LN; GBp856.00; Outperform)
TalkTalk Telecom Group PLC (LSE: TALK LN; GBp207.60; Sector Perform)
Telefonica, S.A. (SIBE: TEF SM; 8.97; Underperform)
Telefonica Deutschland Holding AG (XETRA: O2D GR; 3.60; Outperform)
Vodafone Group PLC (LSE: VOD LN; GBp223.95; Outperform)
Required disclosures
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Investment Banking
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October 20, 2016 31
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October 20, 2016 33

RBCCapitalMarkets UKTelecomConvergence Oct 19 2016

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RBCCapitalMarkets UKTelecomConvergence Oct 19 2016

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RBC Europe Limited

October 20, 2016

Exhibit 1: Exposure to UK telecoms and UK mobile (%)

Operator Price Target Currency UK, % of revenues UK mobile, % of revenues EV % UK

October 20, 2016 2

Strong market presence

Exhibit 2: O2UK remains popular with its customers

Mobile share in broadband homes

October 20, 2016 3

Exhibit 3: O2UK and Vodafone are overweight in Sky and BT homes

Mobile per broadband base

Exhibit 4: UK mobile customers by broadband provider

October 20, 2016 4

How significant could convergence be?

Exhibit 5: Convergence across Europe

Mobile SIM per broadband Converged as % of broadband Converged as % of fixed

Wealth transfer is clear Mapping customers and flexing risks

Exhibit 6: Mapping Mobile SIMs to UK broadband homes (m)

O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile Total

Exhibit 7: Ultimate dispersion of mobile SIMs in a fully converged UK (m)

O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile Total

Exhibit 8: Impact on current operators (m)

O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile

Exhibit 9: Redistribution of ARPU and wealth (m)

O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile Total

October 20, 2016 6

BT should push multi SIM, or hope Sky cant add mobile

SIMs per converged home

m O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile Total

m O2 EE VOD Three TalkTalk Mobile VMOB Sky Mobile Total

October 20, 2016 7

Exhibit 13: O2 outperforms in the 2140 categories; Vodafone 40+

Total 20 & 21-30 31-40 40+

October 20, 2016 8

Lessons from Telefonica Deutschland choose partners wisely

Exhibit 14: Telefonica Deutschland Partner revenues

Source: Company reports, RBC Capital Markets estimates

Source: Company reports, RBC Capital Markets estimates

October 20, 2016 9

Source: Company reports, RBC Capital Markets estimates

October 20, 2016 10

UK bundling limited to date

Exhibit 17: Virgin Media Relatively limited fixed-mobile bundling to date

Broadband subscribers Mobile subscribers Mobile per Broadband

October 20, 2016 11

Exhibit 18: TalkTalk Mobile light

October 20, 2016 12

Exhibit 19: Spain Jazztel 201015

Mobile subscribers Broadband subscribers Mobile per Broadband

Source: Company reports, RBC Capital Markets estimates

October 20, 2016 13

Exhibit 20: Telefonica Fusion has been a success

Source: Company reports, RBC Capital Markets estimates

Exhibit 21: Telefonica Significant customer and revenue loss

Source: Company reports, RBC Capital Markets estimates

October 20, 2016 14

Broadband Mobile Mobile per Broadband

Source: Company reports, RBC Capital Markets estimates

Exhibit 23: Iliad Mobile has been a raging success

Source: Company reports, RBC Capital Markets estimates

October 20, 2016 15

Mobile Broadband Broadband non-converged Broadband converged "Idea"

Source: Company reports, RBC Capital Markets estimates

Exhibit 25: Bouygues Launch of Iliad has been punishing