Generating profitable growth in European markets.

Highlights on Romania

Bucharest, June 2010

Iulian Circiumaru

Agenda
A.T. Kearney at a Glance Local market positioning within the European context Conclusions and implications for the Romanian market

A.T. Kearney xx/mm.yyyy/00000

A.T. Kearney is present in Romania since 2003

We combine global insights with local expertise, wherever our clients operate:
Europe
Bucharest Copenhagen Dsseldorf Frankfurt Helsinki Kiev Amsterdam Berlin Brussels Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich

Middle East Americas

Atlanta Boston Chicago Dallas Detroit Mexico City New York San Francisco So Paulo Toronto Washington, DC Abu Dhabi Dubai Manama Riyadh

Asia Pacific
Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Tokyo

84 years of experience, founded 1926 53 offices in 35 countries More than 2,700 colleagues Growing 1 billion USD revenues company

A.T. Kearney

Our expertise spans a wide range of industries and services

Aerospace & Defense

Automotive

Communications & High Tech

Consumer Products & Retail

Energy & Process Industries

Services

Innovation & Complexity Mgt Mergers & Acquisitions

Organization & Transformation

Strategy

Supply Chain Management Sustainability

Operations

Procurement & Analytics

Strategic IT

Financial Services

Pharma & Healthcare

Public Sector

Transportation

Utilities

A.T. Kearney

A.T. Kearney advises leading companies in the Communications & High Tech Industry across all sectors
Global References
Mobile Operator APAC Fixed Operator

Selection
High-Tech and ICT Supplier

EMEA

North America

South America

Eastern Europe
Source: A.T. Kearney
A.T. Kearney xx/mm.yyyy/00000

Agenda
A.T. Kearney at a Glance Local market positioning within the European context Conclusions and implications for the Romanian market

A.T. Kearney xx/mm.yyyy/00000

The network coverage in 2G is similar in all areas while 3G is less developed in Eastern Europe
Mobile network coverage in EEA1 (2009,%)
EEA
98 100 77
Romania, 43%

Western Europe
98 100 86 99

Eastern Europe
100

42

47 39 10

2G
Geographic

3G
Population

2G

3G

2G

3G

Romania is slightly above the average of its EE peer country group

(1) EEA includes Iceland, Liechtenstein, Norway and EU27 states. Source: European Mobile Industry Observatory 2009, A.T. Kearney.

A.T. Kearney xx/mm.yyyy/00000

Different consumer preferences and operators pricing lead to significant variance in between penetration rates of active SIMs across EEA
Penetration rate of active SIMs in EEA countries (2009)
183% 161% 146% 145% 155% 150% Weighted average 09: 124% 148% 141% 145% 130% 129% 128% 124% 133% Weighted average 07: 117% 129% 115% 126% 123% 122% 117% 117% 117% 116% 111% 102% 101% 102% 101% 98% 93% 85%

GR CY IT

PT LT LU FI BG LI RO AT DE CZ SE DK UK IE NL EE PL ES HU CH BE SK NO LV IS

SI MT FR

Romania has a high penetration of active SIMs indicating an important level of market saturation on the mobile market, which raises question marks on the business models sustainability of the incumbents
Source: European Mobile Industry Observatory 2009, A.T. Kearney.
A.T. Kearney xx/mm.yyyy/00000

Variations between business models of mobile operators and consumer preferences lead to a different ratios of prepaid vs. postpaid services
Percentage of pre- and post-paid SIMs in EEA countries (2009)
9% 30% 30% 37% 38% 39% 40% 40% 47% 49% 49% 49% 50%

54% 54% 55% 56% 56% 58% 60%

63% 65% 65% 67% 69%

70% 73% 75% 75% 76%

85%

91% 70% 70% 63% 62% 61% 60% 60% 53% 51% 51% 51% 50%

46% 46% 45% 44% 44% 42% 40%

37% 35% 35% 33% 31%

30% 27% 25% 25% 24%

15%

FI

FR NO SI DK AT SE ES CH NL BG CZ SK PL EE BE LV DE HU UK LT CY Prepaid Post-paid

LI

IE

LU RO PT

IS GR MT IT

Average prepaid SIMs 09: 56%

Romania has a relatively low percentage of postpaid users also due to aggressive offers for prepaid services
Source: European Mobile Industry Observatory 2009, A.T. Kearney.
A.T. Kearney xx/mm.yyyy/00000

The levels of penetration, tariffs variances and consumer preferences lead to high national discrepancies in fix/mobile split
Minutes of usage by mobile and fixed line per capita in EEA
383 383 360 332 331 322 326 314 313 57% 44% 65% 55% 50% 26% 47% 70% 20% 302 301 297 289 280 274 267 265 43% 48% 40% 43%

Weighted averages: Total: 260 Fixed line: 134 Mobile: 126

251 38% 238 196 195 68% 31% 44% 162 35% 118 117 114 101 23% 74 42% 38% 31% 25% 31% 23% 54% 58% 62% 69% 75% 69% 46% 77% 77% LI 138 137 131

260

50%

76%

56% 56%

43%

56% 35%

74% 45% 50% 53%

80% 57% 30% 52% 60% 57% 50% 44% 44% 62% 32% 69%

24%

56% 65%

49 18% 82%

NO SE GR CH DK FI Fixed line

IT

LV LU AT DE IE

ES FR NL UK IS BE CY PT SI HU EE BG LT RO CZ PL

SK MT

Mobile

In Romania, as in other CEE states, the mobile calls dominate on a market significantly below the EEA level in terms of usage per capita
Source: European Mobile Industry Observatory 2009, A.T. Kearney.
A.T. Kearney xx/mm.yyyy/00000

10

The average coverage with 3G services is more than double the percentage of population owning 3G enabled phones
3G Population coverage in the EEA (2009)
Weighted average 09 77% 43% 44% 54% 60% 46% 49% 50% 50% 53% 70% 70% 70% 85% 75% 80% 81% 81% 83% 88% 90% 90% 91% 92% 94% 97% 97% 98% 98% 98%

34%

HU RO PL

LT CY SK LV BG

IS

CZ

FI

LI

GR EE BE DE DK NO FR ES NL

IT

PT CH SL AT UK LU SE

IE

Percentage of EEA population with 3G enabled phones (2009)

Weighted average 09 33% 16% 17% 17% 18% 18% 6% 6% 6% 9% LV EE IS LT BE CZ MT HU SK PL BG FR NO RO DE SI CH FI NL AT DK UK LI SE ES PT IE CY IT 20% 21% 24% 31% 25% 26% 27% 28% 32% 33% 34% 36%

40% 41% 41% 41% 42%

48%

50% 53%

58% 60%

GR LU

Romania shows gaps to close comparing to the averages, especially on the 3G network coverage
Source: European Mobile Industry Observatory 2009, A.T. Kearney.
A.T. Kearney xx/mm.yyyy/00000

11

Mobile broadband penetration is within the beginning stage and varies significantly across Europe
Mobile broadband penetration in Europe
(% of population, Q2 2009)
13,8% 12,6% 10,8% 8,3% 6,3% 4,9% 4,7% 4,7% 4,5% 4,4% 3,2% 2,8% 3,2% 3,2% 1,6% 2,5% 2,1% 1,9% 1,4% 1,8% 1,6% 1,5% 1,3%

1,0%

0,8% 0,5%

AT SE PT

IE DK UK IT

PL SK LT CZ ES DE HU SI RO FR MT GR BE NL EE LU BG LV CY

The growth trend is expected to continue with forecasts of 20% penetration in next 2-3 years, fueled by marketing push and growth of compliant phones
Source: Broadband Access in EU: Stuation at 1st July 2009, European Comission.
A.T. Kearney xx/mm.yyyy/00000

12

In addition, broadband markets must see a realignment of value and cost

Consumer Internet Traffic & Revenue by Type, 2008
Gaming1)/Gambling Communications Other Online Services2 IPTV VoD3)
1%

2% 22%

7% 1% 7% 14%

Gaming/Gambling Communications General/Vertical Content Sites Search

File Sharing & VoD: Generate 73% of all consumer traffic... ...but only 8% of consumer revenues

3% 18%

60%

File-sharing/ Digital Downloads

e-Retail e-Travel e-Brokerage

54%

2% 6% 2%

IPTV VoD3) Digital Music/Video/Book Sales

Traffic

Revenue

(1) Includes Video and Casual Gaming; (2) Includes all General/Vertical Content, Search and e-Commerce Online Services; (3) Includes Adult Source: Cisco, Gartner, IAB, IDC, eMarketer, Business Insights, JP Morgan, Natixis, PwC, A.T. Kearney analysis

A.T. Kearney

13

On the European level, the strong increase in mobile usage did not balance the drop of tariffs
Minutes of use on mobile
(billion of minutes per year)
16,6%

225
2000

296

342

404

470

530

634

704

767

2001

2002

2003

2004

2005

2006

2007

2008

Evolution of ARPU in Europe

(EUR/user)
CAGR 00-09: -4,7%
34 30 30 30 28 28 26 25 23 22

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: European Mobile Industry Observatory 2009, A.T. Kearney.

A.T. Kearney xx/mm.yyyy/00000

14

In European telecoms, fierce price declines have outpaced efforts to cut costs and boost volumes
European Wireless Key Economic Trends
Voice Revenue per Minute Indexed to 2005 = 100
100 87 71 63 52
CAGR -15%

OPEX per Minute Indexed to 2005 = 100

100 80
CAGR -13%

70

61

57

2005

2006

2007

2008

2009

2005

2006

2007

2008

2009

Data Revenue per GB Indexed to 2005 = 100

100
CAGR -49%

OPEX per Air Traffic (voice & data) Indexed to 2005 = 100
100 78 62 48 36
CAGR -23%

57 26 12
2005 2006 2007 2008

7
2009 2005 2006 2007 2008 2009
A.T. Kearney

Source: Global Cost Benchmark, A.T. Kearney analysis

15

To protect the margins within the context of decreasing ARPU the mobile operators resorted to OPEX reduction
Highlights on cost reduction focus
Cost reduction by function

6%

-6%

-6% -10% -14% -18%

Sales

IT

Customer Management

Network

Suport& overhead

Marketing & Product Development

Cost reduction by function

Are business models sustainable?

Source: A.T. Kearney- European Cost Benchmarking for Mobile Operators.

A.T. Kearney xx/mm.yyyy/00000

16

Users of telecommunication services are among the most likely customers to change suppliers, thus
Percentage of EU27 consumers that changed supplier in the last two years
(% of consumers, 2008)
22% 18% 19% 19%

11% 7% 8%

Gas

Electricity

Banking

Fixed Telephone

Insurance

Mobile

Internet Provider

are the cost reduction initiatives carefully aligned with the market challenges?
Source: Consumers view on switching service providers -EUROBAROMETER of January 2009.
A.T. Kearney xx/mm.yyyy/00000

17

European Telecom demand has shown different exposure to the crisis

European Telecom demand: key trends Mobile
ARPUs impacted where/when crisis hits strongly

Fixed
Voice revenues decline not clearly accelerated by crisis

Usage elasticity to voice price is dropping, roaming reducing

Fixed broadband lines growth more impacted by saturation than crisis

Data services appear resilient to the crisis

Handsets replacement cycle is slowing

Increase in F-M substitution

Internet & Data revenues growth still steady

Market partially impacted so far, but deeper hit expected as crisis continues

Market decrease will likely be accelerated as economic downturn will exacerbate structural factors

More impacted by economic downturn

A.T. Kearney

18

External growth will most probably determine concentration in Europe and a further expansion to emerging markets
Consolidation in European Telco Sector Expansion in emerging markets

Few champions surviving at national level External growth in emerging markets

F-M Convergence

Fixed and mobile sectors converging

Fixed Mobile

Consolidation & External Growth

Large multinational operators expanding

A.T. Kearney

19

In summary, several consolidation & external growth drivers fostered by macroeconomic downturn will most probably reshape the European Telecomunication industry
European Telecommunication market structure Today
Mobile
National integrated Others

Fixed 14%

Consolidation drivers

End game
Mobile
National integrated Others

10%

National market repairing

Fixed 25% 10%

Consolidate locally to achieve scale

15%

10%

32% 36%

F-M Convergence

Mobile champions acquiring Fixed Altnets Merge among Fixed and Mobile Altnets
Multinational Integrated

75%

Multinational Integrated(1)

58%

50%

Multinational Strength

65%

Acquire intl market share Sell & Acquire to rationalize portfolio

# of Groups(2)

42

< 30

Notes: Source:

(1) F-M integrated at country level (2) ~ 95% of total market Company Reports, Merrill Lynch, A.T. Kearney analysis
A.T. Kearney

20

Multinational groups will enhance market power in European Telecomunication markets leveraging their strong financial position
Drivers for European multinational expansion Strong financial position to enable growth Increase in equity and in L/T financial leverage may bring ~60 bn for acquisitions Multinational dimension in mature markets rewarded by investors: -15% vs. -26% avg. European market performance (Jun-08 to Mar-09) Some cross-country synergies to be leveraged Brand equity Product development Group functions (although execution)
Other operators

Expected market evolution Mobile

13% ~5% Limited 47%

Fixed

End game scenario

~15%

Today
Multinational groups 87%

53%

Fixed Mobile multinational groups may enlarge market power in particular in Fixed sector

The direction of multinational expansion shall take into consideration that size in local markets drives cost position hence margins
Source: Company Reports, Merrill Lynch, A.T. Kearney analysis
A.T. Kearney

21

Agenda
A.T. Kearney at a Glance Local market positioning within the European context Conclusions and implications for the Romanian market

A.T. Kearney xx/mm.yyyy/00000

22

The Romanian market has good aspects, but also less good ones
Overview of the key outcomes for the Romanian market
Market potential
Despite the high penetration rate, the local market still demonstrates a good potential to grow on the medium and long term. However, in order to achieve sustainable growth, local market players have to review, rethink and reinvent their business models. Realignment of value and cost has to be done based on strong fundamental assumptions, not on an ad-hoc basis. Often, restructuring of business models result in realignments of offering portfolio, but a reshuffled offer does not imply a realignment of business models!
Consolidation is highly probable on the current fragmented market. The consolidation wave is conditioned to increasing needs to finance network CAPEX which cannot be supported by small players, low valuations which make small players easy targets, severe pressure on margins which force low performing players in M&As. Consolidation could be a means of reducing pressure on margins on the overall market level and enable the market to afford next waves of technology (scale economies effects).

Need to review the business models

Consolidation most likely

Further drop in prices?

Additional downward adjustments of prices depend, apart from the regulatory environment, mainly on pace of consolidation trend and on the sustainability of the local business models.

Customer trends

Slowdown of handsets replacement cycles Customer retention function gain more and more importance (costs with customer management have to be rationalized, not merely reduced!)

A.T. Kearney

23

Thank you!

CONTACT DETAILS: A.T. Kearney Management Consulting SRL 39-41 Academiei Street, 6th floor, 010013 , District 1, Bucharest Romania Iulian Circiumaru, Associate +40 (21) 304 02 20 (Office) +40 (21) 304 02 38 (Fax) iulian.circiumaru@atkearney.com
A.T. Kearney xx/mm.yyyy/00000

24

Back up pages

A.T. Kearney xx/mm.yyyy/00000

25

Some indicators warn on critical impact that crisis may have, particularly on mobile revenues
Mobile elasticity of MoU to RPM(1)
- #, 07 08 Corr.= 87%

Elasticity of MOU to RPM

Elasticity of MOU to RPM GDP growth (%)

GDP growth (%)

RPM ( cents /min) 14,5 Voice ARPU () 21,3

14,2 21,5

14,0 21,4

13,2 20,3

12,5 19,3

12,4 19,5

12,3 19,4

11,8 18,7

Strong correlation between GDP growth and usage elasticity on price warns on critical impact that tariff reductions would have during crisis
Notes: Source: (1) MOU = Minutes of Usage; RPM = Revenues per Minute; Elasticity calculated as delta MOU % / - delta RPM %. MTRs reduction over 2008 does not substantially affect elasticity trends Companies reports; Merrill Lynch; A.T. Kearney analysis

A.T. Kearney xx/mm.yyyy/00000

26

In a W-shaped scenario, revenues and margins would be tangibly hit as market trends would worsen
MOBILE European(1) Mobile Service Revenues
- YoY % growth, 07 13 1,7% 1,0% 2,4% 0,6% 0,2% Revenue YoY growth GDP growth

FIXED European(1) Fixed Line Revenues

- YoY % growth, 07 13 -

GDP growth Revenue YoY growth

-2,8% -4,2%

( bn) Revenues EBITDA

140 52

142 53

136 49

136 50

133 47

133 47

135 49

( bn) Revenues 158 EBITDA

158 49

153 46

149 44

144 42

141 40

137 38

49

Revenue YoY growth (%, W scenario)

GDP growth (%, W scenario)

Revenue YoY growth (%, W scenario)

GDP growth (%, W scenario)

(1) Countries include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Sweden, Spain, Switzerland, UK Source: IMF; IDC; A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000

Notes:

27

During 2000-2008 period the proportion of mobile communication increased to almost half and the tendency is likely to continue
Minutes of use on mobile and fixed lines in the EEA (billion of minutes per year)
+4%
1,190 1,274 1,321 1,352 1,392 CAGR 2000-2008 1,585 -2% 1,576

1,433

1,518

965

978

979

948

922

903

884

872

818

225
2000
19%

296
2001
23%

342
2002
26%

404
2003
30%

470
2004
34%

530
2005
37%

634
2006
42%

704

767

17%

2007
45%

2008
48% Mobile % of Total

Fixed line minutes of use Mobile minutes of use

Mobile services driven an increase in market overall with total calls increasing from 200 min per user per month in 2001 to 260 min in 2008
Source: European Mobile Industry Observatory 2009, A.T. Kearney.
A.T. Kearney xx/mm.yyyy/00000

28

1. Consolidation & external growth

Local consolidation will be a way to reduce pressure on industry margins and position sector in better shape to afford next wave of A technology innovation
Mobile
EBITDA Margin vs. Market Share
- %; 08 EBITDA %
50% 45% 40% 35% 30% 25%

National consolidation

Fixed
EBITDA Margin vs. concentration
- %; 08 EBITDA (%)
60% 50%

Few Champions

Optimal scale

Portugal
40%

Spain

1
Germany

30% 20%

1-2+
UK

1 1 Finland Austria
Sweden

Italy France

20% 15% 5%

Sub-scale
10% 15% 20% 25% 30% 35% 40% 45% 50%

10% 40%

50%

60%

70%

80%

90%

100%

Market Share # of Customers BB penetration on HH

Market share of first 2 players (%) X = # of players being consolidated (Expectation)

Consolidation in UK required to uplift sector margins Consolidation in other EU countries may drive sector margins improvement
Source: Merrill Lynch; Company Reports; A.T. Kearney analysis

Improvement in local sector EBITDA may be driven by the consolidation of 1-2 smaller players in main EU markets

A.T. Kearney xx/mm.yyyy/00000

29

1. Consolidation & external growth

F-M convergence will be reached via an acquisition game led by Mobile B Champions and a merger game among Altnets
European Telecom service market - 2008
Mobile Fixed
4% 29% 20%

Fixed and mobile sectors converging

F-M drivers of external growth & consolidation

1

Mobile Champions

Altnets(1) fixed or mobile only

Integrated Altnets(1)

Acquisition game

2
Fading out
18%

3% 17%

Incumbents fixed only

Mobile champions acquiring and consolidating sub-scale fixed Altnets, leveraging on: Strong cash-flows generated Strong brand recognition to be leveraged in fixed

18%
Integrated fixed incumbents

56% 36%

Merger game

Mobile Altnets merging with Fixed Altnets to exploit benefits of F-M integration To be sustainable, mergers should involve players with sufficient scale (Multi-mergers might be required)

Mobile champions: 1st and 2nd mobile player in more than one country (in some cases with fixed operations) Altnets(1) fixed or mobile only: Altnets with no integrated operations in country Integrated Altnets(1): Altnets with integrated operations in country Incumbent Fixed only: Fixed incumbents not integrated in country Integrated Fixed incumbents: Fixed incumbents integrated in country Notes: Source: (1) Includes multinational groups in countries in which they are not incumbents A.T. Kearney

A.T. Kearney

30