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Experience of a newcomer in mobile telecoms and broadcasting

Quirino Brindisi
Senior economist, H3G Italy
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 1

Agenda

H3G overview Mobile telecoms Mobile broadcasting Conclusions


Mobile Regulation & Competition Law Bruxelles 12/06/08

page 2

H3G, a newcomer but... a different one


 H3G is probably the most innovative mobile operator in Europe, having launched:
 The 1st mobile service in Europe based on UMTS technology (March 2003)  the 1st DVB-H broadcasting service in the world (June 2006)

 You can consider H3G as the latest infrastructure-based newcomer in an ordinary way, or the first mobile video company in Europe... ... but, most of all, H3G is a developer of new technologies & business models

Mobile Regulation & Competition Law Bruxelles 12/06/08

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Organization of the group


 H3G is controlled by Hong Kongs Hutchison Whampoa Group (HWL) through 3 Italia
3 Italia s.p.a.
100%

UMTS network

H3G s.p.a.
100%

UMTS & DVB-H services

DVB-H network

3lettronica Industriale

 H3G provides mobile telecoms and broadcasting services to the market, 3Lettronica provides digital broadcasting capacity to H3G  Italian law imposed to setup 3lettronica as a separate company, in order to avoid risk of cross-subsidies between tlc and broadcasting
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 4

Some figures
 H3G has achieved so far over 8,2 m subscribers, more than 10% of these enabled to mobile TV services via dual-mode UMTS / DVB-H hs  In Italy H3G has about 9% share on total mobile lines and 9% on revenues, while keeping the leadership on UMTS with 38% lines  H3G reached 2.1 bn turnover in 2007, and EBITDA breakeven in the 2nd half of the same year, but it is still far from profitability  H3G has achieved about 88% population coverage with both its UMTS and DVB-H networks, providing basic mobile services to 99% pop  Hutchison Whampoa has invested in H3G, up to now, almost 9bn. The single largest greenfield foreign direct investment ever in Italy
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 5

Agenda

H3G overview Mobile broadcasting Mobile telecoms Conclusions


Mobile Regulation & Competition Law Bruxelles 12/06/08

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The DVB-H start-up


 In November 2005 H3G took over a regional analogue TV operator, called M.I.T., owning a national digital TV license for DVB-T technology  According to Italian law, M.I.T. - now 3lettronica Industriale (3li) committed to cover 50% population with digital signal in 6 months time*  On May 2006, according to NRA delibera n. 266/06/CONS, 3li notified its decision to provide broadcasting services also to mobile devices  On June 2006, La3 TV launched its commercial offer, with a rich set of premium contents, including German world football championship H3G started up its commercial mobile TV offer in a record time, thanks to a favourable regulatory environment
Mobile Regulation & Competition Law Bruxelles 12/06/08
*After the Ministry converted the local TV license into a nationwide TV license.

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The DVB-H network


 3li has completed about 40 local TV sites acquisitions for basic coverage, all cleared by the Competition Commission and the NRA  Frequencies are now different throughout Italy. Operators will implement regional Single Frequency Networks (SFNs) after analogue TV switch off  In Italy analogue TV switch off is scheduled for completion by 2012  H3G has also placed, mainly on UMTS sites, a number of gap fillers to enhance coverage indoor and at ground level
Open Coverage Front Door Coverage: 30% 50% Front Door Coverage: 0% 30% Mobile Regulation & Competition Law Bruxelles 12/06/08

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The DVB-H offer


 H3G as a service provider interfaces with end customers and provides the conditional access functionality implemented for pay channels  La3 TV provides a rich bouquet of channels, some self-produced (La3 Live, La3 Sport), other replicating market leaders (RAI, Mediaset, SKY)
Free to air channel

 Basic package and premium channels are offered via:


 long term subscription (Pay-tv)  Pay-per-time (day, week, month)

Basic pay TV Package (9 channels + soccer)

Premium channels*
* Available only through a personal security code.

 H3G has developed a dynamic channel schedule to optimize capacity


Mobile Regulation & Competition Law Bruxelles 12/06/08 page 9

DVB-H open issues


 Need to maintain current coverage and offers when realizing new frequency organization plans at the national level (e.g. SFN networks)  Access to contents (both premium and free-to-air) vs. legitimate protection of copyright, in order to build attractive retail offers (from 4th June RAI available to all DVB-H terminals)  H3G has is developing new advertising models specific for mobile TV. The regulation now in place for analogue TV is not well suited  Need for acceleration at EU level on licenses awarding as well as on Content Protection and Interactive Service standards definition

Mobile Regulation & Competition Law Bruxelles 12/06/08

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Agenda

H3G overview Mobile broadcasting Mobile telecoms Conclusions


Mobile Regulation & Competition Law Bruxelles 12/06/08

page 11

Italian mobile market overview


 Italy still holds some remarkable records compared to other top European countries:
Italy Penetration/p op Top 2 ops lines* EBITDA margin
153% 74% 47.4%

Spain
112% 77% 40.3%

France
89% 82% 39.4%

German y
118% 72% 37.5%

UK
122% 50% 27.4%

* Italy has the most concentrated 4 MNOs market, whereas France and Spain have 3 MNOs ,Germany has 4 and UK 5 (Source Merrill Lynch Global wireless matrix 4Q07).

EBITDA/pop 181 162 142 92 117  Italy has also the largest UMTS market, with over 21 m subscribers, out of ()

90 m overall (i.e. 24% of total), and more than 50% of net adds  The market is very concentrated, with TIM and Vodafone accounting for 74% of customers and revenues, with shares stable from 2006
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 12

The mobile experience: the early years


 Italy is probably the most developed and profitable mobile market in Europe, but also one of the toughest for new entrants (Blu and IPSE exit)  H3G won its UMTS license in 2001 (15 MHz FDD + 5 MHz TDD) for a total 3.2 bn, including 826 m paid for 5 MHz reserved to newcomers  Regulatory asymmetries for newcomers included in the auction were very attractive:
 National roaming for voice, SMS and GPRS for 5 years at cost-oriented prices;  Right to share radio sites an fast MNP at cost-oriented prices (for all players);  No access rights for MVNOs and resellers for up to 8 years after 3G launch.

H3G obtained favourable roaming rates for voice and SMS, with NRA intervention. Other provisions largely remained on paper
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 13

The mobile experience: the start-up


 After a slow start in 2003, due to limited UMTS handset availability, H3G in 2004 began to gain traction, introducing hs subsidies and lock  Existing operators reacted to H3G entry, leveraging on their market share advantage:
 Launch of very low on-net prices to retain and acquire customers;  Delaying MNP requests and launching large retention campaigns;  Also fostering the unlawful practice of unlocking H3G handset.

 Most H3G subscribers decided at least to delay MNP request, so becoming multi-terminal customers, using at the same time two networks

Multi-terminal customers keep receiving calls on their old line so leading to an imbalance in outgoing vs. incoming traffic
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 14

Traffic imbalance and MTR symmetry


 The MTR symmetry principle, tough being based on economic efficiency reasons, is not suitable in competitively unbalanced scenarios  Huge traffic imbalances, in the order of bn of min per year, easily would lead to transfer hundreds mln from smaller to large operators  The traffic imbalance, driven by multi-terminal issue, is more likely to arise in markets:
 With high penetration rates and low switching costs (e.g. prepaid 90% in Italy)  When newcomers enter the market, especially with a new technology (e.g. H3G)

 Traffic imbalance could be, at least partially, offset by very low off-net retail prices. This is not applicable when competitors have high MTRs BEFORE introducing MTR symmetry, NRAs have to solve competitive issues
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 15

Current MTRs regime in Italy


 Italian operators enjoyed, over time, high MTRs compared to EU avg. TIM and Vodafone, as early entrants, had almost 10 years grace period*  H3G has signed interconnection agreements in 2001, asking for a MTR straight in line with average values set by the regulator (18.76 c/m)  The NRA has taken a tougher stance on MTRs from 2005, leading to cuts for all operators, including Wind (after a 6.5 year grace period)
Date of changes TIM, Vodafone Wind H3G From 1/6/03 14.95 18.15 18.76 1/9/05 12.10 14.35 18.76 1/7/06 11.2 12.9 18.76 1/7/07 9.97 11.09 18.76 1/03/08 9.97 11.09 16.26

 Current MTRs regime is based on NRA decisions n. 3/06, ruling a price cap 2006 - 2009 for TIM/ Vodafone (RPI -13%) and Wind (RPI -16%), and n.628/07 ruling a -13% cut on H3G
Mobile Regulation & Competition Law Bruxelles 12/06/08
* Before 1999, TIM and Omnitel had the right to set the whole retail price for incoming calls(!). After a sentence from NCA, they agreed on voluntuary annual reductions of their MTR up to the NRA dec

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Proposed MTRs regime in Italy


 The Italian NRA adopted on May 21st a draft decision on new MTRs, still to be published for consultation, for the years 2009 to 2012
16.26

13

11

c/min

9.51 9.51 8.7 8.85 8.85 7.7 6.6 5.9 9 7.2 7

 NRA estimates a 30% cut on avg. rate (H3G is -57%) to Ofcom like rates  H3G would bear another 20% one-off cut, only 6 months after the 1st one (for a total -31%)

Ju l-0 8 Se p08 No v08 Ja n09 M ar -0 9 M ay -0 9 Ju l-0 9 Se p09 No v09 Ja n10 M ar -1 0 M ay -1 0 Ju l-1 0 Se p10 No v10 Ja n11 M ar -1 1 M ay -1 1 Ju l-1 1

TIM / Vodafone

Wind

H3G

H3G is going to be damaged by the announced NRA decision because of an excessive MTR reduction vs. competitors
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 17

Agenda

H3G overview Mobile telecoms Mobile broadcasting Conclusions


Mobile Regulation & Competition Law Bruxelles 12/06/08

page 18

Looking forward
 H3G is still committed to invest in innovation, for example completing HSPA coverage and developing DVB-SH (trial to be launched soon)  The competitive outlook is getting tougher also due to factors non imputable to H3G:
 Unfair win-back and retention campaigns performed by its competitors;  MVNO entry on the market, among telcoms specialists (BT, Fastweb etc...);  Sudden regulatory changes, like Bersani law banning prepaid top-up fees.

 All this is resulting in a slowdown of H3G Italy performance, this is leading many analysts to forecast an imminent exit of H3G from the market H3G has the strength and willingness to keep competing on the Italian market but needs a pro competitive and stable regulatory framework
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 19

Conclusions
 HWL invested in Italy also thanks to a regulatory environment supportive of new entrants  Now H3G is not asking NRA and EC aid to effectively compete on the market, but to remove competitive distortion in the Italian market  The main issue arises from high incumbents MTRs enabling on-net discrimination. H3G has had a high MTR vs. Eu avg. not vs. competitors  H3G MTR grace period has been 5 years, vs. 10 for TIM/Vodafone 6.5 for Wind. H3G ought to maintain enough asymmetry to compete  The old ONP framework has established competition in EU telecoms at the advantage of customers. Now consolidation has become the best option?
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 20

Thank you

Address for comments and/or questions: Quirino Brindisi Economic analyses manager Regulatory affairs H3G S.p.A. Via Alessandro Severo, 246 00145 Rome Italy Tel: +39 0659556586 Fax: +39 0659556928 Mobile: +393931113258
Mobile Regulation & Competition Law Bruxelles 12/06/08 page 21

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