Top 10 risks in telecommunications 2012. Page 2 Contents Risk radar chart Methodology 03 41 Below the radar risks for telecommunications 3 19 Top 10 Business

Top 10 risks in telecommunications 2012

Top 10 risks in telecommunications 2012Page 2

Contents

Risk radar chart Methodology

03

41Below the radar risks for telecommunications

319

Top 10 Business Risks

205 21

Risk radar chart


Risk radar chart

The Ernst & Young risk radar is used to present a snapshot of the top 10 business risks.

The risk radar is divided into four sections that correspond to the Ernst & Young Risk Universe™ model:

► Compliance threats originate in politics, law, regulation or corporate governance

► Operational threats impact the processes, systems, people and overall value chain of a business

► Strategic threats are related to customers, competitors and investors

► Financial threats stem from volatility in the markets and in the real economy

Risk weighting and risk prioritization

Top 10 business risks


Top 10 business risks for telecommunications in 2012

1. Failure to shift the business model from minutes to bytes

2. Disengagement from the changing customer mindset

3. Lack of confidence in return on investment

4. Insufficient information to turn demand into value

5. Lack of regulatory certainty on new market structures

6. Failure to capitalize on new types of connectivity

7. Poorly formulated M&A and partnership strategy

8. Failure to define new business metrics

9. Privacy, security and resilience

10. Lack of organizational flexibility

Top 10 risks — 2012

A more pressing green agenda

Concentration of equipment vendors

Difficulties in managing debtand cash

Evolving service cannibalization scenarios

Below the radar

Disengagement from the changing customer mindset

Lack of confidence in return on investment

Lack of regulatory certainty on new market structures

Privacy, security and resilience

Poorly formulated M&A and strategic partnerships

Failure to define new business metrics

Failure to capitalize on new types of connectivity

Insufficient information to turn demand into value

Failure to shift the business model from minutes to bytes

Lack of organizational flexibility


IntroductionThe telecoms sector is defensively positioned during ongoing macroeconomic uncertainty …

% change y/y

Operating cash flow margin (%)

Telecoms remains a relatively safe haven Europe — GDP and telecoms revenue development¹

► Telco perform best relative to other sectors when markets are suffering:

► Fluctuations in sector revenue growth underperform GDP volatility over the last three years.

► Strong cash flow and dividend yield underpins the investor view.

► Apart from Southern Europe, incumbents have outperformed their local markets (7% higher total share return year-to-date)

► However, challenges remain:

► Telco revenue performance linked to employment rates.

► Mobile is the most economically sensitive segment — voice volumes fell significantly during 2009 in the wake of recession.

Improving performance predicted in many regions

► Telcos have proved themselves strong on cost control — strategies such as network sharing are helping ease the pressure on infrastructure upgrades.

► Globally, operating cash flow (OCF) margins are seen growing over the next two years:

► Investors are positive on North American telcos due to early investment in 4G and high smartphone penetration.

► High valuation multiples in Asia reflect confidence in continued growth.

► Worldwide, dividend yields are seen increasing, although investors remain cautious towards dividend sustainability in Europe.

Telecoms OCF margins by region FY 2011-13²

1. Eurostat; Deutsche Bank, “European Telcos: The best way to play,” 5th September 20112. Macquarie, “Global Telecoms,” 15th September 2011

Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 01 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

European telecoms revenue growth Euro area real GDP growth

Global Americas Asia ex Japan

Japan Europe Africa

0

5

10

15

20

25

FY 2011 FY 2012 FY 2013


… but question marks accompany future growth stories

The sector is outgrowing assumptions Global mobile device and subscriber penetration

► Mobile connections are forecast to surpass global human population in 2014:

► Represents long tail of emerging market users

► Multiple SIMs and devices per person

► Embedded SIMs and machine-to-machine (M2M)

► Global smartphone shipments continue to ramp impressively:

► Wireless data growth set to remain strong across all regions

► However, minutes of use (MoU) flattening in some markets, e.g., US

Conflicting perspectives on sector evolution

► Data will rise from 20% of global mobile revenues in 2008 to 36% in 2015

► Investor view of telecoms remains fundamentally ambivalent:

► Difficulty reconciling structural weakness (e.g., regulation on high-margin parts of the business) with secular growth opportunities (e.g., mobile data)

► Uncertainty on the trade-off between cost and value of new growth areas — uncertain capex commitments as mobile traffic growth and mobile data revenue growth diverge

► Dividend focuses a short-term view of the sector where long-term value creation needs to be addressed

Global mobile revenue and data traffic³

Global population and mobile connections¹ (m)

2008

2009

2010

2011

2012

2013

2014

2015

0

2,000,000

4,000,000

6,000,000

8,000,000

Population Mobile connections

Annual smartphone shipments² (m)

FY 2

00

6

FY 2

00

7

FY 2

00

8

FY 2

00

9

FY 2

01

0

FY 2

01

1E

FY 2

01

2E

0

100

200

300

400

500

600

2008 2009 2010 2011 2012 2013 2014 2015

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

0

1,000

2,000

3,000

4,000

5,000

6,000

Mobile voice revenue Mobile data revenue Mobile data traffic

Revenue (US$m)

1. Ovum, UNFPA, 2008 Population Revision Database, Ernst & Young Analysis2. Deutsche Bank, “Global Telecommunications”, 25th July 20113. Ovum Mobile Regional Forecasts 2008-2015, February 2011; Cisco Visual Networking Index

Traffic (PB per month)


#1. Failure to shift the business model from minutes to bytesCompetitor actions and fast-changing industry ecosystems bring new challenges

User loyalty considerations stifle value creation UK mobile data usage¹

► Legacy strategies have focused on retaining loyalty rather than monetizing demand:

► Anti-churn strategies have commoditized the value perception of minutes and bandwidth, e.g., fixed broadband free upgrades, flat-rate mobile data, multi-play packages.

► New consumer service areas are being exploited by players with new business models, e.g., over-the-top TV, add-supported apps.

► Even previously insulated products such as SMS are under pressure from new free services, e.g., mobile instant messaging (IM).

Business models have to adapt to wider ecosystem

► Revenue mix forecasts suggest an increasing shift towards wholesale service provision:

► Operators need to identify new types of wholesale customer in the wake of a shifting value chain.

► Revenue growth potential in enterprise segment remains high relative to the consumer market:

► Business models for enterprise customers have to embrace new approaches to provisioning (e.g., cloud computing) alongside partner-oriented go-to-market.

► Operators need to master various types of charging models, e.g., flat-rate, per-event, ad-supported.

► Cross-sector growth strategies will require vertical-specific business models.

Operator revenue mixes — 2020 scenarios²

Monthly MB per mobile data user % mobile users using data

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

0

50

100

150

200

0

20

40

60

80

Monthly MB per mobile data user % mobile users using data

1. Ofcom, “UK Communications Market Report: UK,” 4th August 20112. Ovum, 14 November 2011

Lean operator 2020

Smart operator 2020

Current

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

20%

60%

50%

30%

25%

30%

50%

15%

20%

Consumer Business Wholesale


#2. Disengagement from the changing customer mindset Quickening technology cycles, changing brand affinities

Technology brands are top of mind with customers Take-up of consumer electronics devices¹

► Technology cycles are quickening across consumer/enterprise, and multiple devices per user is the norm:

► Time taken to reach 50% penetration is shortening (15 years for mobile phones, 4/5 years for smartphones/tablets).

► Fixed and mobile networks are now a platform for access to a wide number of businesses and services, e.g., TV, banking.

► Disruptive players are extending their service propositions:

► Brand value of leading tech players typically outstrips leading telcos.

► Devices do much to determine the mobile customer experience.

Adapting to the new customer mindset is key

► Clear communication on the value of the network and what it takes to provide high-quality services:

► It’s not just about the device or application.

► Network and service quality is not necessarily a given.

► Operators need to define their added value in areas of new service provision:

► Security credentials in network-based enterprise services

► New types of bundle packages for consumers

► Trusted provider of new services, e.g., m-payments

Top 10 global brands 2011²

UK device penetration Q1 2011 (%)

TV s

et

Mob

ile p

hone

Land

line

phon

e

HD

-rea

dy T

V

Lapt

op

Gam

es c

onso

le

HD

TV r

ecei

ver

Sm

artp

hone

e-R

eade

r

Net

book

3DTV

Tabl

et

020406080

10098 93 85

60 55 54

33 27

4 4 2 2

Rank 2011

Rank 2010

Rank 2009

Brand Industry group

1 2 5 Google Technology

2 20 27 Apple Technology

3 5 4 Microsoft Technology

4 4 3 IBM Technology

5 1 1 Walmart Retail

6 7 8 Vodafone Telecoms

7 6 6 GE Diversified

8 10 10 Toyota Automotive

9 11 14 AT&T Telecoms

10 8 7 HSBC Financial services

1. Ofcom, “Communications market report: UK,” 4th August 20112. Brand Finance, “Global 100,” September 2011


#3. Lack of confidence in return on investment Capex control risks sidelining operators from future growth

Capex control has ambivalent outcomes Telecoms capital intensity by region 2008-Q2 2011¹

► Telcos remain cautious on investment due to external forces such as regulation and customer demand:► Doubts persist over revenue potential of new services, new market structures

remain unclear.

► Capex control helps telcos maintain defensive characteristics, e.g., FCF, dividend yields, while opex reductions are less flexible.

► Levels of capital intensity remain largely stable worldwide:► Spectrum release is lagging in some developed markets.

► Growth-driven capex in emerging markets is falling.

► Nevertheless, capex control can undermine service quality, competitiveness, and growth prospects of new services.

The timing of new investment is crucial

► Operators must understand how infrastructure upgrades relate to customer demand, competitor actions, industrial policy. Challenges include:

► Uncertainties in supply and demand, e.g., spectrum release, high-bandwidth applications.

► Shifting market structures, e.g., network sharing, consolidation.

► Current capex planning is driven by ability to protect cash flow, limiting the future revenue and margin potential of new services:

► Industrial policies require substantial increase in super-fast broadband coverage over next 8 years

► Customers increasingly concerned about network quality

► Telcos often have multi-technology strategies and fail to understand the complementarities/optimization

Global high-speed mobile connections²

Fixed and mobile capex/sales (%)

1. Ovum, “Network infrastructure report,” 19th September 20112. Ovum, “Mobile Regional and Country Forecast: 2011–16,” July 2011

2008 2009 2010 Q1 2011 Q2 2011

0

5

10

15

20

25

30

North America Europe Asia Pacific MEA

2009 2010 2011 2012 2013 2014 2015 2016

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

WCDMA TD-SCDMA (incl. TD-HSPA) HSPA LTE CDMA 1XEV-DO

Connections split by technology (000)


#4. Insufficient information to turn demand into valueA lack of business intelligence to drive customer propositions

Time-to-market and customer centricity under threat Time-to-market: telco perceptions and performance¹

► Operator time-to-market for new services has not improved in the last two years:► This is a growing risk as technology and product life cycles shorten.

► Disruptive actors are dynamically repurposing customer data for new services.

► Telcos struggle to repurpose their information assets due to a number of factors:► Patchwork of legacy systems which holds fragmented customer and network

information

► Lack of real-time analytics to build a single view of the customer across multiple devices and territories

Many benefits to leveraging information assets

► Operators are collecting more information about the customer than ever before

► Repurposing customer data in new ways can improve market positioning:

► Better business intelligence, e.g., anticipating market and customer changes before competitors

► Reusing network data for partners, industry verticals

► Reducing operational costs and improving the speed of delivery of new data services

► Ensuring regulatory compliance

► The value of customer and network data will rise in an increasingly partnership- and data-centric sector

Advantages of repurposing data inside the business

1. Amdocs, “Amdocs survey: time to market grows in importance,” 14th April 2011 (125 senior executives)

Improved monetization of new customer demands

Dynamic charging capability

Better distribution of network load

Improved time-to-market

Better targeted marketing initiatives

Deeper relationships with third parties and partner ecosystems

2008

2011

52 54 56 58 60 62 64 66 68 70 72

59

70

2008

2011

50 55 60 65 70 75

67

65

% service providers that say time-to-market is very important to remaining competitive

% service providers that can bring a product to market within 6 months


#5. Lack of regulatory certainty on new market structures Policy challenges undermine willingness to invest

Pro-investment policies are vital Survey: challenges facing ISPs¹

► Regulatory policy approaches to new market structures remain challenging:► Shifting regulatory standpoints on wholesale broadband access pricing

► Imposition of network separation as a pro-competition tool in super-fast broadband

► New spectrum release will determine 4G market structures — rules vary from market to market, e.g., spectrum caps, trading

► Regulatory jurisdictions and policies laggoing in new areas like mobile money

► Regulatory pressure on legacy parts of the business, e.g., MTRs, roaming.► Telecoms can be a source of government taxation as well as the scene of

government investment.

Pursuing greater regulatory certainty

► Operators must engage with a wider set of stakeholders to drive better regulatory certainty:

► Impact of consolidation on pricing and investment

► NGA funding and spectrum release require market consensus

► Impact of net neutrality across TMT

► Operators need to form workable stances on a range of issues:

► Increasing interrelationship of fixed and mobile policies, e.g., rural broadband coverage

► Regulatory approaches in adjacent markets, e.g., financial services

► Traffic management of data services

European 800MHz spectrum auctions²

Q. What is the key issue facing ISPs over the next five years?

1. Ernst & Young/ITU Telecom World poll, November 2011 (85 online respondents)2. Ernst & Young research

Access to capital

Launching new services

Return on investment

Regulatory frameworks

0 5 10 15 20 25 30 35 40 45

15

20

24

41

% respondents

Date Country MHz Total price (€m)

Price/ MHz/pop

Notes

Sep 11

Italy 60 2,962 0.82 Spectrum won by two of three existing network owners; simultaneous 1800MHz and 2600MHz auction

Jul 11 Spain 60 1,205 0.47 900/1800/2600MHz auctions also took place in mid-2011; further 900MHz spectrum to be released in Q4 2012E

Mar 11

Sweden 60 228 0.42 All three network owners won spectrum; 1800MHz auction took place in Oct 11 — two of three network owners won spectrum in first round

May 10

Germany 60 3,600 0.73 Three of four network owners won spectrum; 1800/2600MHz spectrum awarded at same time to all network owners (total price €445m)


#6. Failure to capitalize on new forms of connectivityBusiness models must adapt to new service creation scenarios

Connectivity is being redefined Global M2M connections in 2020 by vertical¹

► Operators continue to consider connections in human terms, but sector growth increasingly relies on a new understanding of connectivity:► Value apparent in “interconnectedness” of devices, e.g., M2M, NFC,

multi-screen content

► Proliferation of business models, e.g., B2B, B2C, B2B2C

► Operator moves into new areas are often defensive and piecemeal.► Operators moving into emerging market segments face various

challenges:► High upfront costs, lower ARPU per SIM in M2M

► Exposure to new regulatory and reputational risks, e.g., mobile money

New strategies can unlock incremental revenues

► Operators need to consider how best to align themselves to new growth areas:

► Decide upon core competencies in increasingly composite value chains.

► Clearly delineate between the need to build capability or partner/outsource in view of existing network and customer footprint.

► Majoring on certain industries can help differentiate propositions, while stages of service maturity vary according to vertical.

► Carefully evaluate emerging use cases.

► Local market factors will play a pivotal role in emerging service areas, e.g., regulation, vertical sector landscape, existing network coverage.

► Issues around technological complexity need to be continually assessed if operator and cross-sector partnerships are to overcome fragmentation.

Selected operator approaches to M2M²

M2M connections (billions)

1. Analysys Mason, “Imagine an M2M world with 2.1 billion connected things,” January 20112. Ernst & Young research

1.32; 61%

0.45; 21%

0.28; 13%

0.07; 3% 0.03; 1%Utilities

Security

Automotive and transport

Health care

Government, retail and fi-nancial services

Global M2M connections:

2.1 billion

Operator M2M organization Service delivery platform

Target segments

AT&T Emerging Devices Org as dedicated BU. B2B M2M is part of Advanced Mobility Solutions Group

Jasper-powered Control Center — provides analytics reports, automated provisioning

Utilities, fleet management, security, health care, consumer electronics

Deutsche Telekom

International M2M competence center in Bonn; US M2M outsourced to RACO Wireless

M2M service portal since 2010 — can be integrated into customer environment via API

Home security, resource management, smart metering and grid, telematics, logistics, retail

Vodafone Dedicated M2M organization launched in 2010

Automated SIM pre- and post-paid provisioning; policy management; API integration with customer systems

Environmental monitoring, remote maintenance and control, tracking, health care, metering, automotive telematics and fleet management


#7. Poorly formulated M&A and partnership strategyConsolidation rationale remains — and partnerships offer new routes to growth

Adapting to the changing role of M&A Quarterly global telecoms M&A 2008-10¹

► Deal activity has picked up in 2010–11 compared to 2008–09; however, plenty of risks remain:► Shifting regulatory attitudes to consolidation, e.g., competition considerations

► Valuation uncertainties

► High levels of political and macroeconomic risks in some regions, e.g., MENA, Europe

► The nature of M&A is changing:► For some, footprint control is more important than footprint growth.

► Shifts in the value chain herald new M&A trends, e.g., tower management.

► Acquisitions in emerging market segments remain important.

Partnering abilities will act as a differentiator

► Partnerships act as a new route to growth in a wider sector ecosystem.

► The scope of partnerships is widening due to a number of factors:

► Collaborative focus on cost efficiencies, e.g., network and procurement JVs

► Reliance on cross-sector collaboration for new product development

► Operators must work with new types of partner, e.g., application developers, power companies, tech companies.

► Revenue share issues persist.

► Operators must continually reassess their relationship with partners outside the sector.

Deal factors in telecoms²

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

10

20

30

40

50

60

70

80

Deal value # of deals

US

$m

# o

f de

als

Q. Which of the following factors have increased/decreased over the last six months?

46%

45%

61%

46%

69%

39%

-7%

-7%

-4%

-4%

-3%

-7%Price expectation gaps

Valuation uncertainty/complexity

Regulatory pressures

Board/audit committee scrutiny

Competition for assets

Stakeholder caution

Decreased Increased1. Ovum, 14 November 20112. Ernst & Young Capital Confidence Barometer survey, November 2011 (interviews with 31 senior

telecoms executives)


#8. Failure to define new business metricsFinding new ways to communicate progress

Current metrics fall short of new and timely insights Evolution of KPIs in mobile data

► External operational metrics are predicated on communicating basic take-up.► Legacy penetration rates fail to communicate fully the addressable market for

new services.

► Customer level usage metrics often fail to delineate the impact and effect of bundle and flat-rate packages, e.g., MoU

► Data service metrics are lacking at the customer level, e.g., MB per user.

► Financial metrics such as ROIC offer greater insight than EBITDA as a way to measure to communicate intrinsic value.

► Many internal metrics do not provide sufficient granularity to improve the customer experience

► Metrics for new growth segments are lacking e.g. mobile apps/advertising

Evolving metrics have to put the customer first

► Financial metrics ,such as ROIC, indicate the intrinsic value better than traditional metrics, such as EBITDA

► More granular external KPIs that highlight network usage and related costs or new service take-up:

► Revenue generating units (RGUs) per customer and segment market shares in addition to penetration of installed base with new services

► Greater sensitivity to households and existing coverage areas

► More depth on network utilization, e.g., urban versus non-urban

► More depth on smartphone behaviors

► Additional internal operational metrics can improve the customer experience:

► More insights on quality of experience (QoE)

► KPIs built on aggregated data from different systems and processes e.g.. service configuration, billing, customer care

Operational KPIs for consumer fixed-line services1

1. KPN, “Third Quarter Results 2011,” 25th October 2011

Mobile voice growthVoice maturity,

mobile data growthMobile data

maturity

► Network coverage► Subscribers► Penetration► Customer market share► MoU► ARPU► Pre- and post-paid split

► SAC/SRC► Churn► Data share of revenue► Mobile internet page

hits► Revenue market share► 3G handset take-up► On-portal visitors and

traffic

► Cost per bit transmitted► 3G/4G network

utilization► Data usage per

subscriber► M2M connections► Mobile payment users► Smartphone take-up► App store revenue

Key performance indicator

Return on invested capital (ROIC)

Rationale

Measures efficiency to utilize the capital invested to generate returns

Return on capital employed (ROCE)

Indicates the efficiency and profitability of the telcos capital investments

TV market shareShare of the TV market helps communicate

IPTV strategies

Revenue generating unit per subscriber

RGU per sub describes the average number of services taken subscribers,

reflecting bundle take-up


#9. Privacy, security and resilience Operators are seen as security guarantors across a range of services

Coping with a growing range of threats User perception of responsibility for mobile security¹

► End users are now subject to a growing range of threats as mobile phones become personal data hubs:► Privacy and security issues are multiplying as threats converge from different

environments, e.g., SMS, cloud, web 2.0, mobile apps.

► Customers are as concerned about data integrity as call quality.

► Carriers are more trusted than other service providers e.g. social networks, yet customers deem them responsible for threats from third parties and suppliers:► Operators are seen as guarantors of security even for mobile malware and

rogue apps.

► Privacy concerns hamper service innovation — location-sensitive data can support advertising-based revenue models but affect customer privacy.

New definitions new responsibilities

► National security considerations are rising in importance while concepts of digital rights are an emotive issue:

► Security concerns vary according to customer and stakeholder, e.g., consumer, enterprise, government.

► Operators must work with governments to define their responsibilities in terms of content and data, e.g., content for children, anti-terrorism measures.

► Operators should also work with suppliers and partners to tackle privacy and security issues in new service areas, e.g., cloud security, mobile apps.

► Emerging service types as mobile money, M2M require new approaches to secure solutions.

Key issues in data retention regulation

1. Adaptive Mobile, “Mobile Trust & Security Barometer — US,” September 2011 (survey consists of online interviews with 2,000 smartphone users)

Rogue apps that can steal data/spy on you

Malware/viruses

Unsolicited messages/spam

SMS text phishing

Unexpected items on bill

0% 20% 40% 60% 80% 100%

36

46

54

55

74

10

11

7

8

6

37

23

18

15

9

17

20

21

22

11

Carriers Mobile handset manufacturers

Content/app provider Me/the individual

Delineating data types according to type of

operator

External attitudes to data retention, e.g., end users,

privacy groups

Cost reimbursement of service provider

compliance

Conditions of access to and use of retained data

Timing of implementation

Period of data retention

Regulatory issues


#10. Lack of organizational flexibilityNew strategies require more agile organizations

Organizational structures subject to various forces Carrier organizations — sample new business units¹

► Significant changes to organizational structures have already been made:► Move from product-towards segment-based structures► New business units to exploit new growth areas (see right)

► However, organizational structures are subject to ongoing external forces:► High regulation of domestic businesses of many incumbents► Fast-changing market maturities by region► In-market and cross-border efficiencies in fast-changing areas of

demand, e.g., enterprise ICT, smart services, fixed and mobile bundles

Further refinements needed for new market dynamics

► Operators have to consider how best to align their business units to maximize geographic footprint in terms of scale and scope economies:

► Combinations of regional and integrated structures need to be revisited.

► Competing forces need to be reconciled:

► Geographic sensitivity, e.g., importance of local market factors ► Global strength, e.g., unified customer view, purchasing power

► Flexibility is important — segmentation strategies should recognize that boundaries between customer types will remain blurred while regular large-scale restructuring is impractical.

Options for telecoms organization structures

1. Operators, Ernst & Young research

Date Operator New Unit Notes

Sep 11 Telenor Digital Services Driving growth in internet-based ecosystems. Includes existing businesses such as Telenor Next and Comoyo

Group Industrial Development

New unit established to drive operational efficiency, cross-market streamlining and other synergies

Sep 11 Telefonica Telefonica Digital Headquartered in London, with 2,500 employees from Global Services unit, Jajah, Telefonica R + D among others

Global Resources New operating unit designed to leverage economies of scale and drive transformation into fully global company

Jul 11 Telstra Customer Sales and Service

Merger of existing sales and retail customer service

Applications and Ventures

Created to spearhead investment in new and emerging broadband businesses

Segment-based

Consumer Enterprise Wholesale

Function-based

Finance HR Operations

Product-based

Fixed Mobile Other

Geography-based

Domestic Regional Int’l

Below the radar risks for telecommunications


Below the radar risks for telecommunications

1. Evolving service cannibalization scenarios

This represents a new below-the-radar risk for 2012. New types of cannibalization are appearing, such as mobile IM as an alternative to SMS; operators need to move beyond legacy assumptions about user behavior.

2. A more pressing green agenda

The green agenda is now top of the below the radar risks — operators must move beyond regulatory compliance and ensure that they begin to differentiate via sustainability.

3. Concentration of equipment vendors

Consolidation is an ongoing feature of the telecoms equipment market, and M&A in the device and equipment market remains high in 2012. Operators need to ensure they are not overly reliant on any single equipment manufacturer.

4. Difficulties in managing debt and cash

While operators entered the economic crisis in better shape than other sectors due to balance sheet repair in 2002-03, a more constrained environment is putting new demands on the sector. More defensive capex programs help maximize operating cash flow. Current net debt/EBITDA levels (European average 2.0x) remain strong.

What’s below the radar?Difficulties in managing debt

and cash

Evolving service cannibalization

scenarios

Concentration of equipment vendors

A more pressing green agenda

Disengagement from the changing customer mindset

Lack of confidence in return on investment

Lack of regulatory certainty on new market structures

Privacy, security and resilience

Poorly formulated M&A and strategic partnerships

Failure to define new business metrics

Failure to capitalize on new types of connectivity

Insufficient information to turn demand into value

Failure to shift the business model from minutes to bytes

Lack of organizational flexibility

Methodology


Methodology

Top 10 risks in telecommunications 2012 is the latest in a series of annual reports that highlight the most critical issues in the sector

The report was produced via the insights of our sector practitioners and supplemented by research and analysis from our Global Telecommunications Center

Our sector professionals were asked to:

► Evaluate the most important strategic challenges for global businesses

► Rate the severity of these risks for their sectors

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

How the Ernst & Young Global Telecommunications Center can help your business

Telecommunications operators are facing a rapidly transforming business model. Competition from technology companies is creating fierce challenges over the ownership of customers and service innovation, and pricing pressures and network capacity are intensifying scrutiny on return on investment. Additionally, regulatory pressures and shareholder expectations require agility and cost efficiency. If you are facing these challenges, we can provide a sector-based perspective to addressing your assurance, advisory, transaction and tax needs. Our Global Telecommunications Center is a virtual hub that brings together people, cultures and leading ideas from across the world, to help you address your global, regional and local challenges. These may include next-generation services and product profitability, customer life cycles and revenue assurance, working capital management, risk, regulatory strategies and compliance, potential cost reductions, mergers and acquisitions, financial and operational improvements, accounting and tax strategies. Whatever your need, we can help you improve the performance of your business.

Learn more about our approaches and services by visiting our website: www.ey.com/telecommunications

© 2012 EYGM Limited.

All Rights Reserved.

EYG No. EF0101

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

http://www.ey.com/

http://www.ey.com/telecommunications

Documents

Top 10 risks in telecommunications 2012. Page 2 Contents Risk radar chart Methodology 03 41 Below the radar risks for telecommunications 3 19 Top 10 Business