Digital Agenda in Europe: The role of the market

Brussels, June 16, 2011

Alfredo Baptista, CTO

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of Portugal Telecom is strictly prohibited

2

Contents

Fibre as a key driver of competitiveness in the wireline business

PT as a case study in fibre network deployment

Fibre as a strategic pillar for each business unit

3

Strong competition from cable operators in Portugal in 2007

Source:Screen Digest

100% =Others

2007

1,390

75%

20%

5%

2004

1,252

79%

17%

4%

Pay-TV market share(thousands of subscribers)

Two dominant players in pay-TV… … with strong positioning in the broadband market

PT market share (2007)Percentage

25

69

-44pp

ULL areasNon-ULL areas

Broadband penetration (2005)Percentage of house

4421

ULL areasNon-ULL areas

x2

Ranking

#1

#2

#3

Non-ULL areas ULL areas

4

PT launched an IPTV offer supported by disruptive communication

Multiscreen and QoS

TV anywhere

Largest distribution and support network

Tailored offerVariety of channels, VoD with 2,000 titles

Content

New TV experiencePersonalized, Interactive

Functionalities

Communication

Disruptive communicationHigh recall levels

5

This offer captured an existing opportunity in the market2007

*Static TV guide with no updates**Pay-movies available at specific pre-scheduled timesSource:Screen Digest; WMM Global Insight

Relative importance of attribute (beyond price)Percentage

2

4

Domotic

Fixed voice

Brand 10

Broadband 12

TV 29

Interest in servicesPercentage of homes in Portugal

Digital recording 24

VoD 27**

TV Guide/EPG 27*

Live-pause 33

HD 41

21Gaming

Cable offer in 2007

*

**

IPTV

… with room for improvement in advanced services offerTV offer is a driver of operator choice…

6

… and underpinned the turnaround of wireline business

-3.4-3.8-4.4-4.9-5.7-6.1-7.3-8.3-9.1

-12.2-12.1-10.8

Q4Q3Q2Q1Q4Q3 Q4Q3Q2Q1Q2Q1

Revenue growth%.YoY

Voice retail accesses growth %. YoY

1.3

-0.3

3.02.0

-4.3-3.9-5.7-5.5-6.0

Q4Q3Q2

-0.6

Q1Q4Q1 Q3

-0.3

Q2

-3.6

Q1Q4Q3Q2

2007 2008 2009

2007 2008 2009

Meo IPTV drove turnaround of wireline business by 2009

Meo success is an European case-study…

+22pp

-14pp78%64%

ZON (cable)

Other

2009

13%

23%

2007

21%1%

23

84443

1 5432

Operator

Source:Anacom; Annual reports

Pay-TV market share

Market share 21 months after launchPercentage

7

Technological evolution of cable technology…

Strong cable investment in technological evolution beyond copper infrastructure capabilities

DOCSIS 3.0 maximum internet connection speedMbps

360

200

30

2010200920082007

N.a.

House-hold coverage%

0 5 42 52

… beyond copper infrastructure capabilities

Connection speed (Mbps)

Accesses%

100 12 16 8

~70%

1 SD TV

100%

1 HD TV

2 SD TVs

FTTH

ADSL

Source:Annual reports

8

Local market context favourable towards investment in fibre rollout

• Efficient deployment fostered by full access to nationwide duct network

• Only competitive commercial alternative in high cable penetration and competition areas

As a result, PT launched an ambitious FTTH rollout plan

Note:Some double counting on the total homes passed may occur due to the possibility of the same home being served by more than a providerSource:FTTH Council

“The launch of PT’s FTTH offer gave a boost to fibre technology in Portugal” -- Anacom (July 2010)

1 million homes passed with FTTH in 2010 and the goal of 1,6 million by the end of the year

PT FTTH passed homesThousands

400

2011

2009

x4

2010

1,000

1,600

9

Contents

Fibre as a key driver of competitiveness in the wireline business

PT as a case study in fibre network deployment

Fibre as a strategic pillar for each business unit

10

Structured end-to-end fibre rollout processKey activities

Rollout success

Construction processPreparation and training

Technological solution

1 2 3

4

• Selection of efficient architecture technology (GPON)

• RF-overlay to allow multiple TV sets

• Field force transformation program

• Dedicated field force training academy

• Strategic partnership ecosystem for technology, construction and R&D

• Structured, end-to-end construction process

• Technical and commercial geographic viability studies

• Productivity-enhancement support processes and tools

• < 200€ of Capex per home passed

• Installation efficiency and reduced maintenance needs

• Impact on customer base growth both through new clients and reduced churn

HQ Cabinet

ONT

ONT

ONT

OLT Splitter

11

Selection of GPON and RF-overlay technologies

Selection of GPON due to its potential and efficient architecture

• Higher speeds (100 Mbps vs. 24 Mbps for ADSL 2+)

• Better QoS with less down time

• Less opex with reduced energy consumption (~2.5 to 5 times less)

• Less space required, with equipment 4 to 7 times more concentrated

• Lower capex with reductions between 30 and 60%

• Potential to increase bandwidth with emerging NGN PON (10GPON, WDM-PON, etc.)

Introduction of RF-overlay as a competitive advantage

Key sources of advantage

• Unlimited number of TV sets (with ~70 channels)

• Significant reduction of investment in customer acquisition

• Simplification of home installation, which should allow for lower investment

• Reduction of IP bandwidth dedicated to TV streams allowing for broadband offers with higher speeds

IP Signal RF SignalONT

WiFiHome

Gateway VOIP

STB …

HQ Cabinet

ONT

ONT

ONT

OLT Splitter

1

xDSL

Advantages vs. ...

Ethernet 2P

12

Transformation and training of field force

Requalification of internal field force “academy” Dedicated training center for SPs

• Training of internal technicians to boost efficiency and client satisfaction

• Selective process for ~330 high skills technicians with a 12-month rotation in the academy

# of technicians by age 2007

2009

2009: average age of 43

2007: average age of 45

• Compulsory certification process for all SPs

• Quality assessment tests to SP equipment

• Real-life situation practical tests for SP technicians

• Technical activity support tools training (e.g., PDA)

2

13

Ecosystem of partnerships to deliver leading-edge fibre solutions at scale

Objective PT initiatives

Technologysuppliers

Strong partnership with leading suppliers

Partners

Fast rollout, building on strong external SPs and internal technical know-how

Construction providers

• Launch of a tender bid to select partners to design and construct the fibre network (6 service providers selected, including the 4 copper SPs)

• Creation of a G-PON project office to supervise the rollout

• Leverage of best fibre suppliers to define key network architecture criteria

• Supplier selection takes into consideration in-depth technical analysis and logistics capabilities

Build state-of--the-art knowledge and technologies for future needs

R&D specialists • WDM-PON ONT project with the objective

of massifying ultra-high speed access (>2 Gbps)

• Advanced technological platform (IMS) for development of convergent multimedia services

2

14

Innovative processes to ensure efficient end-to-end construction

Fusion process

Clear curve

Innovative efficient construction methods

• Improved signal quality

• Reduced cost

• Faster installation

• Increased cornering angles (up to 90º)

Theoretical viability

Real viability

Detailed evaluation of viability

• Ranking of market potential• Consistency of geographical

assessment

• SP capability and workload assessment

• Commercial and technical on-site survey

Commerciallaunch

Sign-off

Construction stages Key challenges

• Market potential vs. penetration trade-off

• Consistency in selection criteria between different areas

• Assessment of construction and new duct needs

• Flexibility in design to avoid interference with other utilities’ ducts

• External factor delays• Lack of qualified work force

• Optical system test under harsh conditions

• Trade-off of acceptable maximum values and sample size

• Trade-off between availability and delay of commercial launch

Construction

Project

Evaluation

3

15

Efficiency coupled with superior customer experience

Increased customer satisfaction Better quality of service

Increased usage More TV sets per customer

Meo churn rate%

Meo repairs2011

Customers with RF-overlay%

Average traffic/accessHigh speed internet downstream (2009). Kbps

0

50

100

150

200

GPON

xDSL

4x

Meo fibre launch

-4pp

1Q111Q10

-85%

FTTHADSL

38<2 TV sets

>2 TV sets62

16

Contents

Fibre as a key driver of competitiveness in the wireline business

PT as a case study in fibre network deployment

Fibre as a strategic pillar for each business unit

17

Fibre optics brings advantages across the market segmentsF

ibre

Op

tic

Cab

le

Residential

Business

Mobile Backhaul

Community

• Multiple TVs without requiring STB• High-speed internet with high upload speeds• Digital TV with STB giving access to advanced services• Voice calls with advanced IP functionalities• Utilisation of Femto cells to improve indoor coverage

• Disruptive cost structure will allow massification of optical solutions on the business market and enabling medium and small companies access to better communications

• Fibre Optic spread across the cities and towns will lower the CAPEX to migrate the Mobile Network to LTE, due to less costs on the backhaul

• e-Education: sharing of educational materials (including video)

• e-Government: efficiency in constituents-government relation• e-Health: remote telemedicine and teleassistance • e-Security: all law enforcement connected by a single network

IPTV stream

VOIP

Analog RF TV

Broadband

FentoCell Backhaul

18

Fibre allows for a range of advanced residential services

Fibre enables new advanced services…

• Full 3D

• Super HD

• Gaming-on-demand

• High speed internet

• Next-generation homes

• Surveillance system

• Internet-enabled household appliances

• Real-time monitoring (e.g., energy consumption)

… and accelerates download/upload speeds

Download time for a DVD movie*Minutes

Fibre (100 Mbps)

7

ADSL (24 Mbps)

31

Upload time for a 100 photos**Minutes

Fibre (10 Mbps)

7

ADSL (1 Mbps)

75

* 5 GB**500 MB

Advanced services

Intelligent homes

19

Fibre as enabler of an enhanced customer experience

Advanced applications Available everywhere Home of the future

• Customized music

player

• Cloud-based

gaming

• Multi-screen and

multi-platform

• Remote access

from all devices

• Real-time energy

monitoring

• Remote control of

home appliances

20

Advanced convergent offers for Corporate and SME customers leveraging fibre infrastructure

• Convergent F-M voice & data solutions with access to subsidized equipment (e.g. PC, PBX)

• Integrated and vertical offer with business specific software

• Flexible pricing solution per workstation

• Unlimited wireless voice and flat rate data plans

• One-stop-shop for advanced IT/IS solutions

• Focus on Business Process Outsourcing providing flexibility and scale

• Machine to Machine process optimization and efficiency enhancement

SME offer Corporate solutions

Cloud Computing

• Superior cloud-based offer leveraging strategic partnerships focusing on IaaS and SaaS

• Adaptable, scalable and highly reliable platform based on multi-tenant infrastructure

21

876

476

1Q083Q07

505

646

3Q10

769

1Q11

3Q09

211

384

1Q093Q08 1Q10

MEO customersThousands

• Video-on-demand

• Launch of advanced settop box

• Disney Channel• European club soccer• Euro 2008 in HD

• MEO Fibre• Remote EPG/PVR on phone and PC

• Launch of Meo@PC

• First 3D broadcasting

• Multi-room PVR

• New widgets

Pay-TV market share%

+30pp

-23ppCable

Others

1Q11

55

13

31191

78

2007

Fixed lines net addsThousands

-12-30

-103

1Q07

-88%

1Q09 1Q11

Meo’s success has become a case-study

22

All in all…

… fibre is a viable technology in competitive markets

… efficient planning and deployment in a structured end-to-end process are key for success

… fibre is at the core of every business unit’s strategy

Digital Agenda in Europe: The role of the market

Brussels, June 16, 2011

Alfredo Baptista, CTO

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of Portugal Telecom is strictly prohibited