Top 10 Fixed-Line Operators in Western Europe, 3Q03

Market Analysis Top 10 Fixed-Line Operators in Western Europe, 3Q03 Abstract: There are signs that the market is improving, but operators must manage the revenue mix and invest in new services if they are to thrive in the future. By Lisa Unden Recommendations Fixed-line operators should manage their revenue mix. They should carefully monitor declines in voice services and identify innovative marketing capabilities and abilities to leverage existing voice, data and Internet investments through the bundling of services. Operators should also extend their capabilities in mobile services for example, through the new or enhanced mobile data, video and mobile voice services features. This will counter declining fixed-voice revenue and reduce churn as the mobile market matures. Operators should also plan capabilities for fixed/mobile integration, such as billing, networks, back-office platforms and so on. Operators must recognize that basic retail and wholesale services are effectively commodities with limited profitability. Unless operators have low-cost service delivery and economies of scale, they should exercise caution in expanding into and investing in new geographic areas. Operators should continue to invest in the managed data and broadband Internet services markets. In particular, they should plan to move from a network-centric approach to a serviceoriented one. They should also aggressively expand data and Internet services by offering content, multimedia, cost-effective IP and integrated services on top of basic connectivity. Publication Date: 23 December 2003

2 Top 10 Fixed-Line Operators in Western Europe, 3Q03 Signs of an Improving Market Each quarter, Gartner Dataquest analyzes the revenue of the top 10 telecom operators in Western Europe, using the operators' financial reports and Gartner research. This document provides our findings for 3Q03. Figure 1 shows the revenue in euros for each of the top 10 for the seven quarters from 1Q02 to 3Q03, and the compound quarterly change over this period. Figure 1 Top 10 Fixed-Line Operators by Revenue: Western Europe, 1Q02-3Q03 16,000 14,000 12,000 Millions of Euros +1.6% Compound Quarterly Growth Rate From 1Q02 to 3Q03 +1.6% 10,000 8,000-2.2% -0.3% +0.1% 6,000 4,000 2,000 +0.9% +0.2% +0.4% +0.3% +1.6% 0 Deutsche Telekom British Telecom France Telecom Telefonica Telecom Italia KPN Swisscom TeliaSonera TDC (TeleDanmark) Telenor 119107-00-01 Source: Company financial reports and Gartner Research Overall, there are signs that the market is improving. With the exception of BT and Telefonica, all the top 10 have experienced an increase in revenue over the seven quarters, with the main growth areas being mobile, data and IP services. In analyzing these figures, it's important to remember that revenue in the fourth quarter each year are higher, corresponding with sales cycles geared to the end of operators' financial years (apart from BT, which reports from April to March). Mobile revenue in fourth quarters also benefits from increased promotional and marketing activities in the run up to Christmas. Total revenue for the top 10 in 3Q03 was up by 1 percent over the previous quarter (see Figure 2), beating the 0.7 percent growth from 1Q03 to 2Q03. (This growth had previously been reported as 1.2 percent, but has been adjusted downward following the restatement of Telecom Italia's revenue after its merger with Olivetti in August 2003.) This acceleration in revenue growth is a clear sign that the market is beginning to improve.

3 Figure 2 Top 10 Fixed-Line Operators' Combined Quarterly Revenue: Western Europe, 1Q02-3Q03 59,000 Millions of Euros Up by 0.7% on previous quarter Down by 1.5% on previous year Up by 1.0% on previous quarter Down by 0.2% on previous year 58,500 58,000 57,500 57,000 56,500 56,000 55,500 1Q02 2Q02 3Q02 1Q03 2Q03 3Q03 119107-00-02 Source: Company financial reports and Gartner Research Figure 2 also shows that the top 10's combined revenue in 3Q03 declined by 0.2 percent compared with the same quarter a year earlier. This compares with a yearon-year decline of 1.5 percent from 2Q02 to 2Q03, and again indicates that the market is improving. Gartner believes that it will be another two or three quarters before year-on-year growth resumes, once any cyclical variations have been eliminated. We expect relatively high quarter-on-quarter growth in 4Q03 as operators push to meet year-end targets, although revenue in this quarter will likely be relatively unchanged compared with the same quarter a year earlier. We forecast that combined revenue in 1Q04 will be up by between 0.2 percent and 0.5 percent on the same quarter in 2003, and combined revenue in 2Q04 will be between 0.7 percent and 1 percent higher than in 2Q03. Despite growth in total revenue, operators will continue to experience weakening demand for traditional voice services. They will therefore need to focus on improving and developing new revenue streams in mobile communications, and in data and Internet services such as broadband and Ethernet-related services. In addition to signs of improving revenue, the top 10 operators are meeting other financial goals. They continue to focus on debt reduction and cost constraints. Although year-on-year capital expenditure declined by 7 percent in 3Q03, this was a marked improvement on the 20 percent year-on-year decline in 2Q03. Despite the decline in capital expenditure, operators are still investing in high-growth segments such as extending and developing broadband networks and service offerings, and developing Universal Mobile Telecommunications System (UMTS) networks and mobile data services. For example: Telefonica (through its overseas subsidiaries) increased capital expenditure in its mobile division because it deployed GSM networks in Chile and Mexico. It also increased capital expenditure in its Terra Lycos division and its content and media business.

4 Top 10 Fixed-Line Operators in Western Europe, 3Q03 Telecom Italia continued to invest in innovative wireline services (broadband, content). BT continued to invest in its "new wave" fixed-line initiatives (which include broadband, global solutions and mobility). Most of BT's capital expenditure will be directed toward its IP-based network for the deployment and future-proofing of advanced and value-added services. KPN continues to invest in broadband coverage and transmission and content development for its fixed networks. Although Gartner expects year-on-year capital expenditure to continue to decline during 2004, the rate of decline will slow as operators focus on where to get the best return on investment, in terms of revenue, profitability and future-proofing services. Areas for continued investment are the convergence of voice, and data (including mobile), convergence of telecommunications and IT, broadband, Wi-Fi, Ethernet, content services, and the development of mobile data and video platforms, billing engines and so on. Operators' Growth Rates Vary In the seven quarters since 1Q02, revenue performance among the top 10 operators has varied. The worst performers have been BT and Telefonica, whose compound quarterly revenues have declined by 2.2 percent and 0.3 percent. All the others' revenue grew over this period, with the best performers being, Deutsche Telekom, France Telecom and Telenor, each with compound quarterly growth of 1.6 percent. BT's revenue decline reported in euros suffered from the deteriorating U.K. pound/euro exchange rate, although other factors also contributed. The decline in Telefonica's revenue was due mainly to currency devaluations in Latin America. In 3Q03, seven of the top 10 had higher revenue than in the previous quarter (see Table 1). This is a slight improvement on 2Q03. The best performers in 3Q03 were Deutsche Telekom and TDC, which both had quarter-on quarter increases of 3.6 percent, followed by Telefonica (2.3 percent). The worst performers were Telecom Italia (-4.3 percent) and TeliaSonera (-0.9 percent). Table 1 Top 10 Fixed-Line Operators' Revenue Growth: Western Europe, Year on Year, and Quarter on Quarter Operator Growth 2Q03-3Q03 Growth 3Q02-3Q03 Deutsche Telekom 3.6% 4.9% British Telecom -0.4% -11.3% France Telecom 1.5% -2.7% Telefonica 2.3% 6.4% Telecom Italia -4.3% -1.7% KPN 1.3% 1.8% Swisscom 1.0% -2.8% TeliaSonera -0.9% 0.2% TDC (TeleDanmark) 3.6% -0.1% Telenor 2.0% 4.4% Total 1.0% -0.2% Source: Company financial reports and Gartner research Comparing 3Q03 with 3Q02, the best performers were Telefonica (6.4 percent), Deutsche Telekom (4.9 percent) and Telenor (4.4 percent), and the worst were BT (-11.3 percent), Swisscom (-2.8 percent) and France Telecom (-2.7 percent). But BT's year-on-year decline in U.K. pounds is just 2 percent.

5 Strong Performers Deutsche Telekom's growth is due mainly to strong increases in mobile, data and Internet revenue, and growth in wholesale (particularly international) within T- Systems' carrier services area. Figure 3 emphasizes Deutsche Telekom's strong performance in these areas in 3Q03 compared with a year earlier. The growth in broadband is also a contributor to Deutsche Telekom's increased revenue, as is as a slight increase in T-Systems-related data services. The latter are helping to ease the financial position of many German small and midsize businesses, which is leading to increased sales of data services. Telefonica's strong revenue performance follows its recovery from the adverse affects of Latin American currency devaluations during 2H02 and 1Q03. Its Latin American division's revenue in 3Q03 grew by 15.8 percent over 2Q03 and by 10.0 percent over 3Q02. Greater stability in Latin American currencies also helped strong revenue growth in Telefonica's mobile business, both inside and outside Western Europe. Moreover, the decline in Telefonica D'Espana's revenue is waning as access revenue rise. In the future, increases in this source of revenue may be sufficient to offset the decline in fixed-line voice revenue. Weak Performers Telecom Italia's revenue as reported by Gartner Dataquest has been impacted by the merger with Olivetti. We have changed the way we have historically presented Telecom Italia's revenue to take into account of the merged group's revenue. Its total 3Q03 revenue has fallen in comparison with the previous quarter and with a year earlier. More favorable Latin American exchange rates were not sufficient to offset declining revenue streams from that region. Also, declining revenue from the company's IT Market and Tecnost group more than offset any growth achieved by the IT Group division during the quarter. But Telecom Italia's mobile revenue grew year-on-year and quarter-on-quarter. Domestic wireline revenue grew by only 0.1 percent compared with a year earlier (but declined compared with the previous quarter). These improvements, along with improved European revenue from data and Internet services and improvements in wholesale revenue, were not enough to prevent the group's overall revenue declining in 3Q03. BT's 3Q03 revenue declined by 11.3 percent quarter-on-quarter (but by only 2 percent in U.K. pounds) and by 0.4 percent year-on-year. The main reason for the decline is falling revenue from its core fixed-line voice services and from wholesale services. The growth in revenue from new national data and Internet-related services and from BT Global Services was not sufficient to compensate for these declines. Unlike the other top 10 operators, BT cannot look to increasing mobile revenue to offset declines in traditional revenue sources, as it no longer has a mobile arm. This means BT must continue to focus on achieving strong growth in its retail services business by developing the broadband market, and in its international and enterprise offerings by developing advanced IP-related services.

6 Top 10 Fixed-Line Operators in Western Europe, 3Q03 Figure 3 Revenue Growth by Segment by Operator: Western Europe, 3Q02-3Q03 30% 20% 10% 0% -10% Fixed Line Voice Fixed Line Data Wholesale Mobile -20% -30% -40% -50% Deutsche Telekom British Telecom France Telecom Telefonica Telecom Italia KPN Swisscom TeliaSonera TDC (TeleDanmark) Telenor Total 119107-00-03 Source: Company financial reports and Gartner Research. This is includes Western European revenue only by segment. Fixed-Line Voice Market Segment Continues to Decline Figure 3 shows that fixed fixed-line voice revenue in 3Q03 declined quarter-onquarter for each of the top 10 operators. With the exception of Swisscom, all operators experience increased revenue from fixe-line data services, due mainly to growth in broadband, Internet and new IP-related data services such as Multiprotocol Label Switching (MPLS) and IP VPNs. Swisscom's data revenue declined because of lower revenue from its enterprise solutions networking division. Changes in the Swiss Franc/euro exchange rate were also a factor. Mobile revenue continued to grow in all operators, with the exception of Telenor, which was also affected by exchange rate fluctuations. Wholesale revenue increased by respectable percentages except in TeliaSonera, Swisscom and BT. In these three operators, quarter-on-quarter wholesale revenue declined because of reduced demand for international wholesale and carrier services, price reductions for basic wholesale services and an increase in competing operators connecting directly with each other instead of with the incumbent. However, Figure 4 shows that wholesale revenue across the top 10 was relatively unchanged over the seven quarters from 1Q02 to 3Q03.

7 Figure 4 Quarterly Growth in Revenue Segments: Western Europe, 1Q02-3Q03 20,000 18,000 16,000 14,000 Millions of Euros +1.6% Compound Quarterly Growth Rate From 1Q02 to 3Q03 +3.1% 1Q02 2Q02 3Q02 4Q02 1Q 03 2Q03 3Q03 12,000 10,000 8,000 6,000 +2.4% +0.1% 4,000 2,000 0 Fixed Line Voice Fixed Data and Internet Wholesale Mobile 119107-00-04 Source: Company financial reports and Gartner Research Table 2 shows the total top 10 operators' total revenue by segment for 3Q02 and 3Q03. Significantly, fixed-line voice is now a smaller proportion than mobile voice and data, reversing the situation a year ago. This trend is set to continue, and operators must strive to increase other revenue streams (mobile, data and Internet) to compensate for declining fixed-line voice revenue. If they don't, any market improvement will be short-lived. To succeed, operators need to: Manage fixed-line voice revenue streams carefully. Increase average revenue per customer. Generate new mobile and data revenue. Enhance their wholesale portfolios to add services on top of basic commodity transport-related services. Table 2 Top 10 Fixed-Line Operators' Combined Revenue by Segment: Western Europe, 3Q03 vs. 3Q02 Revenue 3Q02 (Euros M) Revenue Share Revenue 3Q03 (Euros M) Revenue Share Growth 3Q02-3Q03 Fixed Line Voice 17,801.2 36.9% 16,271.4 33.3% -8.6% Mobile Voice and Data 16,340.9 33.9% 17,761.5 36.3% 8.7% Data and Internet 7,736.7 16.0% 8,588.5 17.6% 11.0% Wholesale Voice and Data 6,348.5 13.2% 6,293.7 12.9% -0.9% Total 48,227.3 100.0% 48,915.2 100.0% 1.4% Source: Company financial reports and Gartner Research

8 Top 10 Fixed-Line Operators in Western Europe, 3Q03 Actions for Operators Although the top 10 operators' revenues are starting to improve, they need to manage their revenue mix. The best performers will be those that are investing in the development of advanced and converged data and Internet services such as broadband networks, broadband content, Web hosting, billing transmission, converged applications and optical fiber. Although mobile revenues continue to grow strongly, a maturing market and high European mobile penetration will temper future growth. As a result, future growth in mobile revenue will require operators to increase the average revenue per mobile customer. Achieving this will mean investing in areas such as mobile data, content for delivery to mobile devices, or even fixed-tomobile integration. Operators will also need to invest in the associated enablers such as mobile data platforms, content management systems, prepaid billing engines and network development. Growth in these areas will counter declining fixed-line voice revenues. The most successful among top 10 Western European operators will be those with the ability to manage and address declining fixed-voice revenue streams while creating new and innovative revenue-generating services. Key indicators of success are: The level of investment an operator has made in networks to support future services and in service-delivery capabilities. Clearly articulated target markets. Integrated back-office capabilities to support bundled services and billing. A strategy for moving toward converged services, both fixed-to-mobile, and voice and data. Key Issue How will opportunities in the public network service market be affected by competition, technology and evolving user requirements This document has been published to the following Marketplace codes: TELC-WW-DP-0642 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-267770 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 119107