Manoel L. Amorim

1
HOW FIXED LINE OPERATORS (ILECs) CAN CREATE
VALUE BEYOND PRODUCTIVITY IMPROVEMENTS.

• Manoel L. Amorim
• CEO, Telecomunicações de São Paulo S.A. (Telesp)
• Telefonica Group

São Paulo, April 20, 2001
1
2
Telefonica Group in Brazil

• Largest non State owned, non banking enterprise
  in the country in 2000
• 09 independent operating companies sharing commom
  services provided by a Shared Services Center and
  a Country Corporate Center.

2000 NET Revenues R 9.415.000 M
Ownership Share of Groups revenues
86.19 65
86.19
65.04 28
100 1.4
100 4.3
100 0.6
100 0.8
B2B, EMERGIA, TEBS
3
TELESP

• One of 3 ILEC concessions
• in Brazil.
• Most attractive concession area
• in the country.

Telemar
Brazil Telecom
Telesp
5.025 31 21 80 3.5
3.474 100 100 100 100
GPD/Capita (US / year) Countrys GDP
Countrys Population of Countrys top
250 largest corporations of Countrys land
Area
.
Source Investor Conference March 2001, except
of Country land Area (IBGE)
4
TELESP
A success story since privatization
1998
2000
Growth ()
Financial performance (MM R) Revenues EBITDA
EBITDA margins Net income Debt /
Asset Cost / Line R Operational
Performance LIS M Waiting list Lines /
employee R / employee
4.496 2.429 54 678 6.1 0,32 6.409.457 8.461.
648 339 36
7.312 3.975 54 1.481 9.5 0,31 10.595.923 2.4
57.095 825 115
63 64 1 119 58 - 2 65 -71 144
222
5
TELESP
Performance ahead of Anatel goals set in
concession contract
Key Universalization Indicators
Anatel Goal for 2000
Telesp Actual Performance - 2000
Minimum number of fixed access installed (in
thousands)
10,882
12,485
Minimum number of public telephones (in thousands)
240.460
248.039
Maximum distance between public telephones within
the limits of a locality (in meters)
800
Reached
Key Quality of Service Indicators
Minimum digitalization level of network ()
75
93.07
Dial Tone within 3 seconds (as a of cases)
98
99.92
Local call completion rate during pick periods
60
65.77
Maximum repair requests (as of lines in
services)
3
2.82
6
TELESP
WHERE CAN ADDITIONAL VALUE COME FROM?
7
TELESP
Still plenty of value creation opportunities
Market
Voice
Internet
Broadband
Stage
Young-adulthood
Infancy
To be created
72 HH penetration of basic lines. 1,4 MM
waiting list. 39 pennetration of value added
voice services.
15 HH penetration.
lt 1 HH penetration.
Telesp Position
99 Local SP traffic. 70 LD intra-state. 0
LD inter-state. 0 LD international.
99 SP Traffic.
70 share in SP. 50 share nationally. Ahead
in learning curve.
Telesp goals

• Defend and develop local voice traffic.
• Leadership share of LD nationally.

• Defend and develop internet traffic in
  partnership w / ISPs in SP.

• Develop and lead nationally.

8
Broadband access creates new market opportunity
Broadband Access
Broadband Applications
Impact on interactive services market

• Rich media content
• High-quality video streaming
• Heavier use of graphics
• Better quality of sound
• Integration of video/audio/data
• Sophisticated interactivity
• Fast 2-way interaction
• Impulsive usage
• Attractive digital delivery
• Larger files, faster delivery
• Pull and push content
• New ways to price services

Faster/more bandwidth

• Improve attractiveness of existing
  services
• Internet
• iTV
• Expand reach to new devices
• Enable new services

Always / instant on
Flat fee
9
Potentially dramatic impact on many types
ofInteractive PC applications
Types of PC application
Broadband potentially enables

• Video
• Music
• Gaming

• Video/Audio on-demand with motion picture/CD
  quality
• Web-casting of TV and CD radio
• High-speed on-line video games
• Push services (e.g.,news)

Entertainment/ Information

• Marketing Sales
• Distribution
• Customer care

• Interactive advertising
• Virtual tours
• Click and talk
• Software distribution

E-commerce

• Messaging
• Telephony
• Conferencing / chat
• File exchange

• Video/voice Email
• High quality VoIP
• Video conferencing/chat
• Video napster , home working

Communication
10
Early brodband users are attractive customers(US
Example)
Hours online per month
Narrowband
More than 2 years online
Applications usage
Broadband
75
72
72 h
More active
61
Lifetime value Index
55
36 h
196
Affluent households
Annual online spending
Online purchase frequency
100
942
More atractive
21
40
566
13
23
Narrow-band
Broad- band
Compounded index of usage of e-mail, software
download, Chat, financial services, games
Annual income above USD 100.000 Source ITM
research Chello Jupiter Excice_at_Home subscriber
study McKinsey e-marketer e-land inc. Ziff
Davis
11
A Sticky service offering
Once you go to ADSL , yor never go back
Actual consumer quote
would sacrifice item before giving up their DSL
Coffee Newspaper Radio Cable TV
63 78 74 59
And they want more!
Interest in future applications
Distance learning Video on demand Video
conferencing
71 70 69
12
The broadband opportunity in Brazil
13
Significant value to be captured by early
winners, as the market is still in very early
stages of development
Brazil broadband subscribers by technology
ADSL
Cable
78
60
2000
2001
2002
2003
Source The Yankee Group, 2000
14
ADSL offered by ILECs is expected to be the most
popular broadband technology in the medium term
in Brazil
ADVANTAGES VS. PAY TV OPERATORS   Larger coverage
than cable infraestructure . Paid TV services
available to only 7 of Brazilian
cities   Higher capitalization than paid TV
operators   Investment focus top priority for
telephone operators   Ability to sell bundled
services distinct preference of SME market ,
easier / one stop shopping , key to achieving
scale and   Large commercial network and
infra-structure selling broad service offerings.
15
LEADING BROADBAND DEVELOPMENT HOW TELESP PLANS
TO  TURN COPPER INTO GOLD
16
In Brazil Telesp is ahead of the game
Estimated Market Shares
ADSL
Telesp (Speedy)
Cable
São Paulo Brasil
75 55
75 30
25 45
17
And demmand continues to be strong...
18
And we keep improving our performance (1)
19
And we keep improving our performance (2)
20
And We keep improving our performance (3)
Daily Complaints
Trends
21
And Telesp is accelerating ADSL growth by
focusing on key success factors
Technology management

• Dedicated supplier experts
• Documentation of procedures
• Rationalization of equipment

Provisioning

• Dedicated operation
• New systems

Customer Care

• Dedicated call center and field operations
• Close management monitoring of performance
• Speedy resolution of problems

Right partnerships

• ISPs and content developers

Rigth pricing and broad offerings
22
Key Conclusions

• Significant potential value in broadband for the
  future
• Higher customer NPV
• Sticky offering
• Many opportunities to sell VASs.
• Very low HH penetration.
• ILECs have important competitive advantages to
  capture broadband value
• Large coverage
• Higher capitalization
• Investment focus
• Commercial arm
• Early movers
• Focus on key success factors pays out
• Tecnology management
• Provisioning