2016 "economics of telecoms" report - update of key economic metrics

Core presentation – Fédération Française des Télécoms

2016 “Economics of Telecoms” Report

– Update of key economic metrics

December, 2016

2

Agenda

1 Global digital ecosystem: which dynamics?

2 French digital ecosystem: which dynamics?

3 Key takeaways

3

Globally, the digital ecosystem has experienced a strong growth mostly

driven by internet players and device manufacturers

Source: Thomson Reuters, Arthur D. Little analysis1Top 30 per category by 2015 revenues2Euro vs 2015 local currency, applied to the local current currency value

Global digital ecosystem: which dynamics?

Illustrative

companies

Network

operators

Telecom

equipment

IT and

software services

Internet

Content

Devices

1 332

270

185

334+6%

1 237

2014 2015

1 301

3 915

493

3 709

175

1 271

2013

3 526

1 176

174

460

269

233262

1 215

2012

481

3 358

1 106

1 165

283

442

184

828

25586

984

3 128

2 649

188

960

951

2 882

20102009

371343

2008

274277

145

2011

1 054

412

189

108

187

1 052

269

179

2 642

198

27374

927

357

869

820

2007

200

2 459

746

326

25266

Revenues of the digital ecosystem by sector1

World, 2007-2015, billions of constant euros2

CAGR

2007-2015

+1%

-1%

+8%

+5%

+22%

+5%

4

Network operators and device manufacturers have driven 70% of the

world ecosystem’s growth over the period

Source: Thomson Reuters, Arthur D. Little analysis1Top 30 per category by 2015 revenues2Euro vs 2015 local currency, applied to the local current currency value


Revenues of the digital ecosystem1

World, 2007-2015, billions of constant euros2

268

Internet

18

Telecom

equipment

167

15

Content Ecosystem

2015

IT and

software

services

Network

operators

Devices

432

Ecosystem

2007

2 459

3 915

586

(31%)(-1%)

(40%)

(11%)(1%) (18%)

(x%) : weight in the growth of the digital ecosystem

5

The digital ecosystem continues to grow at a slightly higher rate than the

world GDP

Source: Thomson Reuters, Arthur D. Little analysis 1In PPP dollars


GDP growth

Growth of the

digital ecosystem

CAGR

2007-2015

+6%

+5%

144

159

90

100

110

120

130

140

150

160

2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP growth1 vs revenues of the digital ecosystemMonde, 2007-2015, base 100 in 2007

6

Europe is the only region which does not benefit from the growth of the

digital ecosystem

Source: Thomson Reuters, Arthur D. Little analysis


North America

+6%

Europe

South America

Oceania

2015

Asia

1 601

47

2013

1 361

18

2012

483

3 358

3 709 18

1 460

2014

1 790

51

1 697

173 526

3 915

514

54

1 539

499520

1 228

1 150

17

17

1 391

508

17

2011

530

46

1 057

531

2009

4036

3 128

1 2672 642

2010

1 081

1 497

2 8822 649

22

2008

17

2007

2 459

997

25

921

18

523506

16

1 015

19

1 073

1 035

Revenues of the digital ecosystem by sectorWorld, 2007-2015, billions of constant euros

+7%

0%

+8%

+14%

+1%

CAGR

2007-2015

7

Apart from telecom equipment vendors, all other digital ecosystem players

have exceeded their before-downturn capitalization levels

Source: Thomson Reuters, Arthur D. Little analysis


CAGR

2012-2015

Market capitalization value by sector World, 2007-2015, billions of constant euros

1 264

4 020

269 300

4 577

558520

1 154

980

894

350

1 026

1 280

1 197

1 149

1 020

2012

517

2009

1 099

538

4 544

1 079

391

1 149

249

287159

3 713

2008

233

2 794829

302

870

2007

312

4 044

313

2010

895

420

970

337 326

447

936

816

329

1 587

430

2014

0%

415

Content

1 552

408

353

Network

operators

6 656

537

1 484

2013 2015

6 923

1 629

5 9461 219

1 398

Telecom

equipment

Internet

1 542

522

1 362

1 511

Devices

IT and software

services

+15%

2011

1 506

+14%

+11%

+6%

+14%

+39%

+11%

CAGR

2007-2012

-4%

-8%

+4%

+5%

+11%

-5%

8

All telecom operators, except European ones, have benefited from a

strong growth over the period

Source: Thomson Reuters, Arthur D. Little analysis1Nationality according to HQ location


Evolution of telecom operator revenues per region1

World, 2007-2015, billions of constant euros

+5%

Europe

North America

South America

Asia

273

2013

1 176

391

48

18

428

442

18

283

2012

1 106

349

Oceania

2014 2015

474

1 237

17

290

42

295

492

45

1 301

45321

18

2008

329

927

291

279

2011

17

35

372

299

2010

295

2009

41

333

17

297

951

291

292

341

1 054984

403

32

17

322

2007

17

1617

265

288

869

18

282

+7%

0%

+7%

+14%

+1%

CAGR

2007-2015

9

European telecom operators’ capitalization is still far lower than pre-

downturn level

Source: Thomson Reuters, Arthur D. Little analysis1Nationality according to HQ location


53

442

404

1 154

45

426

314

23

2009

357

51436

44

38

1 197

41

2011

552

385

251

28

2010

290

1 149

407

1 506

2012

355

32

2007

1 079

33

1 099

24

29

2008

1 587

434

316316

423

445

314

387

304

635

32

+11%

North America

-5%

Europe

40

Asia

2015

Oceania

1 629

339

640

577

27South America

2013

39

545

46

593

49

317

2014

1 542

-8%

-10%

0%

0%

+2%

CAGR

2007-2012

+11%

+11%

+13%

-13%

+8%

CAGR

2012-2015

Evolution of telecom operator market capitalization per region1

World, 2007-2015, billions of constant euros

10

Agenda



3 Key takeaways

11

The French mobile market is very dynamic in terms of equipment and

data consumption

French digital ecosystem: which dynamics?

Source: comScore, ARCEP, network operator, AT&T, Arthur D. Little analysis1Active 3G or 4G broadband clients

Average monthly

data consumption1

Smartphone installed base

(Millions de smartphones)

4G cards

(Millions of active cards)

34

Jan.-15 Jan.-16

+8%37

25

13

4

Q1 2015

+157%

Q1 2014 Q1 2016

X%

5% 19%

% of SIM card

1 GB

Q1 2015

1,5 GB

Q1 2016

54%

34%

Connectivity and equipment in France – MobileFrance, 2014-2016

55h of music streaming or

6h of SD video streaming

12

Broadband subscriptions are growing strongly in France, largely in the

form of multiple play bundles


Source: ARCEP, Arthur D. Little analysis1Speed >= 30 Mbps2Fixed broadband and other subscriptions

4,8

3,6

+33%

Q2 2016Q2 2015

Very High Speed1 broadband

subscriptions

(Millions of subscriptions)

Multiplay subscription2

(% fixed broadband subscriptions)

Q2 2016

68% 69%

Q2 2012

62%

Q2 2014

+6%

Connectivity and equipment in France – Fixed broadbandFrance, 2012-2016

13

2%1%

14%

1%

82%

1%

89%

4%

3%

8%

68%

16%

4%

3%

3%

12%

17%

14%

54%

Network operators are essential to the French digital ecosystem

Source: Diane, annual reports, Arthur D. Little analysis1Revenues declared in France or released in the press2Adjusted data to account for estimated revenues of international players in France3Investments of Nokia’s mobile business unit are reported with Microsoft following the acquisition of this unit by the latter in 2014


5 content

players

5 Internet OTT

players

5 telecom

operators

5 equipment

vendors

5 device

manufacturers

Revenues1,2

€73 B

Direct jobs

128 500

Investments3

€9 B

Taxes

€3 B

Relative size of sub-sectors in the digital ecosystemFrance, 2015

3%

R E I T

14

The share of telecom services in French household spending is low and

has decreased over the past few years

Source: Euromonitor, Arthur D. Little analysis


Telecom share in total household spendFrance, 2007-2015, % of household expense

17%

Clothing &

furniture

9%

Leisure

15%

Food

4%

Health

27%

Housing

13%

Transport

2%

Telecom

services

13%

10%

4%

24%

14%

16%16%

3%

13%

Others

20152007

R E I T

15

Contrary to other key regulated sectors, telecom services prices have

dropped over the past 5 years

Source: Insee, Arthur D. Little analysis


Consumer price index evolution on selected productsFrance, 2010-2015, Base 100 in 2010

130

122

79

106

75

80

85

90

95

100

105

110

115

120

125

130

2010 2011 2012 2013 2014 2015

Telecom services

Postal services

Inflation

Rail111

Toll roads & parking

117

Electricity

City gas115

R E I T

16

Prices of telecom services in France are still lower than in other large

Western countries

Source: network operators, Arthur D. Little analysis1Triple play offers only; unlimited calls to fixed lines at least; unlimited high-speed Internet via xDSL or fibre; TV included, except for additional packages; operators with > 10%

market share; 2 Unlimited calls when available (otherwise >500 minutes), unlimited SMS/MMS, 2 Go Internet at least; offers excluding device, free of engagement when available;

operators with > 10% market share


Offer benchmark – Main operatorsSelection of countries, October 2016, € incl. taxes / month

37€

28€23€22€20€

15€

USSPUKITAL

2015 20 € 42 €30 € 74 €› 25 € 47 € 30 €20 €20 € 47 €45 €26 €

Fixed (Triple Play)1 Mobile2

74€

41€36€

26€25€18€

R E I T

17

The strong decline in revenues from network operators has had an

important negative impact on level of employment of 2010

Source: ARCEP, Insee, Arthur D. Little analysis1Incl. a part of direct employments2ARCEP figures (retail market)


Direct employments and revenues of network operators in FranceFrance, 2010-2015, Base 100 in 2010

87

94

60

70

80

90

100

110

2010 2011 2012 2013 2014 2015

83

Revenues2

Direct employment (ARCEP)

CAGR 2010-2015

- 1,3 %

- 3,7 %

Employment (DARES)1 - 2,8 %

R E I T

18

Despite the drop in revenues, operators strongly raised their investments

to meet the demand for very high speed broadband


Source: ARCEP, Arthur D. Little analysis1Investment effort : operators investments (excluding frequency acquisition) / operators revenues2Temporary ARCEP figures for 2015

Telecom operators investment and revenue evolutionFrance, 2010-2015, Base 100 in 2010

121

83

147

70

80

90

100

110

120

130

140

150

2010 2011 2012 2013 2014 2015

Investment effort1

Investment effort

(excluding frequency acquisition)2

Revenues2

R E I T

19

Telecom operators’ investments has remained very high – €62 billion

were invested over the period


Source: ARCEP, Arthur D. Little analysis1Investments excluding frequency acquisition2Speed >= 30 Mbps

Investments of network operators1

France, 2007-2015, billions of constant euros

3,8 4,3 3,7 4,4 5,0 4,9 4,7 4,75,5

2,42,2

2,22,1

2,3 2,5 2,6 2,42,3

20102007

7,47,3

5,96,5

2008

6,5

2009 2011

6,1

7,3

20152012 2013

7,8

2014

Mobile

investments

Fixed

investments

7,0

% of

revenue15% 15% 14% 15% 17% 18% 19% 19% 22%

R E I T

62 billion

(69 billion including frequency acquisition)

Before Very

High Speed2

Investment phase incl.

Very High Speed

With ~7m of

fiber

connections,

France benefits

from a coverage

of ~25% of

households in

2016

20

The 7 billion euros invested each year by network operators represent a

very significant weight in the economy

Source: companies, desk research, Arthur D. Little analysis1Network operators: ARCEP figures (excluding frequency acquisition); Electricity: RTE (2009 to 2014) and ERDF; RFF; Highways: ASFA (Sanef, SAPN, ASF….)


Telecom operators investments1 vs. other sectorsFrance, 2008-2015, 8-year annual average

7,0

5,04,7

1,7

Highways Tr. / distrib.

of electricity

Railways Network

operators

equivalent to the

following

investments, each

year…

or

235 TGV trains

18 A380

17 Millau Viaducts

5 nuclear power plants

or

or

or

520 high school

R E I T

http://www.google.com/url?url=http://www.alundi.com/l/viaduc-de-millau-12543&rct=j&frm=1&q=&esrc=s&sa=U&ei=cp8QVPq-H4_darOUgegE&ved=0CDIQ9QEwDg&usg=AFQjCNFXFg3EUjJPwquyMB6vZo7ERguxDw

21

Telecom has a multiplier effect on the economy, as telecom investments

yield 6 times the amount invested for the French economy

Source: INSEE, IDATE, ARCEP broadband observatory, Arthur D. Little Ericsson Chalmers university of technology « Socioeconomic effects of broadband speeds », French State

finance law project 2013 report on compulsory levy and their evolution, Arthur D. Little analysis


6 €

3 €1 €

R E I T

Multiplier

effect: x6

46% of compulsory

levy on GDP

Telecom operators’

investment in

broadband networks

(fixed and mobile)

Cumulative creation

of added value

(GDP) in France

Taxes and

levies

Examples of induced effects on

the economy

Time and productivity gains for

enterprises

Time savings and customer

experience improvement

Emergence of new sectors of

activities and new players

Value creation of the telecom

investments

1 euro invested in broadband

networks creates 6 euros of

GDP which represents 3 euros

of revenue for the State

generategenerate

22

10 years

15 years

16 years

19 years

19 years

24 years

25 years

27 years

49 years

Luxury goods

Food & agriculture

Telecoms

Construction

Oil

Industry

Utilities and environmental services

Health

Consumer goods

As a consequence, the telecom sector is based on heavy investments

which are amortized on a long term basis

Return on investment timeframe1 for various business sectors2

France, average 2012-2015, number of years


Source: company, Thomson Reuters, Bloomberg, Arthur D. Little analysis1ROALTC : return on average long term capital is calculated as follow : EBIT x (1 – Taxes) / (Total Equity + Total Long Term Debt, Deferred Income Tax and Total Other Liabilities) 2Utilities and environmental services: EDF, Suez, Veolia ; construction: Saint Gobain, Vinci ; telecoms: Orange, SFR, Iliad, Bouygues ; consumer goods: Carrefour ; health: Sanofi ; industry: Renault, Michelin, Schneider Electric; luxury goods: LVMH, L'Oréal, Kering ; food & agriculture: Danone; oil: Total

R E I T

23

Despite the decline in telecom operators’ revenues, specific taxation

remained stable in France

Source: operators, FFT, Arthur D. Little estimations1 Perimeter : top 4 companies’ taxes & FFT members specific taxes 2IFER antennas and copper

Telecom operators’ taxationFrance, 2012 and 2015, millions of euros and % of total taxes

1 219

2015

1 209

2012

4%

7%

10%

26%

47%

6%

R E I T

2015

1 058

2012

2 018

Income tax

Specific taxes

Fréquencies + FH

IS

TOCE (France TV)

COSIP (CNC)

IFER2

Others


24

Telecom operators suffer from an asymmetric taxation, which is

disadvantageous in comparison with other players of the digital ecosystem


Source: Greenwich Consulting, Conseil National du Numérique, PPL Marini, desk research, Arthur D. Little analysis1Forecast figures2Google, Apple, Facebook, Amazon

Fiscal optimization mechanism in Europe of the GAFA

Country of final

consumption

Establishment country

Place of fiscal registration

Ireland

Luxemburg

Examples

VAT Income tax

€600 million of tax revenue on

electronic services for France

in 20141

€14 million of income tax for

the « GAFA2 » in France in

2015

Network

operators

Internet

players

x9

Income tax paid in

France in 2015

R E I T

25

Telecom operators’ margins are used to finance strong investments

Source: companies, desk research, Arthur D. Little analysis1Top 4 of French network operators incl. Orange, SFR, Bouygues Telecom and Free2Estimated operational FCF (EBITDA – CAPEX)


Comparison between KPIs of the telecom sector1 and CAC402015, billions of euros

x% % of revenues

Network operators CAC 40 average

Dividends2 3,3

Revenues

1,1

12,8

Taxes

39,1

CAPEX 8,0

EBITDA 33%

20%

3%

Dividends 1,0

0,7Taxes

5,1

2,3

EBITDA

CAPEX

Revenues 39,1

13%

2%

2%

R E I T

8% 2%

26

Despite efforts made by operators to enhance their profitability, this was

more than absorbed by the growth in investment

Source: companies, desk research, Arthur D. Little analysis1Top 4 of French network operators incl. Orange, SFR, Bouygues Telecom and Free2Estimated operational FCF (EBITDA – CAPEX)


Economic performance of major French network operators1

France, 2013-2015, billions of euros

Revenues EBITDA Operational FCF2

-5%

2015

39,1

2013

41,2

12,0

+7%

2013 2015

12,8

2013

-8%

2015

5,3 4,8

29% 33% 13% 12%

x% % of revenues

+18%

2015

8,06,7

2013

16% 20%

Capex

+ € 800m

of EBITDA

+ € 1,3b of

investmentsvs

27

Agenda



3 Key takeaways

28

Key takeaways of the 2016 "Economics of Telecoms” Report

Key messages

The digital ecosystem keeps growing in every region of the world, except in

Europe1

Appetite for digital services is very strong, especially in terms of connectivity and

usage2

As digital services and technologies rely on connectivity, there is an opportunity

to rebuild a strong digital ecosystem in France3

Telecom operators are the basis of the current digital ecosystem in France and

are key players to develop the sector4

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2016 "economics of telecoms" report - update of key economic metrics

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