Portugal Telecom Board Member

Both sides of the same story!

Peter Golob

Lisbon, September 2004

2

• The Portuguese telecoms market has achieved a The Portuguese telecoms market has achieved a strong level of developmentstrong level of development

• Portugal Telecom has been a key driver in this Portugal Telecom has been a key driver in this process - as opposed to some of its competitors - and process - as opposed to some of its competitors - and despite a very demanding regulatory contextdespite a very demanding regulatory context

• In the future we intend to continue this effort through In the future we intend to continue this effort through a new growth era for the sector with the support of a new growth era for the sector with the support of both Government and regulation authoritiesboth Government and regulation authorities

Contents

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Contents

• The Portuguese telecoms market has achieved a The Portuguese telecoms market has achieved a strong level of developmentstrong level of development

• Portugal Telecom has been a key driver in this Portugal Telecom has been a key driver in this process - as opposed to some of its competitors - and process - as opposed to some of its competitors - and despite a very demanding regulatory contextdespite a very demanding regulatory context

• In the future we intend to continue this effort through In the future we intend to continue this effort through a new growth era for the sector with the support of a new growth era for the sector with the support of both Government and regulation authoritiesboth Government and regulation authorities

4

Portugal has a very strong infrastructure base

Indicators

Fixed coverage (percentage of population)

Mobile penetration (percentage of population)

Cable footprint with “bidirectionability” (percentage of households)

Broadband penetration (percentage of households with PC)

Portugal EU average

100 100

100 90

5030

40 28

5

Service penetration rates are also amongst the highest in EuropePercentage

Spain

*June 2003 data

Source:ANACOM; ECTA; Pyramid

101

99

98

94

92

91

85

85

81

79

70

UK

Germany

Spain

France

Netherlands

Switzerland

Portugal

Mobile(2004)Mobile(2004)

Belgium

Italy

Handset penetration

Greece

Norway

63

47

44

39

38

28

23

23

21

10

UK

Germany

France

Netherlands

Switzerland

Portugal

Cable(2002)Cable(2002)

Belgium

Italy

Homes passed with bidirectionality

Norway

UK

Germany

Spain

France

Netherlands

Portugal

Broadband(2003)

Broadband(2003)

Belgium

Italy

Penetration*

Austria

25

22

16

13

11

10

10

9

8

6

Penetrations are supported by low average prices in a market with competitive conditions in placeEuro cents per minute

*Price per minute of a 3-minute call, regular hours

**Average revenue per minute

***Average excluding Portugal

Wireline* interconnection rates (2004) Mobile** (2004)

Leased lines basket

Origination tariffs Termination

0.70 0.72Local 0.70 0.70

1.00 1.00 1.00 0.98

1.49 1.47 1.49 1.41

Single transit

Double transit

Portugal EU14*** Portugal EU14***

70

100

Portugal EU15

1922

Portugal European average

Index: 100 European average. 2002

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Contents

• Portuguese telecoms market has achieved a strong Portuguese telecoms market has achieved a strong level of developmentlevel of development

• Portugal Telecom has been a key driver in this Portugal Telecom has been a key driver in this process - as opposed to some of its competitors - and process - as opposed to some of its competitors - and despite a very demanding regulatory contextdespite a very demanding regulatory context

• In the future we intend to continue this effort through In the future we intend to continue this effort through a new growth era for the sector with the support of a new growth era for the sector with the support of both Government and regulation authoritiesboth Government and regulation authorities

8

Main investments

Total CapexEUR billion 1996-2003

Upgrade of historic infrastructure

Rollout of successive waves of mobile technology

Infrastructure development in a competitive environment

~3

• Network digitalization• ATM, IP network

development• Launch of new services

(ADSL, Voice mail, etc.)

• Rollout of GSM network• 2.5G upgrade• 3G rollout

• Cable network rollout• Network digitalization • Launch of NetCabo, iTV

~2

~1

Source: PT

Fixed Fixed

Mobile Mobile

Cable/Cable/Multimedia Multimedia

Portugal Telecom had a key role in the development of the sector in Portugal through major investments policies…

9

As opposed to PT, Portuguese competitors show disappointingly low levels of investment as demonstrated by the unbundling example…

52.1

25.8

24.0

16.5

16.0

9.9

5.8

4.0

3.9

3.9

2.6

1.7

1.3

Competitors’ investment levels June 2003, % of C.O. Utilized by attackers

Average 12.9%

Average 12.9%

Finland

Netherlands

Italy

Austria

Sweden

Luxemburg

France

Belgium

Spain

Ireland

Portugal

Greece

UK

Only ~60 out of ~1,600 central offices were being used by competitors in January 2004

8.88

8.17

6.25

5.45

5.30

4.77

4.15

3.49

2.95

2.80

2.32

2.25

0.61

Partial unbundling Monthly fee

Norway

Ireland

UK

Austria

Greece

Germany

Denmark

Spain

Portugal

Italy

Belgium

Netherlands

France

66.90

123.41

165.53

10.90

47.04

74.91

32.25

26.97

88.21

54.87

54.86

44.05

78.70

One-off cost

Average 4.41

Average 4.41

Low prices and availability … … but low investment from competitors

100% of MDFs in Portugal prepared for unbundling

100% of MDFs in Portugal prepared for unbundling

ILLUSTRATION

10

… where Portugal is well behind its peers

*Includes total and partial unbundling

Source:ECTA; Project team

Europe has a slow evolution of unbundled lines... ... but Portugal is one of the less unbundled countries in Europe

642

683

743

883

959

1,010

1,137

1,545

Number of unbundled* linesThousands of lines

3T 01

4T 01

1T 02

2T 02

3T 02

4T 02

1T 03

2T 03

0,31%0,31%

0,34%0,34%

0,37%0,37%

0,44%0,44%

0,49%0,49%

0,52%0,52%

0,59%0,59%

0,79%0,79%

2.60

2.30

2.20

1.60

1.13

0.50

0.25

0.24

0.19

0.11

0.06

0.05

0.01

0.01

Unbundled* lines (June 2003)Percentage of total

Average 0.79%

Average 0.79%

Denmark

Finland

Holland

Germany

Italy

Austria

Sweden

Luxemburg

France

Belgium

Spain

Ireland

Portugal

Greece

Only 5,000 lines were in use by the attackers in 2004

11

In France, where competitive conditions are similar to Portugal, solid strategies have enabled competitors to achive a strong market positioning

Fonte:UBS

France

Portugal

2,95

2,90

Shared

Monthly fee

78,7 78,7

887 887 11,96

10,50

Total

7979

84 84

15

7

7

6

510

50

DSL market share 1Q 2004

FT

Free

AOL

Tiscali

Club Internet

Tele 2

Other

Tele 2 gained this market share in ~9 months with an offer based in renting unbundled lines from LD Com (which has 50% of the population unbundled)

On off fee

Unbundling conditions

12

PT has been a strong industry driver despite a strict liberalization process not conceived to benefit the incumbent…Not only Portugal implemented the liberalization 3 years before the negotiated schedule,… … but also has done it faster than its peers

Liberalization in Europe

Liberalization in Portugal

Scheduled liberalization date for Portugal

19981998

20002000

20032003

Time for introduction of regulatory measures after liberalizationMonths

ULL PreselectionNumber portability

Belgium

France

Italy

Switzerland

Spain

Austria

Portugal

Germany

36

26

26

25

18

12

12

36

24

26

8

0

36

8

0

24

0

25

24

13

27

6

0

27

13

PT provides a comprehensive range of “social services”…

Universal service Plans for retired people

Plans for low consumption levels

Plans for people with disabilities

Social role exclusively

supported by PT

14

…along with other mandatory services also supported solely by PT and without compensation until now

Telegraph “Móvel marítimo”

Telex Broadcasting transport

15

There are several European countries where wireline incubents also own cable networks

Stream (50%), 2nd cable operator in the country with ~900 thousand subscribers

TDC Kabel TV (100%), largest cable operator with ~800 thousand subscribers

Telenor Avidi (100%), largest cable operator with ~370 thousand subscribers

European examples of simultaneous ownership

Regulatory intervention is not acceptable in a context of development of the cable network in a liberalized market

Italy Italy

DenmarkDenmark

Norway Norway

Wireline op. Cable op.

Telecom Italia

TDC

Telenor

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Contents

• The Portuguese telecoms market has achieved a The Portuguese telecoms market has achieved a strong level of developmentstrong level of development

• Portugal Telecom has been a key driver in this Portugal Telecom has been a key driver in this process - as opposed to some of its competitors - and process - as opposed to some of its competitors - and despite a very demanding regulatory contextdespite a very demanding regulatory context

• In the future we intend to continue this effort through In the future we intend to continue this effort through a new growth era for the sector with the support of a new growth era for the sector with the support of both Government and regulation authoritiesboth Government and regulation authorities

17

PT is currently the largest corporate group in Portugal…

Source:Bloomberg; Annual report

Market cap of main Portuguese companiesSeptember 2004 Millions euros

1,780

2,272

2,795

3,795

4,065

5,860

7,050

2,785

11,087

Number of clientsPercentage. Millions

93

34Vídeo

Data

Voice

35

12

15

73Mobile Brasil

Mobile Portugal

Fixed Portugal

Voice clients

100%=32

24%24%

15%15%

13%13%

9%9%

8%8%

6%6%

6%6%

5%5%

4%4%

The Group PT weights ~30% of PSI20 market cap … … and has more than 30 million clients

Weight in PSI 20 market cap

18

… contributing strongly to the economic development of the country…

• Weight in Portugal >3% of GDP

• Leader in the internationalization process of the national economy – present in the 5 continents

• Largest floated Group in Portugal – 30% of … capitalization

• Present in leading capital markets (one of the two Portuguese companies fully listed in NYSE-PT and BCP)

• Key contributor to the development of the information society

• One of the main employers in Portugal - ~14,500 employees

• Weight in Portugal >3% of GDP

• Leader in the internationalization process of the national economy – present in the 5 continents

• Largest floated Group in Portugal – 30% of … capitalization

• Present in leading capital markets (one of the two Portuguese companies fully listed in NYSE-PT and BCP)

• Key contributor to the development of the information society

• One of the main employers in Portugal - ~14,500 employees

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PT’s leadership in the development of the Information Society is one of the Group’s main strategic priorities

Reinforce its role as the

lead actor in the

development of Portugal’s Information

Society

Aspiration

• Increased investment in new technologies, launching and contributing to the mass market development of innovative products and services (e.g., PT’s support of the Aveiro innovation center)

• Support and financing of R&I projects developed by domestic investors and researchers

• Support of specialized technical training, “job recycling” and continuous training

• Development of discussion forums on the information society subject

• Support to the development of entrepreneurship in Portugal

Main initiatives underway

20

To achieve this vision we expect a healthy participation of Portuguese authorities

• Develop Information Society– Promote PC penetration (e.g., subsidize PC acquisitions)– Promote internet utilization (e.g., introduce internet in all public schools)– Promote internet utility perception (e.g., dinamize media advertising

about internet advantages)– Promote e-government (e.g., migrate public services to internet)

• Strictly apply the basic principles of the new regulatory framework– Primacy of ex-post regulation over ex-ante regulation (e.g., do not

introduce ex-ante regulation if “direito da concorrência” is enough to deal with the problem)

– Primacy of wholesale regulation over retail regulation– Minimize regulation over new/emerging markets (e.g., broadband)

• Promote competition, not competitors’ interests, i.e., promote competition based on investments and innovation rather than on free riding

• Promote infrastructure models rather than pure resale models

What we expect

GovernmentGovernment

ANACOMANACOM

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In summary …

• Some players and commentators have pessimistic views on the Portuguese Telecoms market

• Some structural challenges exist but hard facts show that they do not stop Portugal from being at the forefront in the telecom sector

• PT has been a key driver in this process …

• … as opposed to some of our competitors and despite a very demanding regulatory context

• We are a leading player in the market and we have an integrated growth vision …

• … that we expect to develop in a healthy environment supported by Government and regulatory authorities

Thank you !

Back-Up

Section 1

25

What some critics say about the telecoms markets in Portugal

Lack of competitiveness

The regulator is too soft

The prices are too high

“É o enquadramento de um mercado pouco aberto, pouco liberalizado, que nos condiciona”

Pedro Norton de Matos in Diário Económico 14/09/2004

“Estamos a pagar pelo acesso às centrais mais do que noutros países”

Pedro Norton de Matos in Diário Económico 14/09/2004

“A oferta de chamadas grátis (…) é ilegal e viola os mais elementares princípios da concorrência”

Tele 2 19/03/2004

Recent quotations from attackers

26

In fact despite some efforts, Portugal is a difficult market when compared to its European peers: it is a small country with limited income levels, …

SizePopulation. Millions

WealthGDP per capita nominal Thousand euros. 2003

A small market… … with lower income levels

82.5

59.8

59.7

58.1

40.8

16.1

11.4

10.4

8.8

5.3

Germany

France

UK

Italy

Spain

Netherlands

Greece

Portugal

Sweden

Denmark

44.2

37.7

35.3

33.3

32.5

32.4

28.2

22.8

17.0

15.3

Germany

France

UK

Italy

Spain

Netherlands

Greece

Portugal

Sweden

Denmark

27

0.01.

01.01.01.01.42.02.02.1 6.

7

… low sophistication levels…

Illiteracy rate PC penetration rateInternet and broadband utilization in schools

PortugalUS EU*

Schools with broadband Percentage

Schools with websitesPercentage

36

2

94

5737

86

Percentage. June 03

Netherlands

Austria

U.K.

Belgium

France

Germany

Spain

Italy

Portugal

94% of classrooms in

the US with internet access

94% of classrooms in

the US with internet access

65

58

52

50

47

46

45

43

31

Spain

Portugal

Austria

Belgium

Italy

Netherlands

UK

France

Germany

Denmark

Percentage. 2003

28

… heterogeneous resource distribution …

Two different Portugals

“Interior”

“Litoral”

64

87

Purchasing power index

Population densityPop./km2

With a very high concentration on the two major cities% of population of the two major cities

38

38

27

26

24

22

21

13

9

40

377

Portugal

Spain

Belgium

Italy

France

Germany

Denmark

Sweden

Greece

29

… and less modern than its peers, which is illustrated by the primary sector weight in the economyPercentage. Weight of I sector in GDP

1.10

2.10 2.20

3.60

5.565.88

Portugal is the European country where the primary sector weighs more

7171 72.472.4 6969 6868 71.471.4 6464

Spain PortugalItalyUK Denmark Greece

III sector weight

Section 2

31

21 to 26

7

3

Source:European Commission

Delay granted in Portugal

Telephone

Telecoms sector demands a much stronger effort than that of other sectors

Electricity

Gas

Water

Larger effort demanded to the telecoms sector, resulting in a more aggressive competitive environment

Sectors in liberalization National

5

High

Low

Effective delay

2

Internal/external competition

International

Oni, Jazztel

—

Some distributors (e.g., Digal)

—

Vodafone, Optimus/France Telecom

Sodesa

Shell, BP

—

32

Regulation levels in the telecom sector are higher than in other industries…

“Internal”

ProductsProducts

Prices Prices

Ex ante regulation strongly limits development of new products (e.g., bundled pricing plans)

Although present in costing model, curtailment cost are not always considered for pricing definition (e.g., circuits)

Swift liberalization; many (>10) attackers in retail markets

Transparent wholesale offer mandatory, cost-driven and no discrimination

“External”

New entrantsNew entrants

Wholesale offerWholesale offer

Ex-ante regulation limits product development, although commodity status of electricity makes it not critical

Curtailment cost accepted by the regulator for price definition (e.g., restructuring costs)

Delayed liberalization for retail; few entrants (e.g., Sodesa)

Wholesale offer will be available in the future

No limitations on new product launch

Free pricing by operators for products or bundles

Legal barriers (commercial licensing law) protect established players (despite new legislation)

No legal restrictions to the wholesale offer

Telecommunications Electricity Mass distributionLevel

NON- EXHAUSTIVE

Favorable

Unfavorable

33

… and the obligations imposed on the telecoms incumbent are among the strictest in Europe

To supply telephones to any home anywhere

Restrictions on selling bundles of different product families (e.g., fixed and mobile)

6-month ban on contacting clients lost to competitors

To supply pipe gas to any home anywhere

Ban to buy other products in a gas station

Ban on selling fuel to anyone who used another reseller

To have train lines in every corner of the country

Ban to buy monthly tickets to replace more expensive 1-journey tickets

Ban on using a train by anyone who had used a bus

Hypermarkets forced to deliver goods anywhere at zero cost

Ban to sell coffee and sugar bundled in a discounted price

Hypermarket banned from servicing clients that shopped elsewhere

Telecommunications Energy Transport Mass distribution

Universal serviceUniversal service

Commercial positioning

Restrictions to product develop-ment

Restrictions to product develop-ment

Win-back períodWin-back períod

We have in place almost every obligationthat have been imposed in other countries …

… plus some obligations specific to Portugal and very few other countries• Win back• Retail minus in

broadband• Special

interconnect regime for dial up internet

Remedies proposed by Anacom on the new NRF represent the complete supermarket offer

We have in place almost every obligationthat have been imposed in other countries …

… plus some obligations specific to Portugal and very few other countries• Win back• Retail minus in

broadband• Special

interconnect regime for dial up internet

Remedies proposed by Anacom on the new NRF represent the complete supermarket offer

34

Furthermore, universal service is supported by PT alone since ever…

No contribution or other type of support ever provided by other operators

Section 3

36

PT is the only telecoms operator with presence in all 5 continents…Examples

Macau

Timor

37

Our vision for the future entails a growth strategy based on 3 segments

Corporate

Residential

Personnel

Fixo Móvel Cabo