European telecom leaders envision significant challenges ahead, but are confident about the future * Customer behavior will increase traffic volume dramatically, driving the need for substantial network investments * Most conference participants expect internet players to play a prominent or even "disruptive" role in shaping the future of the industry * Private equities and other active investors are expected to play a key role in driving the future of the sector Madrid - 19 June 2007 - Changes in customer behavior strongly influenced by the younger generations are configuring a new landscape in the telecommunications world, challenging the comfort zones for all players involved: telco operators, internet players, media companies and equipment providers. This was one of the recurring messages at a by-invitation-only conference of senior telecoms industry executives hosted by strategy consultants A.T. Kearney in Madrid. For Martin Sonnenschein, Head of A.T. Kearney's European Communications and High Tech Practice, "the telecommunications industry continues to be attractive, with EBIT margins of 18% versus the 13% average for all sectors." "The global telco market is expected to grow 5% annually between 2006 and 2010, chiefly driven by mobile," Mr. Sonnenschein continued. Mr. Antonio Viana-Baptista, General Manager of Telefónica España, sees "four elements that are challenging the basics of the business: consumer behavior, technology, competition and regulation". In Mr. Viana-Baptista's opinion, "changes in consumer patterns are even stronger in the younger generations, that is, those below 30; teenagers are doing things that we don't know and that will shape the future of our sector." Several speakers agreed that the new usage patters are increasing the volume of traffic and loading the networks and will continue to do so dramatically in the next few years, therefore determining the need to heavily invest in fiber development. "We expect the total communication traffic in Spain to multiply by 20 between 2005 and 2009," stated Mr. Viana-Baptista. He cautioned, however, that fiber deployment in Europe is lagging behind the United States, potentially posing a threat to the productivity of European companies. Mr. Louis-Pierre Wenes, Senior Executive Vice President of Group Transformation and French Operations at France Télécom, also sees a new industry landscape being developed. "We are facing a new telco ecosystem formed by equipment and infrastructure providers, telco operators, internet players and content providers," he says. In Mr. Wenes's view, telco operators can legitimately aspire to a more prominent role in this new ecosystem, drawing on their deep knowledge and direct relationship with their broad customer base - for example, by better targeting advertisements based on customer profiling. Failing to do so, he said, could make network operators vulnerable to becoming mere utilities. For Eduardo Montes, President of Siemens Enterprise Communications GmbH, as well as Management Board Member and Senior Vice President of Siemens AG, new players such as Apple, Microsoft and HP are entering the vendors' field and reshaping it. "We need to expect the unexpected. Technology is no longer a limitation, so now the real challenge is to detect customers' needs rather than to look for killer applications we can 'push' to them as in the old days," he stated. Santiago Moreno, Director of Institutional Relations at Vodafone Spain, and Miguel Martins, President of Portuguese broadband operator AR Telecom, concur that customers simply want their communication needs to be met and are not concerned about what technologies operators use (e.g., fixed vs. mobile, DSL vs. cable) to do so, as long as they are competitive in terms of price and quality of service. An informal poll of the conference participants, comprising top executives from European operators, vendors, media and internet companies, showed that over 90% expect convergent offers to account for more than one-fifth of European market revenues in 2010, although less than half (42%) think that more integrated operators enjoy a substantial, sustainable advantage. Asked about the role the "new kids on the block" will play in shaping the future landscape of the industry, over 60% expect internet players (similar to Google or Microsoft) to have a substantial role, while 50% believe new device providers (similar to Apple or Nintendo) will play such a role. Thomas Kratzert, head of A.T. Kearney's telecommunications practice in the Nordic unit remarked: "We've been talking about convergence for several years now. Convergence is already here and it will continue to evolve. What traditional telco operators need to do is to rethink their business models so that they can continue to be at the center of the stage and avoid becoming a mere 'bit pipe.' Development of new innovative relationship models involving players from adjacent sectors - like media, internet, vendor providers - is becoming imperative." Among those surveyed, 82% expect active investors such as private equity firms to play an increased role over the next three years, a circumstance that 66% believe to be positive or, at least, neutral. Finally, in the conference poll, over half the respondents - 54% - unofficially predict that their own companies will enjoy annual growth rates in cash flow of greater than 5% over the next five years. Should these predictions prove to be true, they would meet exactly what the equity markets are looking for at present. According to Jake Donovan, Head of Telecom EMEA for JP Morgan, the markets are currently placing greater emphasis on growth as opposed to yield, although they are now at what he calls an "event phase," as expectant markets await mergers & acquisitions, breakups, etc. In his view, if a company's share price is performing well in the absence of growth, it may well be because markets consider it to be a takeover target. Another important topic of the conference was approached in the "search for integration synergies" panel. Mr. Georg Polzl, Chief Transformation Officer of Deutsche Telekom, set the tone of the discussion by mentioning that "we need to be careful not to abuse the word 'synergy.'" Along the same lines, Joaquín Coronado - Chief Operating Officer of Spanish cable and broadband operator ONO - and Peter Foyo - President of Nextel de México's - agreed that synergies are about setting clear targets and aligning the organization to achieve them. Mr. Carlos Calvo, Chief Operating Officer of Telefónica España, emphasized the importance of leadership to carry out organizational transformations and overcome internal resistance, adding that "we not only have to seek cost synergies, but also revenue synergies." In that quest, Mr. Calvo said: "Resistance to achieving synergy targets is overcome with lots of communication and, above all, lots of leadership." "All in all, reinvention of the business is not planned; instead, players will try to change the wheel while driving the car" concluded Mr. Sonnenschein of A.T. Kearney. # Ends # For further information, please contact: Thomas Kratzert Partner, Head Nordic Unit A.T. Kearney AB Biblioteksgatan 11 Box 1751 S-111 87 Stockholm +46 8 679 39 00 +46 70 896 6918 +46 8 678 18 80 Fax Note on A.T. Kearney A.T. Kearney is an innovative, corporate-focused strategy consulting firm known for high quality tangible results and its working-partner style. The firm was established in 1926 to provide management consulting advice concerning issues on the CEO's agenda. Today, we serve the largest global clients in all major industries. A.T. Kearney's offices are located in 48 cities in 32 countries in Europe, Asia Pacific and the Americas.