Reports from eb Center 6 15804

Competition in Spain's
Telecommunications Sector
Reports fromebcenter
ESTUDIO TI inglés.qxd 15/6/05 16:18 Página 1

Competition in Spain's Telecommunications Sector
Authors: Prof. Josep Valor, Information Systems, IESE Business School
Prof. Sandra Sieber, Information Systems, IESE Business School
Research assistants: Guillermo Armelini
Pascal Trauffler
Editor: Larisa Tatge
www.ebcenter.org
© 2005. e-business Center PricewaterhoseCoopers and IESE. All rights reserved.

Reports fromebcenter
Competition in Spain's Telecommunications Sector

Authors of the Study:
Prof. Josep Valor, Information Systems, IESE Business School
Prof. Sandra Sieber, Information Systems, IESE Business School

Contents
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
1.1. The Evolution of Telecommunications in Europe . . . . . . . . . . . . . . . .7
1.2. The Concept of Online Value Network . . . . . . . . . . . . . . . . . . . . . . . .9
2. Telecommunication Services Supply . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.1. The Fixed Line Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.1.1. History and Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.1.2. The Fixed Line Business Value Chain . . . . . . . . . . . . . . . . . . . .17
2.1.3. New Opportunities in the Fixed Line Business – ADSL
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
2.2. The Mobile Phone Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
2.2.1. Evolution and Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
2.2.2. The Value Chain for Mobile Phone Operators . . . . . . . . . . . . . .28
2.3. Fiber Optic Cable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
2.3.1. The Development of Cable . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
2.3.2. The Online Value Network for Fiber Optic Cable . . . . . . . . . . .32
2.4. Emerging Broadband Technologies – Digital TV, Voice over IP, Satellite
and Power Line Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
2.4.1. Digital TV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
2.4.2. Voice over IP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
2.4.3. Satellite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
2.4.4. Power Line Communication . . . . . . . . . . . . . . . . . . . . . . . . . . .39
2.5. The Telecommunication Online Value Network – Overview . . . . . . .41
3. Competitive Situation in Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
3.1. Full Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
3.2. Multiservice Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
3.3. Specialized Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
3.3.1. Specialist in a Certain Market . . . . . . . . . . . . . . . . . . . . . . . . . .45
3.3.2. Niche Player . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
3.4. Selected Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
3.4.1. Wireline Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
3.4.2. Mobile Telephony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

4. Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
4.1. Spanish Household Spending in Telecommunication Services . . . .58
4.2. Estimate of New Product Consumption and Consumer Reaction
to Product Bundling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
5. Industry Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
5.1. Content, Technology and User Expectation . . . . . . . . . . . . . . . . . . .64
5.1.1. Fit Between Content and Technology . . . . . . . . . . . . . . . . . . . .65
5.1.2. User’s Expectations and Content-Technology Mix . . . . . . . . . .66
5.2. Possible Future Scenario in Fixed Line Business . . . . . . . . . . . . . . .68
5.2.1. Substitution Between Fixed Line and Mobile . . . . . . . . . . . . . .68
5.2.2. Emergence of Voice over IP . . . . . . . . . . . . . . . . . . . . . . . . . . .70
5.2.3. Consequences of Substitution and VoIP . . . . . . . . . . . . . . . . .71
5.3. Broadband Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
5.3.1. What Can be Done to Stimulate Demand for Broadband? . . .74
5.3.2. Broadband Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
5.4. Mobile Telephones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78
5.4.1. Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78
5.4.1.1. Virtual Network Mobile Phone Operators . . . . . . . . . .78
5.4.1.2. Trend Toward Post-Pay Contracts . . . . . . . . . . . . . . . .78
5.4.1.3. Clients’ Willingness to Pay for Mobile Phone Content 79
5.4.1.4. Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
5.4.2. Current Competitive Dynamics . . . . . . . . . . . . . . . . . . . . . . . . .80
5.4.3. UMTS Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
5.4.4. Fourth Generation Mobile Telephony (4G) – What does the Future
Hold? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83
5.4.5. Co-existence of Mobile and Landline Technology . . . . . . . . . .85
5.5. Major Operators’ Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
5.5.1. Telefónica’s New Strategic Orientation . . . . . . . . . . . . . . . . . . .85
5.5.2. Auna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88
5.5.3. ONO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
5.5.4. Vodafone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90
5.6. The Impact of Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91
6. Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94
6.1. OECD Survey Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94
6.2. Sources for Figure 10 - ARPU (H1 2004) of Selected European
Mobile Phone Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97
6.3. Selected Financials of Major Players in the Spanish Telecom
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

e-business Center PricewaterhouseCoopers & IESE 7
1. Introduction
1.1. The Evolution of Telecommunications in Europe
During the last 15 years, the European telecommunication industry has expe-
rienced a deep and continuous transformation. The most significant triggers
of transformation and corporate restructuring have been the liberalization and
privatization of formerly government-controlled activities and the arrival of
various generations of technological innovations such as mobile telephony
and data transmission, which led to a continuing globalization of business
activities within the sector.
Traditionally the telecom sector had developed within the institutional frame-
work of the nation-state. Conventional wisdom considered the supply of com-
munication services as a natural monopoly, based on economies of scale
(Fransman, 2001: 112). Hence, in most countries existed one incumbent servi-
ce provider. In Germany, for instance, the public telecommunication operator
(PTO) was Deutsche Telekom, British Telecom held the monopoly in the UK,
NTT in Japan, and AT&T in the United States. These national carriers provided
voice, fax and later on some other enhanced services to the final customer. As
can be seen in Figure 1, the value chain in these days was short and straight-
forward: contents offered were scarce, there was only one network technology
and only one monopolistic player who produced content and assured delivery
of the latter to the end customer. In this value chain there was no room for addi-
tional players or alternative value propositions. The absence of competitors
allowed the single operator to capture all the value along the chain.
Figure 1 - Telecommunication Value Chain Before the Liberalization of the Market
Source: The Authors.
Content:
voice,fax
Telephone
network
Localloop
Device
Customer

During the ‘90s a deep technological change in information and communica-
tion technologies (ICT) took place. Increasingly, analog signals, be it voice,
data or image, were transformed into digital signals and thereby converged in
their format (digital convergence). Hence telecommunication networks were
required to carry more and more digital signals, Internet achieved critical mass
in 1997 and its penetration in households and companies has continued gro-
wing. Additionally the deployment of broadband networks, both in local loop
and backbone, enables the transmission of huge amounts of data using
Internet-based technologies. Finally wireless technologies, mainly cellular
phones, have rapidly been adopted by the public, reaching penetration rates
of over 80% in Europe, Japan and the USA.
In the context described above, in 1987, the European Union (EU) started a
gradual process of liberalization, establishing the principles and conditions of
the competition in the telecommunication sector in a document called “The
green book”. The aim was the transition from a situation in which a monopo-
list competed for the market, maintaining high prices and limited volume,
towards a market of free competition, within which the participants would
compete in the market, creating a dynamic of low prices and high volumes.
After setting up the rules for a competitive market, the European commission
created an organization whose purpose is to control the liberalization process
and to interact with the national regulators whose mission is to implement the
regulatory framework in their respective countries.
The telecommunication business is one which tends to create natural monopo-
lies subject to network externalities, which is why the EU deemed necessary the
presence of a regulator in order to create a competitive market. In effect, in most
European countries, a single dominant telecom operator held a monopoly in the
sector. Liberalizing the sector without a regulatory framework would probably
have prevented the entry of new players into the market due to the huge advan-
tage the incumbent has with its existing and fully depreciated telephone network.
The role of the regulator is not easy; it has to determine the “correct” prices
for end customer and interconnection services, the level of investment requi-
red for the new entrants (in order to prevent the latter from taking advantage
of the incumbents, existing network without investing themselves in infras-
tructure). Moreover the regulator needs to distinguish between innovative and
anti-competitive action and act in consequence.
8 e-business Center PricewaterhouseCoopers & IESE

The process of liberalization in Europe has been a success from different pers-
pectives. First, prices have considerably gone down especially for long distance
and regional calls. Another point in favor of this process has been the growing
number of new operators with focuses on different markets (some of them are
generalist operators while others are niche players). In the end, although gene-
rally regulation is considered an impediment to free market competition, it proved
to be a beneficial “necessary evil” for the development of the telecom sector.
In Spain the process of liberalization of the telecommunication sector began in
1996 when the government created the Comisión del Mercado de Telecomuni-
caciones (CMT), a public body whose main purposes are to grant operating licen-
ces to telecommunication service providers, to control the reasonable develop-
ment of the market, to guarantee compliance with network interconnection rules
and to watch prices of services and other features of the telecom sector.
In 1998 the congress of deputies approved the general telecommunication law
by which telecommunication services are not public services but general purpo-
se services. With this new categorization the telecommunication services can be
offered in a competitive market.
1.2. The Concept of Online Value Network
The online value network1
is the set of industries creating the connection betwe-
en the customer and the products or services in an interconnected, information-
based economy (See Figure 2). It is the value network in which we represent the
content provider on the left and the end customer on the right.
Figure 2 – The Online Value Network
1
Valor, Josep, “The Online Value System”, IESE Technnical Note SIN-37-E, March 2001.
Content
Provide
Por
Network
Hosting
Application
Internet
Loc
User
Oper
Brows
Software
Customer

The change from a monopolistic market to a multi-player market with high tech-
nological innovation had a double impact on the telecommunications value
chain.
First, there is more than one value chain: due to competing technologies and
merging contents, different value chains get into competition. The same content,
e.g. voice, can be transmitted to the customer via the fixed line telephone value
chain or the mobile phone value chain. On the other hand, digitalization allows
different contents to take the same value chain, while earlier, each content had
its own dedicated route. Formerly voice and TV were distributed through different
ways, but thanks to digitalization, the same fiber optic cable operator can, at
some point of the value chain, channel different contents. Hence the former value
chain has become a value network.
But at the same time, the value network becomes longer. A good example for this
is the popularization of the Internet. While in the basic voice business at the
beginning of the 90s there was only the telephone operator between the content
and the end customer, in the Internet access business the network is made up of
a content provider, the web hosting provider, the network provider (e.g. a classic
telephone operator), the Internet access provider, the suppliers of hard- and soft-
ware, the end customer.
Today, the telephone operator is only one link in the value network and thus can-
not capture the whole value created along the value network. At the same time,
due to free market competition, at the level of each link, numerous firms compe-
te for the favor of the customer.
The value chains have become longer and numerous, partly interchangeable and
intertwined, which poses the question to each of the players in the telecom busi-
ness where to position themselves strategically on this value network. We will
now proceed to study the businesses competing in this network.

2. Telecommunication Services Supply
For each of the existing carrier technologies currently in use in the telecom
industry, i.e. fixed telephony, mobile telephony and cable, we will briefly des-
cribe the market situation, then analyze its position within the online value net-
work. We will then try to identify the strategic implications for the players in the
telecom market.
2.1. The Fixed Line Business
2.1.1. History and Market
Before 1996, the only company authorized to provide fixed line telephony in
Spain was Telefónica de España (TdE). At that time 80% of its capital was in
private hands. In June 1996 the government decided to increase competition
in the sector by creating a new player, Retevisión2
, a public entity. After setting
up this duopoly, the following step was to tender the assets of both compa-
nies. In January 1997 the government sold its remaining 20.9% stake in TdE
and in July of that same year it awarded 70% of Retevisión to a consortium
made up of Endesa, Union Fenosa and Telecom Italia. At the end of 1998, the
remaining 30% was sold to these same three major shareholders and to
BSCH which bought 5.5%3
. In consequence, from December 1998 on, the
fixed line telecom market became one of free competition with two private pla-
yers subject to regulation.
Table 1 shows that from 1998 on, year in which the liberalization process was
initiated, the evolution of fixed line telecommunications has been beneficial to
the user. Traffic minutes in long distance, international and mobile phone calls
have risen substantially as a consequence of the price reduction. In all cases
except calls to mobiles, the drop in price per minute is so huge that the incre-
ased volume does not compensate it; revenue has dropped as a consequen-
ce. Only the traffic in calls to mobiles has soared so tremendously that the
overall turnover increased in spite of the unit price reduction.
2
Retevisión operated wireline telephony and is shareholder (40%) of Retevisión móvil which operates under
the brand name Amena from January 1999 on.
3
In 2000 Retevisión becomes part of a holding company called AUNA under which Endesa, Union Fenosa,
TI and later BSCH regroup their telecom participations. In December 2001, TI sells its 27% in AUNA to
BSCH.

Table 1 – Changes in Prices and Traffic 1997-2003
DESCRIPTION Local Long distance International Mobile
Change in price per minute 2003-1997 -16% -75% -70% -45%
Change in turnover 2003-1997 -14% -64% -6% 112%
Change in traffic minute 2003-1997 2% 44% 212% 287%
Source: percentages calculated from CMT data.
The price reduction and the rise in traffic were accompanied by a progressive
loss of market share of the incumbent. This phenomenon was especially mar-
ked in international calls, calls towards mobile phones and in inter-provincial
calls. (See Table 2).
Table 2 – Telefónica’s Market Share
Evolution of Telefónica’s market share (Revenue)
1998 1999 2000 2001 2002 2003
International calls 94.2 89.1 86.2 82.8 64.9 64.8
Calls towards mobiles 99.9 90.7 86.7 79.4 74.9 70.1
Inter-provincial calls 93.5 87.1 83.4 80.8 75.2 74.9
Provincial calls 99.6 96.0 90.6 84.3 79.1 76.9
Local 100.0 99.8 95.8 88.5 81.7 80.3
- Voice - - 98.9 90.5 82.5 77.2
- Internet - - 86.7 83.8 79.8 90.4
Total (Traffic) 95.2 92.9 89.7 84.3 77.2 74.8
Total (Revenue) 97.8 94.3 91.5 87.6 83.0 81.3
Source: CMT.
The loss of market share of the incumbent operator is observable in all dere-
gulated markets. Based on international comparisons, we believe that this
trend can continue for a few years in Spain. Looking at the UK, a market which
was one of the first in Europe to be deregulated, one notices a loss of market
share of British Telecom. At the same time, despite this trend, the incumbent
operator maintains an overall market share of over 60% (See Figure 3). Similar
trends can be observed in Germany4
.
4
Source: RegTP annual report.

Figure 3 - UK Fixed Line Telecom Market in Volume – Market Shares of Main Players
Source: OFCOM.
A finer analysis reveals that the market share split depends very much on the
type of call. In local calls, BT maintains a very dominant share of 71.7% (in
volume) while the share erosion is strongest in international calls where BT
retains only 30.3% (in volume).
100%
75%
50%
25%
0%
1997/1998 1998/1999 1999/2000 2000/2001 2001/2002
Kingston
Cable&Wireless
Others
NTL&Telewest

Table 3 - Market Shares in Local Calls, Volume and Revenue
Local calls (volume) BT Kingston Cable & Wireless NTL & Telewest Others
1997/98 83.0 1.0 6.5 7.3 2.2
2001/02 71.7 1.2 4.4 15.0 7.7
Local calls (revenue) BT Kingston Cable & Wireless NTL & Telewest Others
1997/98 85.3 0.4 5.9 7.0 1.4
2001/02 71.2 0.5 2.9 18.1 7.3
Source: OFCOM.
Although BT has lost most of its volume market share in international calls, the
loss of market share in terms of revenue has been less. This indicates that BT’s
competitors have gained this market share at the cost of a fierce competition on
price. Also noteworthy is that none of BT’s three big competitors have gained a
significant share in the international calls; all other competitors together hold 55%
of the volume but only 40.6% of the revenues. This can be explained by the high
number of competitors in this segment and the variety of the offer (prepaid cards,
call-by-call access, pre-selection, direct access, long-distance call shops).
Table 4 - Market Shares in International Calls, Volume and Revenue
International calls (revenue) BT Kingston Cable & WirelessNTL & Telewest Others
1997/98 49.30 0.20 17.70 3.40 29.40
2001/02 30.30 0.20 7.80 6.80 55.00
International calls (revenue) BT Kingston Cable & WirelessNTL & Telewest Others
1997/98 53.9 0.3 16.2 4.5 25.1
2001/02 45.7 0.3 5.4 8.0 40.6
Source: OFCOM.
In Germany, price erosion on international calls between 1998 and January
2004 has been up to 96% for certain destinations. Deutsche Telekom’s res-
ponse to the generalized price drop has been to offer flat rates, e.g. for natio-
nal calls, thereby increasing the fixed part of the telephone bill. Consumers
adopted these pricing schemes willingly. In Spain also, the industry has opted
for progressive increases in the monthly fixed fee to counteract the loss of reve-
nue from falling minute prices (See Figure 4).

Figure 4 – Spanish Telecom Sector: Loss of Traffic Induced Revenue and Increase of
the Fixed Charges.
Source: CMT.
Nevertheless, this first stage of the liberalization process, which brought bene-
fits to the consumer and loss of market share to the incumbent, has been
achieved at the cost of heavy investment efforts on behalf of the new entrants.
It proved to be difficult for the latter to enter the market, investing huge
amounts of money, and some of them still do not see positive returns. As can
be seen in Table 5, Telefónica’s main competitors have invested tremendous
amounts in fixed assets in the period between 1998 and 2003, but with the
exception of a couple of operators, most of them still have not broken even.
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1999 2000 2001 2002 2003
BT
6,358.6
5,683.6
5,547.05
6,050.84
5,086.73
1,646.4
2,189.4 2,269.47
2,583.94
2,780.38
Monthly fixed charges Traffic

Table 5 – EBIDTDA of Selected Wireline Operators
EBIDTA
(millions of euros) 1998 1999 2000 2001 2002 2003 Total 1989-2003 M Share 2003
Jazztel -6.1 -135.7 -163.3 -90.6 -40.5 -6.9 -443.0 n/a
Auna Telecom n/a n/a n/a -100.0 -40.0 124.0 -16.0 8.9%
Uni2 n/a -98.3 -95.5 -81.5 8.0 n/a -267.2 4.1%
Ono -9.0 -30.2 -55.8 -57.4 15.8 102.1 -34.5 2.1%
BT Ignite -17.1 -29.5 -65.5 -54.3 -31.5 n/a -197.8 n/a
Euskaltel 0..0 -23.1 -37.3 0.9 5.7 n/a -53.9 n/a
Colt Telecom -2.4 -5.6 0 5.6 14.8 19 31.4 n/a
Comunitel n/a 0.1 -7.2 -3.1 13.0 5.7 8.6 1.3%
Telefónica 0,0 4,496.8 4,453.9 4,485.3 4,496.7 4,534.0 22,466.7 77.2%
Source: CMT.
For the telecom operators the first stage of the liberalization in the fixed line
business has been characterized by: 1) Heavy investments in the rollout of
own networks (first in backbones, then in the local loop); 2) Need to achieve
critical mass in terms of number of customers and revenues to finance growth
in an environment favorable to the incumbent; 3) Competition mainly on price
due to lack of differentiation of the product (the indirect access is transparent
to the customer).
For the end customer the liberalization of the fixed line telecom market
brought along more than just price decay: 1) Improved service, e.g. it takes
less time to get a line installed at home; 2) Choice of operator with the option
to go with a niche player providing custom-made solutions for corporate tele-
com needs; 3) Faster access to latest technologies at reasonable prices.

2.1.2. The Fixed Line Business Value Chain
Figure 5 - The Fixed Line Value Chain
Traditionally telecom carriers transported only voice over their networks and
dominated the whole value chain. The telecom operator provided the network
infrastructure, the local loop and sometimes the hardware (the actual tele-
phone set).
As the content changes from analog signal to digital signal, all kind of data can
be carried over the telephone network. This implies that to the left of the value
chain, there is an increased number of content providers depending on what
kind of data need to be carried over the network. On the other side, closer to
the customer, different hardware is needed (decoders, computers) and soft-
ware plays an increasingly important role. The network in between the content
provider and the customer only needs to be reliable and fast as the amount of
data is ever growing, but it is completely transparent to the customer – it acts
as transport only. The customer is unaware of the technology used. The net-
Voicewithown
customers
Networkinfrastructure
LocalLoop
User’sHardware:
Telephone/Fax
Voicewith
customersof
othersoperators
(fixandmobile)
Network
interconnection
LocalLoop
User’sHardware:
Telephone/Fax
Traditional business Recent business Non-telecom business
Internet
Content
Providers
Portals
Network
Infrastructure
Hosting,Application,
Service
Provider
InternetAccess
LocalLoop
User’sHardware
Operat.System
Browser
Software
Application
Customer

work that carries the information becomes a commodity and is interchangea-
ble with other technologies (cable, wireless).
The implication for the telecom carrier is that in its traditional business its value
added is perceived as low and competition will mainly take place on price.
In order to keep creating value and to capture it, the telecom provider has to
position itself further on the side of the content provider or closer to the cus-
tomer. In the first case, the telecom carrier enters the business of providing
content (e.g. voicemail), portal services (terra.es) or application service provi-
ding. Moving closer to the customer means providing hardware equipment
(modems), software or services (e.g. 1004 by Telefónica).
2.1.3. New Opportunities in the Fixed Line Business – ADSL Technology
Figure 6 – The ADSL Value Chain
Voice
Networkinterconnection
TVContent
DistributionNetwork
Still in testing phase
Internet
Content
Providers
Portals
Network
Infrastructure(backbone)
Service
Provider
AccessNode
ADSLIAP
InterconnectionCenter
Coppertwistedpair
ADSLModem
User’shardware,OS,
Software
Application
Customer

POTS5
offered by telecom carriers are analog voice signal transmitted over a
pair of copper wires. This technology, when used to carry digital signals, is
limited to 64 Kbps or less. It is called narrowband and is inadequate for the
increasing amount of data exchanged nowadays. Since 2000, Telefónica
offers ADSL technology (Asymmetric Digital Subscriber Line) to its customers.
ADSL allows more data to be sent over the same existing copper telephone
line, increasing its capacity to up to 9Mbps when receiving data and 640Kbps
when sending data. ADSL thus increases the capacity of the existing telepho-
ne network without having to replace it, only by putting a piece of hardware
and software at both ends of the wire.
The telecom carrier improves its value proposition to the customer by offering
broadband services at an accessible price and reasonable cost. Moreover,
ADSL technology allows the use of voice and Internet access at the same
time. But again, to date, the service has a few drawbacks: 1) It does not add
value in terms of content and remains a commodity; 2) Its speed is limited to
640 Kbps upstream versus 9Mbps downstream (hence the denomination
Asymmetric DSL); 3) It is technologically inferior to its direct rival, fiber optic
cable, which can carry data at speeds of 100 Mbps.
In order to overcome these shortcomings, some ADSL providers are currently
trying to integrate content into their offer, the latest trend going towards TV
over ADSL and video on demand.
2.2. The Mobile Phone Market
2.2.1. Evolution and Market
The picture in the mobile phone market in Spain and Europe is a different one
from the situation in the land line business. Before the mobile phone became
accessible to the masses (2nd generation mobiles with GSM technology), the
legal framework and standards (GSM) for the development of a competitive
mobile phone market had been set. As a consequence it was unthinkable, at
least at the beginning, to see a monopolistic situation arising as was the case
in the fixed phone telecommunications.
5
POTS: plain old telephone services.

The first Spanish mobile phone operator was Telefónica Móviles (originally
named TS1). Telefónica Móviles operated mobile phones for cars since 1977.
In September 1995 the company started offering GSM telephony under the
brand name MoviStar. Already in 1994 the government had decided to intro-
duce a second mobile phone operator as an incentive to develop the service.
A consortium of companies led by Airtel was awarded the licence and started
operating in July 1995. At that time, the market was not yet liberalized.
After the national elections of March 1996, the Spanish government decided
to liberalize the telecom market. It granted a third mobile phone licence to
Retevisión Móvil (subsidiary of Retevisión) which entered the market under the
brand name Amena in January 1999 in 10 major Spanish cities. At that time,
Telefónica had already 5 million customers and Airtel had reached 2 million.
Liberalization and the introduction of three large companies led to competition
in this market, rather than competition for the market (monopoly). To date,
these three operators have been sharing a constantly growing market in terms
of number of clients. At the same time the price per minute has been slowly
declining (see Table 6). Over the last four years the average revenue per user
(ARPU) has been growing, despite the cheapening of the voice minute, due to
a higher consumption of data, mainly SMS (See Figure 7). The SMS business
apparently is a very profitable one, with some consumer associations claiming
that the operators’ margin is as high as 80%6
. In 2003, there were around 40
companies in Spain providing content over SMS (logos, ring tones and games)
for about 90 euro cents per unit, of which the mobile phone operator retains
50%7
.
6
Source: Federación de Consumidores en Acción (Facua-España) in an article of Redes & Telecom May 31,
2004.
7
Source: El Periódico, August 24, 2003.

Table 6 - The Mobile Phone Market
1998 1999 2000 2001 2002 2003
No. of customers 6,437.444 15,003.708 24,265.059 29,655.729 33,530.997 37,219.839
% Customers with
contracts/Total 66% 38.4% 35.1% 35.0% 37.7% 41.9%
Penetration rate in
the population 16.3% 38.1% 59.9% 72.1% 80.1% 87.2%
Billed Minutes (Mln) 5,216.0 10,427.0 17,026.0 22,942.0 29,258.0 36,266.0
Minutes per customer 810.3 695.0 701.7 773.6 872.6 974.4
Total Revenue (Mln EUR) (1) 2,504.4 3,420.0 4,894.2 6,315.8 7,474.2 9,953.7
Average price per minute (2) 0.48 0.31 0.26 0.24 0.21 0.20 euro
Revenue per customer (3) 389.0 227.9 201.7 213.0 222.9 240.6 euro
(1) Services to end customers only.
(2) Includes only voice minutes and fixed monthly subscription.
(3) Voice + all other services.
Figure 7 - Revenue Growth in Voice and SMS
Source: CMT. Nonexistent in 1999, in 2003 SMS already represents 13% of mobile phone revenues; it is the fas-
test growing segment.
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1999 2000 2001 2002 2003
Voice SMS
+28%
+18%
+19%
+117%
+45% +27%
MillionEur.

The market dynamics that obviously benefited the consumer most were the
popularization of the mobile phone at a quick pace and at accessible pri-
ces. The price drop has been especially rapid due to the necessity of mobi-
le telephony providers to reach critical mass in order to amortize the initial
investment in infrastructure. In the early stages of the race for critical mass,
mobile operators undertook huge marketing efforts and heavily subsidized
the handsets. Customers both in fixed and mobile telephony are price sen-
sitive, but the mobile phone further characteristics of a consumer product:
fashion awareness (especially at introduction of the product) and short
lifecycle.
The fast move of the price declining and the rapid technological improvement
of the mobile phones also brought disadvantages for the consumer:
· premium prices to pay for latest technology and rapid obsolescence of
the mobile device which especially hurt the first, fashion-conscious
buyers;
· difficulty in comparing tariffs as the operators competing on price try to
differentiate themselves through personal packages;
· risk of continuing to pay too high a price after tariffs for new phones are
adjusted downwards;
· network externalities: go with the operator that most of your friends go,
not the one with the best offer; cost of switching provider;
· incentive to postpone acquisition, waiting for prices to decline further.
In comparison with other major European countries, Spain has a relatively high
penetration rate, second only to Italy. This explains why in the last two years
mobile operators try to increase customer loyalty rather than expand custo-
mer base.

Figure 8 – Mobile Phone Penetration 2003
Source: European Commission, 9th implementation report.
In most European countries, the market share of the mobile subsidiary of the
incumbent operator is close to 50%; Spain is no exception to this. The two
biggest operators in the country typically account for over 75% of the market
share (See Figure 9). Only in the UK, the pie is split more evenly where the 4
operators have an almost equal share of 25% each.
Italy
Spain
United Kingdom
Germany
France
60 70 80 90 100 110
96%
87%
85%
75%
66%

Figure 9 - Concentration: Market Shares
Source: ART - 9th report of the European Commission (data from August 2003)
The mobile market is highly concentrated with only 3 or 4 operators in most
countries. Due to high penetration rates, it is unlikely that the cards will be
reshuffled soon in terms of market shares, unless one of the players, or a
new entrant, tries to gain market share by massively launching 3G tele-
phony before all the others. In effect, we have seen Hutchison Whampoa
reaping share from the other players in Italy and the UK, but it did not enter
the Spanish market. Here the three operators launched their 3G offer during
the year 2004.
The risk in such a highly concentrated market is to witness cartel formation
between operators. In France in July 2004, allegations arose about SFR,
Orange and Bouygues Telecom agreeing on prices. According to the July
12 ‘Le Parisien’, a report submitted to the industry ministry by France’s
DGCCRF anti-fraud authority has found proof of collusion in pricing8
. In
Spain, the FACUA (Federación de Consumidores en Acción) suspects the
Spanish mobile phone operators of colluding on SMS prices in order to
maintain high margins9
.
8
Source: Europe Information e-technologies, July 15, 2004.
9
Source: May 31, 2004 Redes & Telecom.
100%
75%
50%
25%
0%
Spain Italy France Germany United Kingdom
20.5%
26.0%
53.5%
17.0%
36.1%
15.7%
35.6%
48.7%
21.0%
48.7%
26.4%
24.9%
37.9%
41.1%46.9%
Incumbent’s mobile arm 2nd operator Other operators

As Figure 10 reveals, for the operators, the Spanish market is a relatively
attractive one in terms of average revenue per user (ARPU). Looking at
Vodafone, which operates in the UK, Spain, France and Italy, it shows that
Spain is the second most attractive market behind the UK.
Interestingly enough, in the 5 countries, the mobile arm of the incumbent -UK:
mmO2 (ex BT), France: Orange (FranceTel), Germany: T-Mobile, Italy: TIM,
Spain: Telefónica Móviles- is the one with the biggest market share, but does
not have the customers with the highest ARPU. At the same time, late entrants
to the market, e.g. Bouygues Telecom in France, Amena in Spain or Virgin
mobile in the UK, typically tend to go for the lower revenue customers and
have a higher proportion of prepaid modality customers which explains these
operators’ lower ARPU. There is one notable exception to this: Hutchison
Whampoa extracts higher revenues from its Italian customers by being the
first operator to offer third generation mobile telephony.
Figure 10 - ARPU (H1 2004) of Selected European Mobile Phone Operators10
Sources: see appendix.
500
400
300
200
Annual ARPU (EUR)
387
409
436
276
288
309
367
343
362
516
364
389
212
408 416
460
Orange(FR)
FranceAverage
SFR(FR)
T-Mobile(DE)
VodafoneGermany
02(DE)
TIM(IT)
VodafoneItaly
Hutchison3G(IT)
TelefónicaMóviles(ES)
VodafoneSpain
VirginMobile(UK)
Orange(UK)
mmO2(UK)
Vodafone(UK)
E-Plus(DE)
10
The exchange rate used for EUR/GBP is 1.49; data were not available for all major operators. Sources:
see appendix.

How does the cost for the consumer for access to basic mobile telephony in
Spain compare with other major European countries? Results from an OECD
survey are shown below11
; the figure represents the monthly cost of a sample
of 25 outgoing calls (42% of which are to fixed lines and 58% to mobile pho-
nes) plus 30 SMS.
Figure 11 - Low Usage Basket: European Tariff Comparison 2003
Source: OECD.
Figure 11 shows that for low usage customers, Spain offers the cheapest
access to mobile telephony.
Spain, Movistar, Plus Eleccion
Spain, Vodafone, Contrato Tarde
Italy, Omnitel, Italy New
Italy, TIM, Menu Family + Tutti Province
Germany, Vodafone, Sun
Germany, T-Mobile, TellySmile
France, SFR, Formule Perso 1H+10 Text
France, Orange, Forfait 1h
UK, Orange, Any Network 30 Your Message 30
UK, T-Mobile, Everyone 25
0 5 10 15 20 25 30
15.84
16.61
19.01
19.70
23.26
23.28
24.00
24.50
25.61
27.11
EUR per month
11
Source: European Commission – Telecommunication Regulatory Package – 9th Implementation Report.

Figure 12 below shows that these results remain true when OECD purchasing
power parities are applied.
Figure 12 - Low Usage Basket: European Tariff Comparison 2003 at Purchasing Power
Parity
Source: OECD Statistics.
The packages used in the OECD study are the ones designed for low usage
customers. The study goes on and applies medium and high usage profiles to
these same packages. We consider that this reflects only what happens when
a low usage customer uses his cell phone more intensively than he is suppo-
sed to, insofar it does not reflect the real cost for a medium to high usage cus-
tomer who would choose a different offer from his operator. We therefore con-
sider that the OECD study is not conclusive for the cost of medium and high
usage of mobile phones.
Spain, Movistar, Plus Eleccion
Spain, Vodafone, Contrato Tarde
Italy, Omnitel, Italy New
Italy, TIM, Menu Family + Tutti Province
Germany, Vodafone, Sun
Germany, T-Mobile, TellySmile
France, SFR, Formule Perso 1H+10 Text
France, Orange, Forfait 1h
UK, Orange, Any Network 30 Your Message 30
UK, T-Mobile, Everyone 25
0 5 10 15 20 25 30
20.17
21.15
22,13
22.94
23.72
23.74
26.34
26.89
26.72
28.28
Cost EUR per month

2.2.2. The Value Chain for Mobile Phone Operators
Figure 13 – The Mobile Telephony Value Chain
Mobile phone operators have a value proposition unequalled by their fixed line
competitors which allows them to capture a bigger portion of the value crea-
ted: mobility. Customers’ willingness to pay for mobile telephony is about
twice as high as for fixed lines12
. At the same time they are willing to put up
with the imperfections of a mobile network, e.g. communication disruptions or
occasionally poor sound quality.
The mobile business model has educated customers to pay per minute; it is
therefore very likely that, once UMTS is in place and permits Internet access,
the revenue model can be sustained, contrary to what happened to fixed line
Internet access. It remains to be seen if a change in the charging method
could occur in the fixed line business at a later stage.
At the same time, while in the fixed line Internet Access Provider business the
presence of over 300 players in 1998 in Spain drove access prices down
rapidly (and many IAPs out of business), this is unlikely to happen in the mobi-
le business. There are only three big players in the market and recent history
has shown that the price of the mobile phone minute tends to stabilize as the
penetration rate approaches saturation.
12
Source: red.es.
VoiceInternet
Content
Providers
Portals
Network
infrastructure
(backbone)
Hosting,application,
service
provider
Accesmode
MobileIAP
Interconnection
center
Localcallantenna
MobilephoneOSand
software
User’shandset
Customer
Network
interconnection

2.3. Fiber Optic Cable
2.3.1. The Development of Cable
Cable network is a recent technology in most of European countries. Before
1995, cable was an unknown technology in Spain. The fact that this country
opted for a public TV model instead of a pay TV model, which uses cable or
satellite technology, could be one of the main reasons which explains the
delay in the deployment of cable network in Spain.
With the purpose of fostering an alternative infrastructure to provide telepho-
ne services, data transmission and television, the congress of deputies appro-
ved the Cable Law in 1995, by which Spain was divided in 29 areas. In each
area the government granted two licences, one to Telefónica and another one
to a new operator according to its financial background and market experien-
ce. Telefónica at that time was interested in the cable business because ADSL
technology was not known; later, Telefónica dropped its licence, deciding to
focus on the development of ADSL.
The initially elevated number of cable operators with relatively small operating
areas also contributed to the delay in the deployment of cable network. Table
7 shows the detail of former operators in each area and the current one after
consolidation. Cable, like other technologies, obeys the rules of network
industries, i.e. need for huge investments and room for only a handful of pla-
yers who need to gain critical mass in order to achieve economies of scale.
The presence of too many players predictably triggered a wave of mergers
and acquisitions between operators. AUNA Group and Cable Europa (ONO),
a cable player with multiple shareholders, began to acquire local cable com-
panies. In this process they had to adapt their own networks to the ones of
the acquired companies, thereby postponing their investment schedule.

Table 7 – Former and Current Cable Operators
Area Former Operator Actual Operator
Albacete (City) Albacete Sistemas de Cable ONO
Almería (City) Supercable Almería AUNA
Andalucía I (Almería, Granada and Jaén) Supercable Andalucía AUNA
Andalucía II (Málaga and Córdoba) Supercable Andalucía AUNA
Andalucía III (Sevilla) Supercable Andalucía AUNA
Andalucía IV (Cádiz and Huelva) Cable and TV Andalucía ONO
Aragón Aragón Cable AUNA
Avilés Telecable Avilés Telecable13
Barcelona CTC AUNA
Basque Country Euskaltel Euskaltel14
Cádiz (City) Cádiz Cable and TV ONO
Canary Islands Cabletelca AUNA
Cantabria Santander Cable ONO
Castilla León Retecal ONO
Catalonia East CTC AUNA
Catalonia West CTC AUNA
Galicia Grupo Gallego R15
(Galicia)
Gijón Telecable Gijón Telecable
Huelva Huelva Cable TV ONO
Ibiza-Formentera ONO
La Coruña Grupo Cable R
La Rioja Reterioja AUNA
Madrid North CyC Comunicaciones AUNA
Madrid Southeast CyC Comunicaciones AUNA
Madrid Southwest CyC Comunicaciones AUNA
Murcia Cable Europa ONO
Navarre Retena AUNA
13
Telecable Shareholders: CajAstur (46%), HidroCantábrico (46%), La Nueva España (8%).
14
Euskaltel main shareholders: BBK (33.13%), Kutxa (19.98%), Iberdrola (11.14%), Endesa (10%), Caja Vital
(7.75%), EITB (5%), Telecom Italia (3%), Basque Government (3%), Grupo Auna (3%), MCC (2%), EVE (2%).
15
R shareholders (source: r.mundo-r.com): Unión Fenosa, Caixanova, Banco Pastor, Grupo Zeta, Faro de
Vigo (Grupo Moll), Grupo Tojeiro, Jealsa Rianxeira, Ceferino Nogueira, Hijos de Rivera, El Progreso, Editorial
Compostela (El Correo Gallego), La Región, Invertaresa, El Ideal Gallego, Dielectro Galicia, Ferro
Inversiones y Olsines (percentages not available).

Oviedo Telecable Oviedo Telecable
Palma Mallorca Corp. Mallorquí Cable ONO
Puerto Santa María Cable TV Puerto SM ONO
Sanlúcar de Barrameda TDC Sanlúcar ONO
Santiago Grupo Cable R
Seville Supercable Sevilla AUNA
Torrent MedNorte Sd Cable ONO
Valencia (City) Valencia de Cable ONO
Valencia North MedNorte Sd Cable ONO
Valencia South MedSur SdCable ONO
The strategy of cable operators consisted of the development of an alternati-
ve network to compete against the incumbent, Telefónica. From 1999 to 2001,
both AUNA and Cable Europa did not break even due to heavy investments in
the deployment of their own networks and low sales which could not take off
until the deployment was finished. Although in 2002 and 2003 both compa-
nies achieved positive operating profit, their net income remained negative
during those years (See Table 8). In spite of their low current market share in
fixed line telephony (less than 6%), they have great potential as already more
than two million homes are cabled while only one third is currently connected
to the network.
Table 8 – Company Data for AUNA and ONO
Data 2003 AUNA ONO
EBDITA MM (1998-2003) (*) -16.0 -34.5
Residential Customers 670,000 581,345
Share of Customers 3.8% 3.3%
Homes cabled 2,097,000 2,003,233
Res Cust/Homes cabled 32% 29%
Cities in service 112 98
Investment (euroMM) (**) 4,573.0 1,542.5
(*) AUNA included information from 2001 and 2003.
(**) Antonio Hernández provided information about investment in AUNA. Investment in ONO is the sum of the
CAPEX of this company from 1997 to 2003.

Bundling is the strategy followed by the cable operators. Auna and Ono offer
commercial discounts to the consumers when they buy a set of products.
From 2000 to 2003 each of their customers subscribed 1.8 services on avera-
ge (Table 9). According to ONO’s annual report, the most demanded service is
fixed telephony, followed by television. However, in the last three years
demand for broadband services has substantially increased (see Table 10).
Table 9 – Average Number of Services Subscribed
2000 2001 2002 2003
ONO 1.87 1.88 1.79 1.84
AUNA 1.70 1.80 1.70 n/a
Table 10 - Product Demand as a % of the Total Customers
2000 2001 2002 2003
Telephone 90% 92% 93% 94%
Television 76% 70% 62% 58%
Internet 8% 11% 24% 32%
2.3.2. The Online Value Network for Fiber Optic Cable
Cable providers have positioned themselves differently from traditional carriers
right from the beginning. Knowing that they could not sell the cable network
itself for its intrinsic qualities, i.e. broadband technology, they formed strategic
alliances with content providers (e.g. TV stations), offered access to content
(Internet) or provided content themselves in the phone business (voice). The
sales pitch focused on content, not on content access.

2.4. Emerging Broadband Technologies – Digital TV, Voice
over IP, Satellite and Power Line Communication
Broadband technology is a carrier technology which opens up a new set of
possibilities for transportation of data-intensive contents. We will look at two
contents which might contribute to shaping the future of the telecom industry:
digital television and voice over IP.
2.4.1. Digital TV
Television had traditionally been a business unrelated to the telecommunica-
tion sector. However, in the late ‘90s both businesses began to converge. On
the one hand, cable operators, whose traditional business was television, star-
ted taking advantage of their infrastructure to provide telecommunications
services such as telephone and broadband Internet access. On the other
hand, traditional telecoms operators began to invest in the television business
–Telefónica had an important share in Via Digital (a digital television operator)–
or developing new business models, such as video on demand using broad-
band networks to broadcast the signal. Satellite television providers comple-
te the picture.
In Spain, up to 1997, the only television model was the public and open TV
which used the analogical spectrum to broadcast the signal. This market was
composed of a public and national channel, RTVE, two national and private TV
networks and several regional channels. In this model the main source of reve-
nue was advertising.
Since 1995 the business model in the television market began to change, shif-
ting from public open-free TV towards private, digital and pay TV. Digital TV
operators generally have a similar structure, comprising a basic package with
a variable number of channels (between 22 and 50) and different additional
options which can be combined. These include cinema channels, cartoons,
theme-specific channels and pay-per-view events. Premiere movies and sport
events, bullfighting and live music concerts are usually offered as pay-per-
view. Cable network, satellite and TDT (Territorial Digital Television) are the
technologies that the new operators use to provide pay TV services.

As described previously (see cable network analysis) the deployment of cable
network started in the mid ‘90s and one of the products offered by cable ope-
rators was TV. Both Auna and Ono offer a set of 30 channels, premium con-
tents, and pay-per-view sport events and other entertainment. TV has been
the second most demanded service since 1997.
Satellite is probably the best device to broadcast a TV signal to a huge num-
ber of customers. Its infrastructure has a fixed cost, allowing satellite opera-
tors to obtain important margins once they reach critical mass. The combina-
tion of satellite and digital technology enable to broadcast hundreds of chan-
nels using the same signal. Therefore satellite-based digital TV platforms have
been the most successful technology in the new TV business model. The most
important players in this market were Canal Satélite Digital (launched February
1997; via Astra) and Distribuidora de Televisión Digital - Vía Digital (launched
September 1997; via Hispasat). Both companies merged at the end of 2002.
Terrestrial digital television (TDT) is a new digital technology that will replace
the former analogical broadcasting system. With TDT it is not necessary to
install a device to receive the signals (cable or satellite dish) because it goes
through the former antenna. The digital technology allows optimizing the radio
electric spectrum; more channels can broadcast their signals in the same fre-
quency, increasing competition between dominant and new operators.
Additionally this technology improves the quality of the image and sound
(similar to DVD) and it gives users access to interactive tools. Although the
legal framework for the development of TDT has been defined since 1997,
public and private open channels will change from analogical to digital tech-
nology only in 2012.
QuieroTV was the only attempt to introduce TDT as a pay service in Spain. The
company, whose main shareholders were AUNA Group, Media Park and
Carlton Communications, was operational only for one year. An over-aggres-
sive marketing plan (that included a promotion of three months free of char-
ge), a deficient customer service that confused and upset its subscribers and
tough competition from the satellite platform are among the main reasons why
QuieroTV went out of business at the beginning of 2002.
To complete the picture of the television business, in 2004, Telefónica rolled out
Imagenio, a pay-ADSL TV project with many of the content providers that were

put out of the digital satellite business. Imagenio offers Internet, a selection of
22 TV channels, and near-video-on-demand. As of June 2004 Imagenio had
2,533 customers i.e. less than 0.1% of pay-TV market share.
The television market, in term of revenues, has been growing in both open and
pay TV. The latter represents an average of 29% of the total revenues (Table
11). The main source of revenue is still advertising, and in open TV, grants from
the government. In the advertising pie, pay TV has only a tiny slice. According
to CMT its share represents only 1.8% of the total, so the unique source of
information of pay-TV is monthly subscriber fees.
Table 11 – Revenues in TV
(Million Euro) 2000 2001 2002 2003
Pay TV 1,127.4 1,387.2 1,466.6 1,835.69
Open TV 2,899.6 3,281.3 3,528.4 3,558.26
TOTAL 4,027.0 4,668.5 4,995.0 5,393.95
% Pay TV 28.0% 29.7% 29.4% 34.0%
Table 12 – Revenue Sources in TV
(Million Euro) 2000 2001 2002 2003 % of rev 2003
Advertising 2,431.0 2,326.36 2,276.55 2,413.66 41%
Pay TV fee 1,071.6 1,191.93 1,322.69 1,385.25 24%
Pay per view fee 105.4 69.18 80.54 104.17 2%
Grants 853.0 1,264.19 1,468.72 1,455.62 25%
Others 16.0 267.53 284.55 512.54 9%
TOTAL 4,477.0 5,119.2 5,433.1 5,871.24 100%
% Fee over Total Revenues 26% 25% 26% 25%
Table 13 shows the evolution of pay TV subscribers from 1999 to 2003. The cus-
tomer base of pay-TV services increased 65% over the period. The sum of Canal
Satélite Digital, Via Digital and Canal Plus subscribers still represent more than
70% of all pay-TV customers, meaning that despite the efforts of cable operators
to introduce their TV services and to reap market share from satellite-based plat-
form companies, the latter managed to maintain a high share in the pay-TV mar-
ket. But especially in the last two years all cable operators have managed to steal
customers from satellite TV in a slightly shrinking market.

Table 13 - Pay TV Subscriber Numbers by Operator
1999 2000 2001 2002 Chg 01/02 2003 Chg 02/03
Canal Satélite Digital 813,490 1,051,563 1,230,038 1,220,669 -0.8% 1,173,024 -3.9%
Via Digital 440,114 633,059 806,379 775,000 -3.9% 622,662 -19.7%
Canal Plus 760,424 885,449 787,370 720,199 -8.5% 705,050 -2.1%
Cableuropa (Ono) 31,023 128,242 232,099 286,536 23.5% 339,378 18.4%
Other cable operators 59,977 100,046 171,722 187,023 8.9% 231,925 24.0%
Aunacable 12,785 69,888 165,632 260,102 57.0% 296,132 13.9%
Quiero TV 0 113,233 133,113 0 0
Cable Local 0 0 18,376 77,717 322.9% 126,240 62.4%
Telefónica cable 0 0 0 0 3,011
TOTAL 2,117,813 2,981,480 3,544,729 3,527,246 -0.5% 3,497,422 -0.8%
Merged (CSD, VD, Cplus) 95.1% 86.2% 79.7% 77.0% 71.5%
2.4.2. Voice over IP
According to WebOpedia, Voice over Internet Protocol (VoIP) is a category of
hardware and software that enables people to use the Internet as the trans-
mission medium for telephone calls by sending voice data in packets using IP
rather than by traditional circuit transmissions of the PSTN (Public Switched
Telephone Network). One advantage of VoIP is that the telephone calls over
the Internet do not incur a surcharge beyond what the user is paying for
Internet access, much in the same way that the user doesn’t pay for sending
individual e-mails over the Internet.
Why isn’t everyone using this technology? Although the concept of VoIP is
easily understood, its implementation is more complicated. In order to send
voice, the information has to be separated into packets just like data. Packets
are chunks of information broken up into the most efficient size for routing
from there, the packets need to be sent and put back together in an efficient
manner. This process is smooth in theory, but voice communications over the
Net are not as seamless as they are over traditional phone lines. Voice over IP
is now mature enough for mass adoption and companies and individuals
worldwide are beginning to use it.
It is important to point out that since VoIP is the transmission of voice using high
speed Internet access, previous deployment of broadband connections is requi-

red. According to different sources of information, during 2003 more than 100
million minutes (less than one percent of the total) were transmitted through the
Internet. Forrester estimates that in 2005 more than half of Internet users will use
VoIP to make their phone calls. According to Gartner group estimation, 19% of
USA households will be VoIP users in 2008 when 45% of families have broad-
band access. In Europe broadband penetration will occur at a similar rate accor-
ding to the predictions of Yankee Group and Gartner. In most European coun-
tries the telephone bill is composed of a fixed monthly fee and a variable part
which reflects consumption. Keeping in mind that the average prices for domes-
tic and international calls are still very high compared to the US, VoIP seem to
be one of the most important threats to the traditional fixed line business.
Skype provides VolP services to 160,000 new users each day. According to
the firm Evalueserve, Skype will serve between 140 to 245 million clients in
2008, while VolP will cause the earnings of traditional providers to fall 10%
and their profit rates to decrease between 22 and 26%.
In the fall of 2005, Skype is planning to launch a voice over Internet (VolP) soft-
ware for latest generation mobile phones, which will employ operating
systems such as Windows Mobile, Embedded Linux or Symbian. This will per-
mit users with wireless Internet access to use their mobile phone with another
Skype user completely free of charge.
In Spain, VolP is a nascent market centered mainly in big and medium-sized
companies, in which British Telecom is one of the most important players.
While Skype continues attracting users, other small companies such as
Netmeeting or the Spanish company Peoplecall are shouldering their way into
the communications business in Spain.
In Spain, VoIP is an incipient market focused mainly on corporations and
medium-sized companies, in which British Telecom is one of the most impor-
tant players.
2.4.3. Satellite
Traditionally, the consumer knows satellite to be a TV signal carrier. In effect
the first TV satellites were one-way communication devices meant to send the
TV signal from the broadcast station towards millions of homes.

Cable, the satellite’s direct competitor, has a bigger data-carrying capacity and is
not susceptible to weather conditions, but cable is very expensive to install
because for every new user some cable must be laid and therefore it is financially
sound only in densely populated areas (it is estimated that laying a meter of cable
costs between 50 and 150 euros). Even ADSL, which uses the existing telepho-
ne line, can be unprofitable in rural areas because the ADSL local exchange sta-
tion cannot be more remote than roughly 5 km from the user’s home.
The satellite, which by itself costs between 290 million USD for a weather satelli-
te and 680 million USD for a military device, requires an additional 50 to 400
million USD for the launch, depending on its weight. But once placed in orbit, it
does not require any additional investment to send its signal to an additional user.
Only the user needs to get equipped with a satellite dish and a decoder. Thus the
satellite seems to be the ideal tool to bring broadband access to rural areas as it
can reach download speeds of 256 Kbps and more. But satellite, with as Internet
broadband access, has proved slow and marginal so far for several reasons.
First, only the more recently launched satellites have two-way communication
capacities. The older ones do not allow the end user to upload data. For this rea-
son, satellite Internet often relies for backhaul on using a normal fixed telephone
line, with the obvious speed limitations that this entails.
A second major obstacle, at the moment, is cost. In 2003, installation of a two-
way satellite Internet connection cost around 1,500 euros and the monthly subs-
cription stood at 75 euros, which makes it considerably more expensive than a
comparable ADSL connection; a one-way connection with a fixed-line backhaul
was considerably cheaper. So far, only companies in rural areas, or people living
in regions where the local government subsidized Internet access, were interes-
ted in the service.
Finally, because of the great distance between the customer’s antenna and
the satellite in orbit, there occurs a phenomenon known as latency. This delay
between a signal sent and its response is due to the time required for the sig-
nal to reach the satellite located in its geostationary position 22,000 miles
above Earth and the time required for the response to travel back. Add to that
the time to compress and decompress the data and the delay becomes long
enough to be noticeable and makes interactive applications like voice, chat or
gaming uninteresting.

Like terrestrial data transmission, the satellite is also a contended service, mea-
ning that numerous users will have to share the same bandwidth. But a single
fiber optic cable can carry many more signals than several satellites put together.
The satellite link will hence get congested much faster, and in terms of cost per
unit of capacity, the satellite remains much more expensive than any terrestrial
network.
Nevertheless, since September 2004, the Spanish ISP ya.com formed an allian-
ce with SES Astra to offer broadband Internet access via satellite. It is a one-way
access which requires an additional telephone line for data uploading. The allian-
ce hopes to acquire 10,000 customers in Spain in the first year in a market of
people without broadband access estimated at 5 million individuals, 300,000
companies and 6,000 municipalities.
2.4.4. Power Line Communication
The idea of Power Line Communication (PLC), also called Broadband Power Line
(BPL), is a simple one. It consists of using the existing power network that feeds
every home with electricity as a data transportation network. The huge advanta-
ge of the power network is its ubiquity; penetration rate of electricity is even hig-
her than that of landline telephony. No additional cables need to be laid, not even
in the end user’s home as the power sockets are used as access points. At local
loop, distances delivery speed is very high and tests at 200 Mbps have been rea-
lized in Japan; commercial offers can realistically be expected to supply 2 to 5
Mbps, which is above the current ADSL offers (256 Kpbs – 1Mbps).
Several uses can be made of the power grid.
The first would be to use the whole power network, which is made up of the high
voltage, medium voltage and the low voltage grid. Theoretically, the three grids
could be used to carry signals but in practice, using the high voltage grid for long
distances deteriorates the signal and speed is limited to around 25 Mbps.
Therefore, usually, a fiber optic backbone is used and the Internet is tapped at a
fiber-optic node somewhere within a mile or two of the end users. Data is con-
verted through a processor and routed over medium- and low-voltage electric
distribution circuits for “last mile” delivery to consumers.
Another use of the power network would be strictly in-house. In this configura-

tion, Internet access would be provided by fiber optic cable to the end user, inclu-
ding the last mile. But within the user’s premises the power lines of the house
would be used to build a home network. This avoids laying dedicated LAN wires
in the building.
The idea of PLC has been worked on since 1989, but several technical problems
had to be overcome before it was launched commercially in 2004 in the US. In
early tests, the technology, which uses high frequency bands typically between
2 and 30 megahertz, created interferences with WiFi networks and amateur radio
frequencies.
Although these technical problems have been overcome, other factors explain
the slow takeoff of PLC. Both utilities and their investors see the utilities business
as a mature, rather slow-moving one; utilities stocks tend to be considered
defensive during down cycles. This – and a few early failures in diversification
from the traditional business – explains the reluctance of utilities to invest massi-
vely into PLC. Many utilities are also struggling to come up with a functional busi-
ness model to market the service. At the same time, regulation in the field lags
behind. Last but not least, nothing has been done to raise awareness for the
technology; in all the hype around WiFi, PLC has been a bit forgotten.
Nevertheless, the technology is slowly taking off. In Spain, Endesa started its
PLC project in 2000 and conducted its first massive field tests in September 2001
in Zaragoza. Endesa concluded these tests successfully and has offered the ser-
vice commercially in selected areas of Zaragoza since October 2003 and in cer-
tain neighborhoods of Barcelona since March 2004.
Whatever the commercial outcome in the next years, PLC can be considered a
cheaper alternative to the satellite to overcome the digital divide and a possibility
of broadband access for rural areas.

2.5. The Telecommunication Online Value Network – Overview
Figure 14 – The Telecommunication Online Value Network
The players in this increasingly complex environment have to position themsel-
ves within this value network matrix by choosing the business(es) they want to be
in and bet on a technology.
In terms of business, the challenges are to find one that is sustainable. First there
must be a continuous demand for the business, but more importantly there
needs to be a willingness to pay on behalf of the customer, which is not always
the case for Internet-related services. At the same time some of these busines-
ses, e.g. the carrier business, are increasingly perceived as commodities with all
the related disadvantages: transparency for the end customer, substitutability,
downward pressure on margins.
Competition is toughened not only by the existence of several carrier technolo-
gies but also by the increased importance of software providers at both ends of
the value chain, which can enhance or make obsolete a carrier technology. The
emergence of GPRS, also coined 2.5G technology, right after the billion dollar
auctions of 3G licences is a telling example of this threat/opportunity. Hence
there is a huge risk of over-investing in the wrong infrastructure.
Interconnection
Center
LocalcellantennaLocalLoop:Copper
twistedpair
MobileIAPM O B I L EADSLIAP
Interconnection
Center
C A B L E
W i r e L i n e : P O T S & A D S L
CARRIER
TECHNOLOGY
Multiplecontent:voice,Internet
content,services,TV,VoIP
Portals
Network
infrastructure
(backbone)
ServiceProvider
Accessmode
IAP
Distrib.
center
Customer
User’s hardware, O.S. and
software

3. Competitive Situation in Spain
In the previous section we described the complexity of the telecom sector
using the online value network framework. In this setting, which in the sec-
tor is referred to as “ecosystem” (because of the coexistence and competi-
tion between different technologies and networks in both the voice and data
business), the operators define their strategic positioning through the com-
bination of five criteria: telecom industry, activity scope, network access,
technologies and product commercialization.
Telecom Industry refers to the different markets in which an operator can play:
Fixed Telephony, Mobile, Cable, ADSL, Digital TV and VoIP. The positioning as
specific niche player or generalist defines the activity scope. Network access
means whether the operator reaches the consumer using its own network or
the one of the incumbent. Additionally in each value chain there can coexist
two or more technologies (e.g. Broadband access technologies can be achie-
ved through cable or ADSL). Finally product commercialization refers to the
way of selling products, the distinction being between bundled and unbundled
products.
3.1. Full Service Providers
In the Spanish market, Telefónica and Auna are the only telecommunication
full service providers (FSP) with business units all along the value chains of the
telecom sector. Those companies are the most important players in terms of
revenues, customers and infrastructure. They have focused their strategies in
the synergies between the mobile and fixed line markets but are also present
in the voice business and, at the same time, try to develop broadband access
technology in the Internet market.
Both FSPs offer their services to domestic and corporate customers.
Additionally they both own their proprietary networks (in fixed as well as mobi-
le telephony). To attract customers, they have taken different approaches to
commercializing their products: while Telefónica sells mobile services, ADSL
and fixed line telephone as separate products, Auna’s strategy is product
bundling. Auna uses the same wired network to channel TV content, voice and
broadband access and therefore offers these three products as a bundle to its
customers. Another important difference between the two companies is that

they compete with distinct technologies. Telefónica uses a network made of
copper twisted pair wires (the former, already fully depreciated public telecom
network) while Auna has deployed a new fiber optic cable network.
In the mobile market, Telefónica is the market leader followed by Vodafone
Group and Amena. While Movistar (Telefónica’s mobile brand) has been profi-
table right from the beginning, Amena has reached positive results only since
2001.
According to the CMT 2003 report, both companies together hold 70% of the
total telecom and digital television market. While Telefónica has been profita-
ble since the beginning in each of its business units, 2003 is the first year in
which Auna Group broke even in its mobile and fixed line businesses. As
shown in Table 14, Telefónica group not only generates revenues representing
four times those of Auna, but also its operating profits are roughly 10 times
Auna’s.
Figure 15 – Percentage of Telecommunications Market Held by Each Group
Source: CMT, 2003.
9.8% AUNA Group
10.6% Vodafone (mobile Airtel)
60.1% Telefónica Group
19.5% Remainder

Table 14 – Comparison Between Telefónica Group and Auna Group
Telefónica 2001 2002 2003
Telefónica Móviles 5,841 6,770 7,496
Telefónica de España 10,222 10,272 10,217
Sales 16,063 17,042 17,713
Telef Móviles 2,817 3,490 3,941
Telef España 4,485 4,497 4,534
Operating Profits 7,303 7,987 8,475
Operating Profitability 45% 47% 48%
Auna
Amena 1,497 2,193 2,784
Auna Telecomunicaciones 849 925 1,076
Sales 2,346 3,118 3,860
Amena 497 957 768
Auna Telecomunicaciones -100 -40 124
Operating Profits 397 917 892
Operating Profitability 17% 29% 23%
3.2. Multiservice Operators
Generalists are companies who are active in more than one business (tele-
vision, Internet or telephone) using wired networks. All cable operators,
with the exception of Auna, are generalist players, because they take
advantage of their cable network to provide multiple services to the end
user. There are some players in PSTN networks who followed a generalist
approach. Examples are Jaszztel and Uni2, a subsidiary of France Telecom.
Both companies offer telephone and broadband (ADSL) services to the end
users and telecom services to large corporate customers and small and
medium companies.

Table 15 – Generalists: Sales and Ebitda
(Million Euro)
Companies 2000 2001 2002
Sales
Ono 51.5 143.6 253.4
Uni2 192.9 303.2 458.0
Telecable 11.0 24.9 36.8
R Cable 7.8 14.2 38.2
JazzTel 125.3 220.3 219.0
Euskaltel 101.3 155.3 215.7
Ebitda
Ono -55.8 -57.4 15.8
Uni2 -95.5 -81.5 8.0
Telecable 0.2 5.1 6.2
R Cable -17.6 -17.9 -9.9
JazzTel -163.3 -90.6 -40.5
Euskaltel -37.3 0.9 5.7
Profitability -75% -28% -1%
Table 15 shows that financial results of most of the generalists are similar to
the ones obtained by the specialists. From 2000 up to 2002 there is a strong
correlation between sales growth and reduction of operating loss, which indi-
cates the presence of a fixed cost component whose relative weight in the
whole cost structure decreases with rising sales.
3.3. Specialized Operators
Players with strategic focus on a defined market or market segment are called
specialists.
3.3.1. Specialist in a Certain Market
In this category we include players focusing on only one market, like mobile
telephony or broadband access. The most important specialist in the Spanish
market is Vodafone, a pure mobile operator. Vodafone is a European player
and the best performing mobile phone company in the world in terms of inco-

me and profitability. Vodafone’s main strength is its international cellular net-
work that allows it to offer more aggressive prices and better conditions than
the local competitors in the European countries where it has set foot.
3.3.2. Niche Player
Most of the indirect access fixed line operators follow a more narrowly focu-
sed strategy. Some companies have positioned themselves in the internatio-
nal call market which requires only low investments. Others prefer to concen-
trate on the corporate segment, like Comunitel or BT Ignite, deploying their
own backbone network and reaching their customers using wireless techno-
logy, thereby circumventing the incumbent’s grip on the last mile.
Table 16 shows sales and operating profits of the main niche players in the
wired network business. From 2000 to 2002, although these companies could
not get positive operating profit, they were able to increase their turnover and
to reduce their operating losses.
Table 16 – Niche players: Sales and Ebitda
(Million Euro)
Companies 2000 2001 2002
Sales
Bt Ignite 103.4 176.6 205.0
Colt Telecom 42.8 76.7 114.3
Comunitel 37.7 71.9 110.3
Ebitda
Comunitel -14.7 -12.9 -2.9
BT Ignite -65.5 -54.3 -31.5
Colt Telecom 0.0 5.6 14.8
Source: companies’ financial reports
Finally Figure 16 represents the competitive positioning of the incumbent
(Telefónica) and its competitors in both indirect (PSTN) and direct access. To
draw their position in the telecom market we selected two indicators, market
share and operating profitability. Although Telefónica group has lost market share

during the last five years, it maintains a high percentage of this market and high
profitability (close to 20% over sales), while its competitors reach less than 10%
share with negative results. The mobile market, on the other hand, is an oligopoly
in which three players share the entire market with high levels of profitability.
Figure 16 – Market Share and Profitability
3.4.- Selected Financials
In order to get an idea of the financial performance of the different players in
the Spanish market, we have compiled a few financial data and ratios whose
details can be found in the appendix.
We look at three operators in the wireline business, Telefónica de España (the
Spanish fixed line subsidiary of Grupo Telefónica, non-listed), AUNA
Telecomunicaciones (non-listed division of Grupo AUNA) and ONO (non-listed
cable operator); we also analyze three mobile phone operators: Telefónica
Móviles España, Vodafone España (non-listed subsidiary of Vodafone Group
plc) and Amena (mobile division of Grupo AUNA)16
.
16
The companies we analyze are all non-listed. This limits the availability of certain data. Data are taken from
the last filings in the registro mercantil or from annual reports of the listed mother companies (which do not
always disclose full details for their subsidiaries).
35%
30%
25%
20%
15%
50%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40%
-45%
-90%
0% 5% 10% 15%20%25% 30%35% 40%45% 55% 60%65% 70%75% 80% 85% 90%95%100%
Market share
Telefónica
MovistarVodafoneAmena
Indirect Acces PSTN operators (voice+data) Cable operators (voice+data) Mobiles
OperativeProfitability(EBITDA/Sales)

First we shall compare the sales of each of the three companies over the last
four years and their profitability in terms of return on sales.
Then we will turn to the level of debt expressed by debt over equity ratio and
profitability of the firms as measured by return on equity. In both cases we use
book value for the equity.
Finally we look at the level of investment in fixed assets over the last three
years.
Except for the sales figures, we express all the other measures in ratios due
to the limited comparability of absolute figures for firms of very different sizes.
3.4.1. Wireline Operators
The land line telephony business is a very unequally distributed one in
Spain. Telefónica de España (TdE) clearly dominates the market and this
translates directly into profitability numbers. TdE’s sales are more than 10
times those of its closes competitor, AUNA Telecomunicaciones. Due to a
high number of companies active in this business, competition mainly takes
place on price and margins, as a consequence get squeezed. The market
as a whole is very mature and hardly growing, so competition is all about
how to steal market share from TdE; for TdE the name of the game is cus-
tomer retention.

Figure 17 – Sales and ROS in the Wireline Business: TdE, AUNA and ONO (2000 –
2003)
While TdE’s sales are slightly declining, its margins get ever thinner; its ROS
drops from 10.5% in 2001 to 1.7% in 2003.
In H1 2004 TdE revenues grew 2.2% YoY to 5,399.4 million euros. A big chunk
of its revenues, 3,524.9 million euros, still proceed from traditional services
(customer network access and voice) but are in decline of 139.4 million euros.
Thanks to its customer retention effort, the decline rate has slowed as com-
pared to 2003. The fastest growing revenue segment (+33% YoY) is Internet
and broadband access, mainly ADSL, with revenues of 530.5 million euros. On
the cost side, operating expenses are on a slight decline (-0.4% to 2,971.3
1999 2000 2001 2002 2003 2004
40%
20%
0%
-20%
-40%
-60%
-80%
ROS
Sales and return on sales
-20.4%
1,076.0
27.1%
358.6
-40.4%
849.0
-52.3%
925.0
-76.8%
253.4
-151.1%
143.6
TdE (wireline Spain only) AUNA Telecom ONO
(1) Profitablility over Sales
(2) Sales in Millons of euros
2.4% (1)
10,012.0 (2)
105% (1)
10,222.1 (2)
7.9% (1)
10,272.1 (2) 1.7% (1)
10,217.0 (2)
-242.6%
51.5

million euros): personnel costs were reduced by 9.8% while costs related to
an increased commercial effort rose by 14.2%.
As a consequence, EBITDA rose by 6.2% to 2,487.5 million euros. Net result
was nevertheless down by 42.9% to 325.4 million euros due to extraordinary
expenses for the 2003-2007 Redundancy Program (611 million euros). ROS
has improved to 6% though.
AUNA has growing sales, +9% in 2002 and +16.3% in 2003. 2003 is also the
first year in which AUNA posts a positive EBITDA of 124 million euros, but due
to high depreciation costs, its net result remains negative, hence the negative
ROS of -20.4%. In the first half of the year 2004 AUNA Telecomunicaciones
reached revenues of 583 million euros (+18% on H1 2003) and an EBITDA of
79 million euros (+201% on H1 2003). Net results are not communicated at
this time.
ONO, as compared to TdE or AUNA, has tiny but fast-rising sales (+76% in
2002, +41% in 2003). Its initial heavy losses are due to big investments and
low sales, but with the former decreasing and the latter rising, its ROS has ste-
adily improved to become positive in 2003 and reach an impressive 27.1%.
ONO’s revenues keep growing fast with H1 2004 revenues of 214.1 million
euros (+30% YoY) and EBITDA growth of +156% YoY. ONO builds its growth
on expansion of its customer base and priority on broadband access sales at
prices below Telefónica’s (€ 30/Month). At the same time ONO is trimming its
refinancing cost by rescheduling its debt and converting part of it into equity.
Net results are not available for H1 2004.

Figure 18 - Debt Ratios and Return on Equity in the Wireline Business
None of the three companies above are listed, which is why we use book value
for shareholder equity when we calculate Return on Equity. It stands out again
that TdE is the more mature company insofar as it displays the least volatility
both in its ROE and D/E ratio. AUNA Telecomunicaciones is struggling to get
debt and profitability under control. ONO has made tremendous efforts in
reducing debt and increasing equity. It makes perfect sense get sound finan-
cial as ONO is planning to go public in 2005.
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
High level of debt D/E Low level of debt
40%
20%
0%
-20%
-40%
-60%
-80%
Debt and profitability
2001
2003
2002
2000
2000
2002
2001
2002
2003
AUNA Telecom ONO TdE (wireline Spain only)
ROE

Figure 19 - Wireline Capital Expenditures
The wireline business is a capital intensive one; estimates vary from 50 to 150
euros per meter of cable laid. Evidently the three firms above depart from
very different positions: TdE only needs to maintain its network or upgrade it
partially while AUNA and ONO are still laying new cable. In 2001, both firms
spent more in capital expenditure than they sold; obviously they could not be
profitable.
But whatever the starting position, the trend goes towards decreasing capital
expenditures. TdE officially states it wants to become a less capital intensive
firm and ONO has recently been growing through acquisition of smaller ope-
rators with existing networks.
18.6%
250%
200%
150%
100%
50%
0%
2002 2003
Investment in fixed assets
122.1%
227.1%
16.8%
65.0%
54.0%
13.8%
43.2%
52.4%
TdE (wireline Spain only)
AUNA Telecom
ONO
CapitalExpenses(CAPEX)/Sales
2001

All in all, the wireline business is not a very lucrative one. To begin with, capi-
tal expenditure in the cable business is much higher than in other networks’
technologies such as satellite or wireless telephony. Investment needs to be
financed by high levels of debt and have long payback periods.
The incumbent operator is very powerful, both operationally - thanks to its
existing network - and financially. The technical superiority of fiber optic cable
has been reduced since the introduction of ADSL and therefore does not allow
for premium prices for data speed.
Finally, the revenue model yields decreasing margins as the trend towards
commoditization of data transportation goes on.
3.4.2. Mobile Telephony
The picture in mobile telephony is somewhat different. To begin with, there are
only three major operators in Spain. Here again, the subsidiary of Grupo
Telefónica, Telefónica Móviles España, has a considerable market share, but it
has no cost advantage over its competitors. Its biggest competitor, Vodafone
España, is part of Vodafone Group Plc, the biggest mobile phone operator in
Europe and therefore also has considerable financial firepower.

Figure 20 - Sales and ROS in the Mobile Business: Telefónica Móviles, Vodafone
España and Amena
Note: Telefónica Mobiles España (TME) is a 100% subsidiary of Telefónica Mobiles SA; in the unconsolidated finan-
cial statements TME posts a for extraordinary charges (writedown of 3G licences) which makes its net result nega-
tive in 2002. This, in turn, results in negative shareholder capital in the unconsolidated balance sheet of TME in
2002 and 2003 (therefore, no significant ROE or D/E could be calculated).
The three companies have considerable sales and all three are profitable. The
latecomer Amena has been growing fastest over recent years and its profita-
bility steadily improving.
In H1 2004, Amena posted revenues of 1,456 million euros (up 19% YoY) and
an EBITDA of 460 million euros.
1999 2000 2001 2002 2003 2004
40%
20%
0%
-20%
-40%
-60%
-80%
ROS
Sales and return on sales
Telefónica Móviles España (uncons.) Amena Vodafone España
-54.0%
835.7
-4.4%
2,599.2 -8.0%
1,497.0
4.6%
2,193.0
6.6%
2,193.0
49.5%
6,770.0
15.9%
4,874.7
17.8%
5,840.9
18.2%
3,000.6
24.8%
7,495.5
17.7%
3,320.0
ProfitabilityoverSales

Telefónica Móviles España increased its revenues by 12.5% to 3,904.0 million
euros and its EBITDA by 9.7% to 2,058.7 million euros. The number of custo-
mers is down to 18.639 million after elimination from the count of 1.3 million
inactive prepaid customers; the number of contract customers increased
during the same period.
Vodafone Group PLC closes its fiscal year in March; no data for H1 2004 for
Vodafone España are available.
Figure 21 - Debt Ratios and Return on Equity in the Mobile Business
3.0 2.5 2.0 1.5 1.0 0.5 0.0
High level of debt D/E Low level of debt
70%
60%
50%
40%
30%
20%
10%
0%
ROE
Telefónica móviles
España (uncons.)
Vodafone España
Debt and profitability

All mobile operators continue in their effort of gradually reducing their debt
which most of them underwrote at the peak of the telecom hype in 2000 in
order to acquire UMTS licences.
While cutting costs and reducing debt, investment in fixed assets are spread
over longer periods of time. This is especially visible in the gradual way all
operators unfold their 3G antennas.
Figure 22 - CAPEX Expenditures in Mobile Telephony
AUNA Group, which is active in both the fixed line and mobile business, is a
good example of the different levels of attractiveness of the two businesses.
Within AUNA Group, AUNA (the cable company) still struggles to become pro-
fitable, Amena (the mobile arm) displays positive results since 2002. The mobi-
7.5%
60%
50%
40%
30%
20%
10%
0%
2002 2003
Investment in fixed assets
11.0%
49.9%
7.7%
29.1%
16.3%
7.0%
9.0%
Telefónica Móviles
España (uncons)
Vodafone España
Amena
2001

le business’s relative attractiveness is due to its different competitive landsca-
pe, i.e. the lower market share of the incumbent, the lighter investment in fixed
assets and a brighter future outlook than for the landline business. On the
other hand, the mobile business also has the downsides of a very dynamic
market: technologies are changing constantly and with every new technology
the market leader can theoretically be challenged. Investment in a given stan-
dard can either bring first-mover advantages or financial ruin. Hence, with the
choice of a market or technology, a firm also chooses a given level of poten-
tial return and risk.

4. Demand
4.1. Spanish Household Spending in Telecommunication Services
The communication budget of households has been consistently growing fas-
ter than the increase of the total budget17
. Telecom spending represented 1.9%
of all expenses in 1996 in 2002 this figure had risen to 2.9% (See Figure 23).
The emergence of new communication media such as the mobile and Internet
during the ‘90s has led the household to assign a higher proportion of its
expenses to communication.
Figure 23 - Household Spending Growth (YoY), Telecom Spending Growth (YoY),
Proportion of the Telecom Expenses within the Total Budget (Righthand Scale).
Growth in Real Terms.
30%
25%
20%
15%
10%
5%
0%
-5%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1995 1996 1997 1998 1999 2000 2001
1.2%
28.3%
0.7%
22.0%
-0.5%
6.5%
2.8%
7.1%
8.9%
8.2%
5.0%
13.3%
9.2%
0.0%
Total household spending
Communciations
% of total
17
INE – Continuous survey of familliy budgets.

A study undertaken by the Spanish Science and Technology Ministry18
on a
representative sample for the 13.6 million Spanish households reveals the
following distribution for fixed phone line, mobile phones, pay TV and Internet
(See Figure 24):
Figure 24 - Penetration Rates
Interestingly enough, although only 25.4% of the households have Internet
access, the same study reveals that 43.4% have a computer. The Internet
penetration rate among Spanish computer owners is thus 58.5%.
Surveys based on telecom invoices show that for these four communication
media, the Spanish households spend most on their mobile phones (2003).
Graph (See Figure 25) shows that the families that have all four media pay
slightly more for their mobiles than for their fixed line.
18
Study on the demand for telecommunications and information offered to the residential segment of Spain,
first were (July - September 2003) - Main Results, Ministry of Science and Technology, red.es.
90.2
75.4
19.2
25.4
InternetPay TVMobileFixed Phone
% of households (base13.6 million)
100
80
60
40
20
0

Figure 25 - Spending per Service
On the other hand, if we compare households that have only a fixed line (no
mobile) with those that have only mobile telephony (no fixed), the survey
shows that the latter spend more than twice on their phones (€60.2/month)
than the former (€24.2/month). The willingness to pay for mobility is thus sig-
nificantly higher than for comparable fixed line services.
The second section of the red.es survey shows a relationship between the
number of services subscribed and certain demographic variables such as
income, age, level of education and place of residence (rural vs. urban).
28.6 29.2
26.4
20.4
InternetPay TVMobileFixed Phone
Monthly Spending (euros)
40
30
20
10
0

Figure 26 - Number of Services Subscribed
Most Spanish households (41.3%) have a subscription to two services, typi-
cally a fixed and a mobile phone. The study shows a positive correlation bet-
ween the number of services subscribed and, household income; number of
people in the household; number of children in the household; size of the city
in which the household is located.
At the same time, the interest and importance expressed for new technolo-
gies in daily life, at work, in education and in social relations are a positive
function of level of education and socio-economic class.
On the other hand, interest is not as pronounced with older people and the
variable ‘residence‘ does not seem to be of statistical relevance.
Proportion of Households Subscribed to 1 or more Services
No service
1.5%
1 service. Typical
profile: Fixed 25.6%
2 services. Typical
profile: Fixed+Mobile
41.3%
3 services. Typical profile:
Fixed+Mobile+Internet
24.2%
4 services. Typical profile:
Fixed+Mobile+Pay TV+Internet
7.4%

4.2. Estimate of New Product Consumption and Consumer
Reaction to Product Bundling
The marginal willingness to pay for an additional service decreases sharply
with the number of services subscribed. On average the consumer pays
€37,2/month for the first communication service, the difference in total spen-
ding between the third and fourth service is only €4/month (See Figure 27).
Thus bundling makes the consumer buy more services but pay less and less
for any additional service. Bundling makes sense in order to gain market share
but entails decreasing margins.
Figure 27 - Average Bill per Consumer According to Services Contracted (in Euros)
37.2
60.8
84.5
88.5
4 services3 services2 services1 service
Euros
100
80
60
40
20
0

Figure 28 - Average Monthly Spending per Service (in Euros)
37.2
30.4
28.2
22.2
4 services3 services2 services1 service
Euros
50
30
10
-10

5. Industry Outlook
In this section we analyze future possible scenarios in the telecom sector. We
think that the main changes in this market will take place in the fixed line sec-
tor due to the gradual replacement of switched circuit technology (the classic
telephone line) by VoIP transmitted through the Internet accessed by broad-
band connection. For this reason, and perhaps due to the development of
interactive services such as video on demand, we will witness an increasing
penetration of broadband connection through both ADSL and cable techno-
logy. Who will be the winner? Will those technologies coexist in the market or
will one of them prevail over the other?
UMTS is likely to be the mobile counterpart to fixed line broadband access
(ADSL and cable). The combination of mobility and broadband access allows
operators to offer a set of services that they could not sell before. The mobile
has a penetration of over 80% in Europe which makes it the device of choice
for the development of the information society.
We will start by looking at the different technologies available in the market-
place and confront them with the contents that can be provided through them.
This will help us find out if there is a dominant design for each of the given
contents.
We will then analyze the dynamics in the markets of these technologies and try
to look at the different possible strategic set-ups for the players in each market.
5.1. Content, Technology and User Expectation
As mentioned above, we believe that in the future, what will drive the business
is content, not so much how content arrives to the user. That is why we try to
find out which is, for the currently available contents, i.e. voice, live images,
messaging, music, movies, games and e-commerce, the most appropriate
technology to convey it to the customer.
With time, we will most probably see a dominant design in the media that will
render the content. In order to project which of the currently available techno-
logies impose themselves as compelling (or dominant), we will first address
contents with the media available and analyze the technological fit. Then we

will proceed to the analysis of what characteristics the general public asks for
when accessing content. From there we will develop a most likely scenario of
dominant technology.
5.1.1. Fit Between Content and Technology
In the following matrix we analyze the fit between the currently available con-
tents and their supporting media. For each of the combinations we rate the
following characteristics: mobility, quality, convenience, speed, price and avai-
lability. The scale reaches from “LF” (low fit) to “OF” (optimum fit).
Explanatory Notes:
(1) Quality refers to the quality with which the content can be enjoyed, i.e. sound quality, resolution.
(2) Convenience measures the adequacy between medium and content or the comfort with which the content can
be enjoyed. For instance, we consider that watching feature movies on a small mobile phone display is not very
convenient.
(3) Speed refers to the velocity with which the data arrive at the medium.
(4) Price: OF (optimum fit) = cheap to the customer, LF (low fit) = expensive.
(5) Availability is conditioned by existence of the infrastructure.
Mobility
Quality (1)
Convenience (2)
Speed (3)
Price (4)
Availability (5)
Mobility
Quality (1)
Convenience (2)
Speed (3)
Price (4)
Availability (5)
Mobility
Quality (1)
Convenience (2)
Speed (3)
Price (4)
Availability (5)
Mobility
Quality (1)
Convenience (2)
Speed (3)
Price (4)
Availability (5)
Copper
cable +
ADSL
Optic
fiber
cable
Satellite
3G
Mobile
Voice
Live image
(video
conference)
Messages
(e-mail, SMS)
Music
(download,
streaming)
Movies
(download,
streaming)
Games
(download,
multiplayer)
e-commerce
LF LF LF LF LF LF LF
OF LF OF OF AF OF OF
AF AF OF OF AF OF OF
AF AF OF OF OF OF OF
OF OF OF OF OF OF OF
OF AF OF AF AF AF AF
LF OF LF LF LF LF LF
AF OF OF OF OF OF OF
OF OF OF OF AF OF OF
LF LF LF LF LF LF LF
OF OF - - LF - -
OF OF - - OF - -
OF OF - - OF - -
AF OF - - OF - -
LF LF - - AF - -
LF LF - - AF - -
AF AF OF OF AF OF OF
OF LF AF OF LF AF AF
AF AF OF AF AF OF OF
AF LF AF AF LF AF AF
LF (low fit) AF (average fit) OF (optimum fit)

For Copper cable, we consider availability of voice universal (optimum fit, OF)
because the fixed phone has over 90% penetration. In the case of contents
requiring a broadband access, we rank availability 2.
In the case of the satellite, we consider voice and videoconference over a
mobile device and movies on a home TV set, which explains the mark for
mobility. We do not consider Internet via satellite because of the limited bidi-
rectionality of the signals.
5.1.2. User’s Expectations and Content-Technology Mix
Beyond the purely technological fit between content and medium, we will have
a look at what customers are looking for when accessing a given content.
Figure 29 - Users’ Preferences for Content Access
The first conclusion that can be drawn from looking at the two matrices is
there is a division between mobile and stationary access. This divide is tech-
nological but also exists in customers’ preferences. Mobility often comes at
the price of lower convenience e.g. smaller pictures or uncomfortably small
keyboard.
In stationary technologies, both ADSL and cable are very close in the features
they offer, the only major difference is their respective theoretical data trans-
mission capacity. Although most commercial offers today are far from rea-
ching the technological limits, ADSL allows transmission at up to 8 Mbps while
Voice
Live image
(video
conference)
Messages
(e-mail, SMS)
Music
(download,
streaming)
Movies
(download,
streaming)
Games
(download,
multiplayer)
e-commerce
Mobility
Quality
Convenience
Speed
Price
Availability
• •
•
• • •
•
• • •
• •
•
• •
• • •
• •
• • •
•
• • •
• •
•
•
• •
• • •
•
• •
• • •
• Desirable • • Higher preference • • • Most important

fiber optic cable can transport data at 100Mbps. The limits of ADSL might
become an obstacle in very data intensive transmissions (high quality strea-
ming or video on demand in DVD quality).
The download time of a DVD (4.7 Gb) at maximum speed with ADSL (8 Mbps)
is 1 hour and 20 minutes; with Cable (100 Mbps), it’s 6 minutes.
The satellite does not qualify as an acceptable stationary transmission mode
for interactive content because it currently does not allow speedy data uploa-
ding. It only proves to be a very good medium for digital TV whenever laying
cables does not make economic sense.
Making abstraction of financial considerations, fiber optic cable stands out as
the superior technology for stationary content providing. It permits delivery of
any kind of content at extremely high speed.
Taking into consideration commercial factors, ADSL technology has the great
advantage of using the existing telephone network and thus has greater reach
in Europe than cable.
The mobile terminal with broadband capacity seems to be the ideal voice and
message communication tool but can also serve as entertainment medium
while on the move (music and games). The only purpose it does not seem to
fulfill is that of a mobile TV, first because of the small format of the screen but
also because it might prove to be very expensive to download an entire movie
onto a mobile device as long as pay-by-minute or pay-per-Kbyte remain the
predominant billing modes. The question with 3G mobile telephony is not
whether it will be adopted but how fast it will become popular and what stra-
tegies the operators will use to that aim.
Before we enter into considerations of how fixed line and mobile access
might coexist or compete, we will have a look at the trends in the distinct
technologies.

5.2. Possible Future Scenario in Fixed Line Business
In the fixed line voice business, three major trends can be identified:
1) The above mentioned loss of market share of the incumbent operator;
2) A substitution effect by which the user makes increased use of his
mobile phone;
3) The emergence of a disruptive technology, Voice over Internet
Protocol (VoIP).
As we have already described the first point at length, we will subsequently
focus on the substitution effect and on VoIP.
5.2.1. Substitution between Fixed Line and Mobile
Substitution of fixed line voice communications by mobile communication is a
steadily growing phenomenon. It is interesting to highlight that a high pene-
tration rate of mobile phones is a necessary but not sufficient condition for
high substitution rates (See Figure 30). Italy displays the highest penetration
rate (94%) and the highest substitution (51%), followed by Portugal (83%;
39%). Germany has relatively low penetration (73%) and low substitution
(6%). On the other hand, France has a high substitution rate (23%) given its
relatively low penetration (65%). In Sweden we observe the opposite: high
penetration (89%) and low substitution (9%).

Figure 30 - Penetration Rate vs. Substitution
Sources: (1) International Telecommunication Union, (2) The McKinsey Quarterly, 2004 No. 3.
In Spain, mobile phone penetration and substitution go hand in hand. A good
indicator of the increasing substitution effect is the growing percentage of
conversation minutes spent on the mobile in the total number of minutes
spent on the phone (See Figure 31). Although growing in absolute terms until
2002, the traffic minutes between fixed and fixed loses importance as propor-
tion of total telephone traffic. In 2003 we see the fixed-to-fixed traffic fall for
the first time, while mobile-to-mobile confirms its growth in traffic and share.
In 2000, traffic implicating a mobile phone (either as initiator, as receiver or
both) stood at 28%; in 2003 it represented 40.7% of all conversations.
60
60
50
40
30
20
10
0
65 70 75 80 85 90 95 100
Penetration rate: number of mobiles per 100 inhabitants (2002)
France
Portugal
Sweden
Germany
Spain
Czech Republic
Trendline
Italy
UK
Finland

Figure 31 - Traffic Between Fixed and Mobile Telephony
Source: CMT.
5.2.2. Emergence of Voice over IP
VoIP has two major drivers: broadband access and cost. The first is a necessary
condition for VoIP to work properly, but as we can reasonably expect growing
broadband penetration, generalized VoIP use is only a question of time. The
other way round, the causality can potentially be turned around: if the general
public becomes aware of VoIP as a convenient means to save on their telepho-
ne bills, the demand for VoIP might become the driver for broadband access.
Currently, awareness for VoIP is higher in the business community than at con-
sumer level. Many firms have already identified the cost saving potential of
VoIP and have started replacing their circuit switched telephone installations
by VoIP devices.
Fixed to fixed
Fixed to mobile
Mobile to fixed
Mobile to mobile
100,000
80,000
60,000
40,000
20,000
0
2000 2001 2002 2003
12.8%
8.0%
7.2%
72.0%
15.2%
8.9%
7.2%
68.7%
19.0%
8.9%
7.2%
64.8%
25.1%
7.9%
7.7%
59.3%
Traffic in
million
minutes

5.2.3. Consequences of Substitution and VoIP
The concurrence of both effects, substitution and VoIP considerably accelera-
tes the obsolescence of POTS and translates itself in an inexorable price
decay for the traditional voice business. We envisage a transition from circuit
switched voice to VoIP in a three stage process:
· First, local calls will drop in volume (especially for the incumbent) as
people increasingly use either cheaper alternative operators or their
mobiles for voice communication. The local access will be used in a
first stage to access the Internet via dial-up connection (narrowband
access). In stage two, narrowband access will gradually be replaced by
broadband access; the local loop will be used by ADSL technology.
· National calls also will be transferred from the incumbent to its chea-
per competitors or to the mobile phone.
· International calls experience the fiercest competition, prices have alre-
ady dropped dramatically and incumbents have seen their market sha-
res shrink tremendously.
In stage 2, the consumers will replace dial-up Internet access by broadband,
which is the necessary condition for stage 3, the large scale roll-out of VoIP.
Gradually all landline telecommunication will pass through VoIP. At the same
time, if by then 3G mobiles are common and massive data transfer is possi-
ble, mobiles also could be reached via VoIP, revolutionizing the billing model
in mobile telephony towards a flat-rate model or a pay-by-Mbyte model.
Figure 32 -Substitution Effect in Fixed Line Telephony
Phase 1 Phase 2 Phase 3
Local calls
National calls
International calls
Alternative carrier
Mobile
Internet Narrowband
Alternative carrier
Mobile
Internet Narrowband
Internet Broadband
VolP
VolP
VolP

How can fixed line carriers respond to the decline in revenue from POTS? The
first thing to be aware of is that landline voice transmission is a commodity, no
matter if it is circuit switched or packet switched. As aforementioned in our
value chain analysis, we believe that the answer lies in moving along the chain
more towards the customer.
A possible strategy for incumbent carriers we already observe in France, for
instance, is the “forward leap” strategy. It consists of acknowledging that the
advent of VoIP is inexorable and therefore one has to be the first to offer it in
order to gain a first-mover advantage. When aiming at residential customers,
the incumbent can bank on its brand and established customer base to mar-
ket VoIP before any other smaller competitor does. At the same time, it can
market broadband access and VoIP as a package if regulation allows it. The
revenue model changes from a traffic oriented billing to a flat-rate model where
market share is the key success factor. Incumbents are in a unique position of
leveraging on their existing customers and should therefore move fast.
The other facet of the strategy is to offer VoIP solutions, rather than only
access to a network, to its corporate customers. This implies a strategic repo-
sitioning from telephone carrier to telephony solution provider. Here again, the
source of revenue will move away from consumption. The revenue drivers will
be telecommunication consulting, hard- and software providing and added-
value services. Again, penetration is key, but even more so will be innovation
in services and products (especially in software).
Another strategy, which Telefónica uses, is the customer retention strategy. In
order for customers to continue paying at least the monthly subscription rate,
Telefónica tries to sell as many ADSL connections as possible. The customer
may stop using his fixed line phone but he still needs the line to get broad-
band access. The strategy has one problem: broadband access is the first
step towards VoIP. Therefore, if Telefónica is not the VoIP provider, some com-
petitor might capture Telefónica’s broadband customers.
5.3. Broadband Outlook
Internet broadband access is still perceived by many as too expensive; others
also ignore its benefits. In Spain the average price for broadband access is
around 40 euros, while the average household spending on Internet access is

20.40 euros. Despite that fact, Spain leads the rest of the European countries
in terms of broadband percentage penetration of households with Internet
access (see table below).
Generally speaking, broadband penetration is higher in smaller countries such
as the Netherlands (24%), Belgium and Denmark, where the telecom market
is more competitive than in bigger European countries. It is expected that bro-
adband growth will be strongest in Sweden, Switzerland and Belgium over the
next several years19
.
Table 17 - Broadband Households as % of Internet Households
By Country 2000 2001 2002
Spain 1% 21% 37%
Sweden 6% 18% 25%
Netherlands 7% 14% 24%
France 3% 9% 21%
Germany 3% 6% 18%
UK 1% 4% 13%
Italy 0% 5% 8%
Europe Total 3% 9% 19%
Table 18 - European Broadband Households (thousands)
By Country 2000 2001 2002
Spain 15 417 1,048
Sweden 129 429 656
Netherlands 190 504 925
France 128 546 1,520
Germany 284 834 2,848
UK 48 312 1,232
Italy 9 230 493
Europe Total 1,309 4,555 11,194
Copyright © 2002-2004 Web Site Optimization, LLC. Last modified: June 19, 2004.
19
Source: CNETnews.com.

5.3.1. What Can Be Done to Stimulate Demand for Broadband?
It might be interesting to look at South Korea, the country with the highest rate
of broadband penetration in the world, to understand how this was achieved.
We will first try to explain what the explanatory factors are, and then we will
see if it is possible to emulate them. In the end we want to briefly discuss if
high broadband access is beneficial.
In March 1995 the Korean government decided to orient the industrial deve-
lopment of the country towards information technology. It established the
Korean Information Infrastructure (KII) plan aimed at deploying high speed and
high capacity networks.
The government took strong measures to foster Internet access:
1) It deregulated the industry, abolishing all barriers to entry to the market or
price regulation. This made several full service providers (FSPs) enter the
market simultaneously, setting flat-rate access prices at low levels to
encourage dial-up customers to switch to broadband.
2) It helped FSPs get cheap financing (through prime rate public loans),
3) Constructed broadband backbones,
4) It gave broadband access to non-profit organizations such as educational
or research institutes, at the same time providing information education to
10 million people to increase Internet literacy.
5) It supported R&D in order for FSPs to hedge risks in developing new tech-
nologies.
6) It subsidized broadband access in rural areas and encouraged the connec-
tion of all new buildings to broadband access.
As a consequence, in 2002, Korea had over 10 million broadband subscribers
or 21 per 100 inhabitants, the highest ratio in the world. While much of the fast
adaptation can be attributed to the government’s vigorous intervention, some
factors specific to Korea made this evolution easier.
First, Korea has a highly dense urban geography, making it easy for broad-
band suppliers to achieve economies of scale.
But furthermore, Koreans display a marked preference for entertainment over
the Internet, network games and IP telephony.

The investment in IT brought several economic benefits. To begin with, Korea
overcame the 1997 Asian financial crisis with an astonishing velocity.
Second, while the Internet continues to make heavy losses in most parts of
the world, in South Korea the web has started to make money. Internet-rela-
ted transactions amounted to 170,000bn Won ($148bn, Euros 126bn, £89bn)
in 2002, or nearly 30 per cent of gross domestic product, according to the
national statistics office20
. One of the sectors that most benefited from the
Internet is e-tailing, with cybermalls alone showing turnover of around $500
million in September 200321
.
Since the beginning of the program, at least $14bn of public and private sec-
tor money was plowed into the project.
The Ministry of Information and Communication (MIC) announced in August
2003 it will equip the country with the broadband convergence network (BcN)
that provides the world’s fastest Internet connection speed of 50-100 megabits
per second (Mbps), up from the present transmission speed of 1.5-2 Mbps.
The MIC expected that the successful implementation of the government’s IT
industry fostering strategy based on the BcN will expand South Korea’s IT-
related production to 400 trillion won in 2007 and provide 1.5 million jobs. It
added that information and communication technology industry will make up
20 percent of GDP by 2007 and increase the nation’s IT-related exports to
$100 billion22
.
On the negative side, since the inception of the project, two FSPs have expe-
rienced financial difficulties. Thrunet, the first company to provide broadband
access, filed for court receivership in March and was up for sale in September
2003. Only one month after Thrunet, Onse Telecommunications Co, one of
South Korea’s small broadband Internet and fixed-line telephone service pro-
viders, filed for court receivership due to a severe cash crunch. Both firms got
into financial turmoil due to excessive levels of debt.
20
Source: Financial Times, October 9, 2003.
21
Source: Retail Asia, November 2003.
22
Source: Korea Times August 26, 2003.

In 2004, Hanaro Telecom, the second biggest player in Korea, had to be resu-
rrected from near-bankruptcy by a group of investors led by U.S. insurer
American International Group.
Is Korea’s example replicable? Following Korea’s example would entail a
much higher financial commitment and a much stronger interventionist orien-
tation on the government’s behalf. For several reasons, we believe that the
Korean example is not a way suitable for the Spanish market.
First, by choice, governments in Europe have decided to let free market dyna-
mics rule the telecom industry within a given regulatory framework. Strong
interventions are currently off the agenda.
Second, Spain is less densely populated than Korea; therefore the main cha-
llenge would be to avoid the digital divide between urban and rural areas.
It might also prove difficult to convince debt-loaded telecom companies and
cable operators to invest further in infrastructure, especially in areas where
economies of scale are hard to achieve. In light of the fact mentioned above
that two million Spanish households already have cable access but only 30%
are actually connected, further investment does not seem to make much
sense. Instead of investing in infrastructure, the battle will have to be fought
on the commercial side.
Rather than stimulating the offer, it might be more beneficial to foster demand
through educational programs intended to increase Internet literacy.
Regulation with regard to pricing and product packaging would have to be
relaxed also (Telefónica is not allowed to sell DSL access under €40/month
and cannot bundle Internet access and telephony).
Broadband access can lead to regulatory measures that artificially drive prices
down. In the UK, last May, British Telecom lowered the access price to the last
mile of its network by 70% of other ISPs, following indications from Ofcom,
the British telecom regulatory body, that in the event of overcharging for the
local loop, it might break up BT’s wholesale business.

5.3.2. Broadband Strategy
Broadband access providers can gain market share through action on price or
through the nature of the service they offer.
In response to the perception of too high a price, access providers could
come up with alternatives to the flat rate pricing model.
In Italy, for example, since the beginning of 2004 the incumbent Telecom Italia
sells prepaid DSL access packages (€50 for 25 hours) and DSL access by the
hour (€2 per hour), thereby leading innovation in European broadband pricing.
Other Italian ISPs followed suit, slightly undercutting TI’s offer. Obviously, this
strategy has the disadvantage of accelerating the downward price spiral.
Nevertheless on September 9th, Telefónica applied for authorization from the
CMT to commercialize a new ADSL offer for €9.90/month, giving 11 hours of
broadband access to the subscriber; every additional hour costs €1.45.
Increased penetration can also be achieved through the promotion of the
benefits of broadband access. Triple play offers (broadband as gate to the
Internet, digital TV and VoIP) should be the “killer application” that will stimu-
late the demand for broadband. The ingredients for a successful implementa-
tion of this strategy are: strategic alliance with content providers; the regula-
tory freedom to offer bundled products; critical size and critical mass in terms
number of customers.
The war for broadband customers will probably be a battle between cable
and ADSL. At the moment, in Spain, the incumbent who owns the telepho-
ne network is heavily regulated and has to give access to competitors at
given prices. Once these regulatory barriers fall, alternative ADSL providers
might get squeezed out of business and only direct access operators will
be left in the market, which boils down to ADSL versus cable.
Cable operators’ competitive edge is the technological superiority of fiber
optic cable. As a consequence, it makes sense to promote cable with data-
heavy content (e.g. fast movie downloads) that ADSL cannot deliver with the
same speed. At the same time, cable operators’ customer orientation should
be geared towards data intensive customers, i.e. companies that provide ser-
vices over the Internet.

ADSL, on the other hand, is probably only a winning bet for the incumbent
operator who owns the fully depreciated twisted copper pair network. For
the incumbent, the challenge is to convert an outdated circuit switched
voice network into a packet switched network while avoiding heavy inves-
tments, retaining a maximum of customers and reorienting its business
from a commodity supply to a value-added service provision.
5.4. Mobile Telephones
5.4.1. Trends
5.4.1.1. Virtual Network Mobile Phone Operators
Following a trend seen in fixed telephony, we might see the emergence of
Mobile Virtual Network Operators (MVNO), operators without a proprietary
network who buy talking time in bulk from mobile network operators in order
to sell it to retail customers as prepaid cards under an own brand name. The
German consumer goods group Tchibo Holding AG continued talks with
German mobile phone operator O2, a unit of the British-based mmO2 plc, to
offer the prepaid cards for Christmas 2004. Industry experts forecast a boom
in MVNO business, mainly due to growing competition and price pressure on
the mobile phone services market.
Swedish cell phone operator Tele2 is also considering setting foot on the
German market as an MVNO and is in talks with German anti-trust authorities23
.
5.4.1.2. Trend Toward Post-Pay Contracts
In the UK, Germany and Spain, customers show an increasing preference for
post-paid contracts. In terms of the evolution of the number of customers by
contract type, it can be seen that the pace of growth in the pre-paid segment
(8.3%) was much slower in 2002 than in the post-paid segment, which incre-
ased at a similar rate to the previous year (21.9%).
Of the total number of new customers in the mobile telephony market, 59%
contracted post-paid services, whereas 41% chose the pre-paid modality
(2002). This behavior reversed the trend observed since the launch of pre-paid
23
Source: Handelsblatt.

services, and was prompted by the loyalty-enhancing policies introduced by
operators. As a result of these loyalty-enhancing policies, particularly the eli-
mination of monthly subscription charges, some pre-paid customers migrated
to the post-paid modality.
5.4.1.3. Clients’ Willingness to Pay for Mobile Phone Content
A study24
carried out by Nokia in nine countries25
reveals that consumers are
ready to pay up to 28% more than they pay for their current content services
today (on average €7.4, younger consumer are willing to pay up to €10 per
month) for content. Film and entertainment listings are the contents users
want to access most on their mobiles. Roughly one third of the people ques-
tioned would accept a flat rate with unlimited access, while only 9% approve
of a pay-per-Kb model, which obviously appeals more to the content provi-
ders. Also there are significant differences among age groups. Willingness to
pay declines with age, while older customers tend to need more education
and hand-holding.
This is a challenge for content providers to customers in mature markets
where the population is aging and is more affluent than younger segments.
5.4.1.4. Content
Content has to be marketed, unlike voice which sells by itself. Moreover, it
has to be traffic generating. Stand-alone games generate one-time down-
loads, but multi-player games generate additional traffic between users. On
the other hand, it has to respond to mobile needs and respect the limits of
mobile technology. So far there is no single “killer application” and experts
expect very few applications to reap a market share of over 20%. You have
to consider that the younger users are most open to new mobile services
like MMS, chat, picture and ring tone downloads and games. At the same
time they are the most price sensitive segment. In a market that reaches
saturation (over 80% penetration) a long term strategy for content-provi-
ding mobile operators is customer education at a young age and making
the customer loyal to content as his willingness to pay for content increa-
ses with age and income.
24
Source: CNET 2004, Nokia.
25
USA, UK, Germany, France, Denmark, Estonia, South Korea, Greece and the Philippines.

5.4.2. Current Competitive Dynamics
As of July 2004, Vodafone, T-Mobile and Orange had launched their first 3G
offerings in the UK. The offer consists of laptop cards that allow mobile
Internet access to business customers. To get Internet on the phone, the
consumer had to wait until fall. This progressive, if not hesitant launch of
3G might be attributed to the operators still not knowing how the networks
will react under operational conditions26
. Widespread doubts still exist
about 3G-to-2.5G handovers, and introducing the data card before the
handsets might be a prudent way of testing it. The only UK operator offe-
ring UMTS handsets is Hutchison Whampoa which managed to attract
400,000 users (as of July’04), far off the initially targeted 1 million for the
end of 2003. Its success was considerably hampered by bulky handsets
with low battery life. Its content does not seem to be up and running either;
3 (the brand name under which Hutchison markets its service) has backed
away from promoting its video telephony and download service and is now
concentrating on offering cheap voice tariffs.
As of today, it looks like we are set for a price war right from the beginning of
the 3G introduction. The first to offer the data card in the UK was Vodafone at
£85 per month for a capped amount of data. Orange followed suit with a £75
flat rate offer, which in turn made T-Mobile respond with a £70 per month
counteroffer (with a lower transmission rate though). In Italy where TIM and
Vodafone began selling UMTS in May 2004, the price war already wages on
handsets; while Vodafone offers terminals at €649 and €599, Hutchison bru-
tally undercuts these by offering entry level handsets at €90 and €108, barely
more expensive than second generation phones.
Given that 4G technology is being tested around the world, and could begin
to be implemented in some countries in 2012, rolling out 3G services cannot
come fast enough. The hope of many mobile phone operators is to keep incre-
asing ARPU in an environment with cheapening price per minute in voice by
pushing customers to increase data exchange. This is no sure bet; in Japan,
where third generation mobile telephony was introduced in 2001, the major
player, NTT DoCoMo, is experiencing falling ARPU in 2004.
26
Source: Stephen Pentland, partner with U.K.-based Spectrum Strategy Consultants.

5.4.3. UMTS Outlook
Nearly four years after the first 3G licences were allocated and after an emba-
rrassing commercial failure of WAP, the European mobile phone operators
seem to turn again to UMTS. So, is UMTS the next big thing in mobile tele-
phony? In order to answer this question we will look at why 2.5G flopped in
Europe while i-mode was a huge success in Japan to find out which errors
mobile phone operators should avoid this time.
The global trend in mobile telephony is dropping revenue share in voice and
an increase in data communication. Both the huge success of SMS in Europe
and the rapid adaptation of data services in Japan seem to confirm this. After
a failed attempt to sell WAP to European customers, UMTS is the second run
for data services in an attempt to (temporarily) counteract the falling ARPU
from voice.
A good example of how data services could be made appealing to the custo-
mer is the highly successful introduction of i-mode in Japan. Setting aside
some aspects which are peculiar to the Japanese society -such as low fixed
line Internet penetration and high access prices, low Japanese language con-
tent (in 1999), preference for being on the move and cultural unacceptability
of loud public conversations on the mobile– there are several factors specific
to the offer of the service which explain its huge success (see Table 19).
Table 19 - i-mode Japan vs. WAP Europe
i-mode Japan’s success thanks to: WAP Europe failure due to:
Strong, compelling, user-oriented content No killer application.
at launch: Banking, e-mail, games, ring tones.
Introduced by dominant player NTT DoCoMo: Low active user base.
· 60% market share in voice; vicious circle: few customers give poor
· Strong brand name and critical mass. incentive to develop further content to attract
new customers.
· Intra NTT network discounts
virtuous circle: content attracts customer
which creates more content offer.
Standard controlled by NTT DoCoMo; content Theoretically unified standard; in practice
suppliers complied. some incompatibilities.

User friendly. Perceived as complicated and painfully slow.
Packet-switched: always on, voice and data Circuit-switched technology: dial-up,
at the same time. no simultaneous voice and data.
HTML: ease of adaptation for programmers. WML: powerful but complex, slower learning
curve for developers.
Marketed as useful mobile services. Marketed as the mobile Internet; creating too
high expectations.
Priced and targeted at young consumers. Highly priced and business oriented.
What can be learned from the i-mode/WAP experience to make UMTS a
success? When NTT DoCoMo launched its i-mode service, it was the only
company to do so. With a market share around 60% in voice at that time, it
dominated the industry and could set the IT and quality standards to be res-
pected by external content providers. Europe, unlike Japan, is not a homoge-
nous market with one dominant player but a set of national markets with a
dominant player in each of them. This makes it impossible to adopt an NTT
DoCoMo strategy of controlling standards and content. For the platform stan-
dards this means that the players have to agree upon one and, more impor-
tant, they have to comply with it.
Due to the high investments in 3G and the necessity to recoup their outlay, it
is in the interest of all operators to achieve very wide adoption of 3G in the
shortest time possible. Therefore, there has to be a strong incentive for the
user to switch from 2G or 2.5G to UMTS.
There should be one or several compelling “killer applications” common to all
operators, the same way voice and mobility was the killer application of 2G.
Trying to develop a proprietary closed, standard killer application, in the hope
to steal market share from rivals, will only slow down the adaptation of 3G by
the public. Possible applications would be video telephony and MMS. In 3G,
MMS would be the logical successor of SMS which has gained wide accep-
tance and has grown tremendously in recent years. For this to happen, its cost
has to come down dramatically in terms of handsets with MMS capabilities
and unit cost of the MMS itself.
These basic applications should be priced accessibly to assure early wides-
pread adoption and high turnover. Competition, on the other hand, should
take place on other content: premium content, business-oriented content.

Another determining factor is the availability of affordable handsets within a
wide range of handsets. The most ready adopters of 3G are young people
under 25; at the same time these are the ones with the lowest purchasing
power. It is therefore crucial to lock in this customer base with attractive hand-
set offers and make them spend on content. Due to this customer base struc-
ture, UMTS services must be available to prepaid users also. Hence strong
incentives must be created for users to switch their current phone for a 3G
device. As was the case at the beginning of the 2nd generation mobile tele-
phony, operators should push their 3G offers with massive marketing cam-
paigns and heavily subsidized handsets.
A differentiating factor for the operators could be high-end handsets. The
mobile phone is not only a gadget but also a fashion accessory. Hence
developing carrier branded handsets in exclusivity with handset providers
could be an attractive way of segmenting the market and extract more value
from tech-enthusiasts and fashion-conscious customers with higher willing-
ness to pay.
The rise and fall of 3G will depend on content. The consumer will only be ready
to switch to 3G if he gets positive word-of-mouth from early adopters and will
only be ready to pay for content if it lives up to its expectations. At least in the
beginning, UMTS operators should be the gatekeepers of content, making
sure that content responds to customer needs, is easy to use and is well
designed. On the other hand, the operator will be able to take a commission
from the content provider but also has the obligation to actively advertise the
content without techno-gibberish. The big difference with voice is that the lat-
ter sold by itself, while data content needs to be marketed.
From the operator’s point of view, ideal content is traffic generating, not a one-
shot download. This means that content needs to be interactive or creates a
community that exchanges information (e.g. multi-player games).
5.4.4. Fourth Generation Mobile Telephony (4G) – What does the Future Hold?
4G or fourth generation mobile telephony has a characteristic which makes it
highly speculative: as of today nobody knows what it will look like; all we know
is that it will some day follow 3G, but no standards have been defined yet and
a considerable number of big and small telecom equipment providers are wor-

king on very different technologies. There seems to be a consensus on a few
points though.
To begin with, it will be faster than UMTS which theoretically can reach 2
Mbps. Speed expectations for 4G reach from 100Mbps to 1Gbps. NTT
DoCoMo announced in early June it has achieved a connection of 300Mbps
with its experimental fourth-generation network. It has managed to achieve a
maximum connection rate of 300 megabits per second, and an average rate
of 130Mbps, using cutting-edge wireless technologies.
But 4G will not only be faster, it will be the convergence of broadband mobile
telephony and radio access technology like WiFi or WiMax. It is expected to
allow any mobile device to roam seamlessly over different wireless technolo-
gies automatically, using the best connection available for the intended use. In
other words it would be “anytime, anywhere, anything” technology.
There also seems to be a consensus about the commercial availability in time
of 4G technology. Most experts believe 2010 to be the year for 4G.
So what is the fuss with 4G if it does not even exist yet? Many see 4G as the
“real” mobile broadband, opinion which stems from a certain disillusion about
3G before it is actually unfolded completely. 3G has been promised to true
mobile broadband. It turns out that instead of the theoretical 2 Mbps, the con-
sumer will get 384 Kbps if things go well. At this speed, pictures are still grainy
and time-lags on video conferences did not spark users’ enthusiasm. At the
same time, mobile operators have been slow in implementing and selling 3G.
The disappointment is especially marked in Europe where operators are reco-
vering from overpaying licences and from a telecom slump, to the point that
some are even sceptical about 4G. The 4G buzz seems to be stronger in Asia,
where China, South Korea and Japan have agreed to develop jointly commu-
nications and other technologies for 4G which may lead to a unified commu-
nications protocol. The three nations see in 4G the opportunity to leap ahead
to define international standards and to gain technological leadership.
But we are not there yet. While this year in Europe, 3G is being rolled out,
some are already working on improving its performance. A technology inten-
ded to boost 3G networks to speeds between 8 and 10 Mbps, called HSDPA
- or High Speed Downlink Packet Access - is currently being tested by NTT
DoCoMo in Japan and is planned to be launched next year. It might become

the 3.5G choice of other operators. HSDPA is expected to allow downlink data
speeds five times faster than the 3G networks being rolled out now. Most ven-
dors are shipping W-CDMA equipment with HSDPA built in and other opera-
tors are planning trials for the end of this year.
At the same time, radio access technologies are being developed by a num-
ber of firms. All use Internet Protocol (IP), but while some are based on stan-
dards like 802.20, more commonly known as WiMax (a development of Wi-Fi
supported by Cisco, Motorola and Siemens), others use proprietary technolo-
gies. Some see wireless access technologies combined with VoIP as a serious
alternative to 3G. At the moment though, it is a technology that does not offer
true mobility and a number of questions remain open: secure authentication,
access authorization, charging mechanisms and billing systems need to be
set up, and this, without centralization at the level of an operator as the net-
work, is a patchwork of private WLANs.
5.4.5. Co-existence of Mobile and Landline Technology
In the medium term we will probably see a co-existence between landline net-
work access and mobile access. The challenge for network operators will be
to come up with a business model that offers a smooth interconnectivity bet-
ween the two access methods. Ideally, the end user has only two devices: a
laptop and a mobile phone, both interconnected and interchangeable accor-
ding to the requirements of the moment (type of content, mobility). The win-
ning operator will be the one who provides both stationary and mobile access,
sending a unique bill to the customer at the end of the month charging for both
access and content.
5.5. Major Operators’ Strategies
5.5.1. Telefónica’s New Strategic Orientation
Telefónica is present in all segments of the telecommunication market. It aims
to provide communication solutions to respond to all the expectations of the
customer by combining different technologies and services.
Generally speaking, the incumbent is currently trying to reinvent itself as a
more customer-oriented company, moving away from being a product-orien-

ted firm. In order to achieve this, Telefónica plans to increase its sales force by
25% after putting through a staff reduction plan concerning a few thousand
employees.
In the near future, selling broadband access will be the firm’s priority.
In the wireline business, ADSL is the obvious solution Telefónica is pushing.
One of the top priorities is a huge effort to reduce customer loss in the fixed
line business, the objective being to contain it to 3% per year. Besides acti-
ve customer recuperation initiatives, ADSL is one of the defence strategies
against mobile substitution and cable. At the same time ADSL is the tech-
nical platform that Telefónica will use to sell its content offer: Imagineo, an
integrated service with video and audio on demand, interactive digital TV
and Internet access on broadband. This is a new concept of television, in
which the customer designs his own programming. Imagineo is an example
of Telefónica’s effort to generate revenue from added value services (See
Figure 33).

Figure 33 - Telefonica’s Future Revenue Drivers
Source: Telefónica.
On the mobile side, the incumbent starts offering UMTS broadband access
from this year on.
It is noteworthy that Telefónica pushes voice and data convergence with its
corporate customers (e.g. IP-based telephony solutions) but does not do so
with its residential customers yet. Migrating the latter to VoIP would kill
Telefónica’s cash cow.
Internally, the group’s focus lies in cost contention and making investments
profitable. The declared goal is to spend no more than 9 to 12 percent of reve-
nue in CapEx with a distribution of 53% for broadband and mobile and 47%
for the maintenance of the traditional business (Figure 34).
Added value
Added value
services
Connectivity
services
New
connectivity
services
Solutions
Applications
and content
New forms of
communication
involving New
Connectivity
Services
Greater needs
of present
connectivity
services
Revenue
Today Future
New services for the digital customer
The new connectivity services that form the basis for
provision of future new Added Value Services are the key
to the future of Telecommunications Operators

Figure 34 - Telefonica’s Future CapEx Strategy
Source: Telefónica .
5.5.2. Auna
Auna positions itself in terms of image as the underdog, as the only true alter-
native to the ex-monopolist. In the battle for broadband customers, Auna’s
effort is centered on avoiding that people believe that broadband is equal to
ADSL in order to sell cable as the more effective broadband access.
Although Auna has its own fiber optic cable, it still has a high number of indi-
rect access customers (946,000 preselected telephony lines). One of its
medium-term goals is to convert these customers to direct access.
Convergence between wireline and wireless is another one of Auna’s priorities.
The convergence materializes through advantageous rate plans which grant
attractive prices for communications between Auna’s wireline handsets and
Amena’s mobile phones. The group believes that convergence will provide
Auna Group with a competitive edge, enabling it to expand its range of pro-
ducts in the market, optimize costs and investments and, ultimately, to impro-
ve its efficiency and productivity.
Auna also focuses on content. Having noticed the fast growth of games, it is
developing a network games platform, the main attraction of which is the
strengthening of the “community” factor as a key to success through sports
animation.
2002
Maintenance of
traditional
business
Transformation
Broadband, fixed
and Mobile
CapEx of revenue. Telefónica Group
(data in percentages)
2006
34
66
13%
53
47
9-12%

In February 2003 the operator completed its range of services to individuals
with the launch of the digital TV service, offering over 90 channels of every
genre, access to new movies and soccer matches with the PPV (pay-per-view)
service. Shortly after, the first interactive television services were launched
which enabled users to send short messages from their TVs to mobile pho-
nes, to chat, send emails, access games and share movie reviews.
Auna continues to focus on bundling of services for residential customers
through its direct access network, as a means of distinguishing itself from its
competitors.
On the UMTS side, Amena launched its offer in October 2004, with a few
months of delay with regard to Telefónica and Vodafone. It plans to invest 700
million euros in 3G telephony and reach 95% of the population in 6 years.
Currently, Auna is in the process of being sold. There are two alternatives being
evaluated: either selling the group in an integrated way or selling the cable unit
(Auna Telecommunications) and mobile phone unit (Amena) separately.
Auna has received various offers, including a $9 billion offer from Carlos Slim,
owner of Telme and América Móvil.
At the same time, ONO (one of the major competitors in the cable sector) has
offered $2.6 billion for Auna Cable. If the operation is carried out, the new
company would compete wilth Telefonica ADSL.
Although the group’s managers are seeking an integrated sale, the decision
rests with the shareholders.
5.5.3. ONO
ONO, a pure cable operator, still has not broken even. Although EBIDTA has
been positive these last years, high depreciations and the service of a heavy
debt keep it from reaching positive net profits.
ONO focuses on commercial effort to get as high utilization rates as possible
from its proprietary network. It does so by offering the triple play package:
telephony, digital TV and broadband access.

At the same time the company keeps extending its network in commercially
viable areas.
In terms of corporate customers, ONO focuses more on SMEs than its bigger
competitors.
ONO’s problem is its size. With around 700,000 customers and a limited pre-
sence only in major cities, the firm will have problems to reach critical mass in
order to take advantage of both network externalities and economies of scale.
That is why the company seems to have opted for external growth. In 2003,
ONO acquired Retecal, a regional company. To date, ONO is in potential mer-
ger talks with AUNA. Both companies plan to go public first, in the first half-
year 2005 and potentially merge afterwards. Together they would have a joint
direct access customer base of around 1.4 million, becoming an increasingly
serious alternative carrier facing Telefónica.
More consolidation could be expected in the cable business as rumors circu-
late about foreign cable operators, such as the American Liberty Media, being
potentially interested in acquiring cable networks across Europe.
5.5.4. Vodafone
Vodafone pursues a double strategy which involves strategic alliances with other
businesses on the value chain.
First, on the consumer side, Vodafone focuses on data in mobile telephony.
Vodafone did not wait for third generation mobile telephony to launch its data
service. It has successfully launched its Vodafone Live! Platform and now
offers the Live! service under 3G. In order to obtain entertaining content,
Vodafone struck a global alliance with Warner Bros Online which will offer
games, screensavers and other mobile applications.
But also on the corporate side, the mobile phone operator offers innovative
solutions in cooperation with wireline telecoms and hardware producers.
Vodafone seems to believe in fixed and mobile convergence, at least for
professional applications. That is why Vodafone engaged in alliances with
wireline network operators such as Colt, Jazztel and Sarenet to offer “wire-

less office”, virtual private network (VPN) and seamless fixed-mobile
solutions.
Commercially speaking, Vodafone is moving closer to the customer by
recently striking a deal with HP which will sell its laptops in a package with the
Vodafone Mobile Connect 3G/GPRS card to corporate customers.
5.6. The Impact of Regulation
The Spanish regulatory framework for the telecom sector is set by the General
Telecommunication Law (GTL) of November 3, 200327
. It is the transposition of
several European directives into Spanish national law28
. The GTL of November
3, 2003 modifies certain aspects of the previous GTL (11/1998 of April 24th).
To begin with, the new GTL institutes an “ex-post” control of the sector while
previously more “ex-ante”. The “ex-post” character of the control materializes
in the freedom for any new operator willing to enter the market to do so
without having to apply for an operating licence. The operator is solely requi-
red to declare to the CMT its intention to set foot in Spain. Hence, the opera-
tor does not have to provide much information at the moment of setting up
business but has an ongoing obligation of transparency and information
supply with regard to the CMT. The Spanish telecom sector has thereby
brought down considerably the administrative barrier to entry to the market
but at the same time increased operating costs and disclosure obligations for
all competitors; all multi-business companies have to present to the CMT
separate and externally audited accounts relative to their telecom activity.
But the most important novelty of the new GTL is the drop of the notion of domi-
nant operator which generally referred to the incumbent. Instead, the concept of
reference markets and operators with significant market power has been inven-
ted. To begin with, the CMT will look at the telecom sector and analyze it in
terms several reference markets (retail vs. wholesale, geographical scope etc.)
whose definitions were to be made public in 2004 but will now probably take
27
Ley 32/2003, de 3 de noviembre, General de Telecomunicaciones.
28
Directives: 2002/21/CE, 2002/20/CE, 2002/22/CE, 2002/19/CE, 2002/58/CE, 2002/77/CE and decision
676/2002/CE.

place in 2005. The idea is to verify if the different reference markets are develo-
ping in an environment of effective competition. Should this not be the case, the
CMT will categorize, according to their market share, one or several players as
operators with significant market power (OSMP). The European Parliament and
Council define as OSMP as “an undertaking which, either individually or jointly
with others, enjoys a position equivalent to dominance, that is to say a position
of economic strength affording it the power to behave to an appreciable extent
independently of competitors, customers and ultimately consumers”29
.
This has several far-reaching consequences for the concerned operators:
First, the incumbent is not always and not in every market the operator with
significant power. This is especially true in the mobile phone market or in cer-
tain geographical areas where Telefónica competes with cable operators in the
wireline business.
Second, the significant power tag comes with a set of obligations that the
CMT can choose to impose:
· transparency with regard to accounting practices, technical specifica-
tions, characteristics of the network, supply and using conditions and
prices;
· non discrimination in network access between independent companies
and subsidiaries;
· separation of accounts in a format and methodology provided by the
CMT;
· access to specific network resources and uses;
· price control.
Recently, the CEO of Auna, Luis Alberto Salazar-Simpson, expressed concern
about the risk of his Amena being pinpointed as OSMP which could entail that
the CMT could regulate its interconnection prices. As of today, only
Telefónica’s interconnection prices are regulated, giving an advantage to
Amena and Vodafone.
The new GTL also redefines the financing of the Servicio Universal, i.e. the mea-
sure that up to date obligated Telefónica to provide minimum telephony services
29
European directive 2002/21/EC of 7 March 2002 on a common regulatory framework for electronic com-
munications networks and services (Framework Directive).

to socially disadvantaged or geographically remote users at preferential tariffs. So
far, Telefónica had to bear the financial burden of the Servicio Universal alone.
Under the new GTL, the Ministerio de Ciencia y Tecnología can designate one or
several telecom operators to provide the servicio universal, for different techno-
logies and in different geographical regions. Financing of the Servicio Universal
has not yet been defined, but it will probably be provided by a fund, itself sustai-
ned partly by all operators and partly by public funds.
The Spanish Government recently decided to maintain in 2005 the price cap
for Telefónica30
, a maximum price system which serves as reference to the
whole sector and is supposed to guarantee low prices for the consumer.
Generally speaking, the implementation of the new GTL marks a new area for
the Spanish telecom sector. It represents the legislator’s acknowledgment that
the sector has matured, that in certain markets free competition has already
materialized and that it is time to level the playing field which so far contained
artificial hurdles for the incumbent. As a consequence, although legally spea-
king it will be easier to set up shop because no more licence is required, sma-
ller new entrants to the market will hardly have a chance to compete against
the established champions. New business will therefore either come from
niche players or from big foreign companies with the necessary depth of poc-
ket to initiate operations.
30
Source: Gaceta de los negocios, August 11, 2004.

6. Appendix
6.1. OECD Survey Methodology
NEW OECD MOBILE BASKETS
Usage is split into three baskets: low usage, medium usage and high usage.
Basket definitions:
No. of outgoing of which to fixed
Basket number of calls percentage that go percentage that go SMS
to fixed phones to mobile phones
Low usage 25 42% 58% 30
Medium usage 75 36% 64% 35
High usage 150 40% 60% 42
· Each basket also has a unique definition of time of day distribution and
call duration, and includes the monthly rental, and any registration
charges distributed over three years.
· The two most prominent operators in each country are covered, based
on available subscriber numbers. All relevant packages from each ope-
rator are considered, but the final results presented here only show the
cheapest package for each basket.
All baskets will include:
· Registration or installation charges with 1/3 of the charges, i.e. distri-
buted over three years.
· Monthly rental charges and any option charges that may apply to the pac-
kage, or package combination.
The three new baskets are:
· Low user basket: the usage level of this basket is low, with a call volu-
me less than half of that in the medium user basket.
· Medium user basket: this basket will have 75 outgoing calls/month.
· High user basket: the usage level is about twice the medium user
basket.
The usage profiles will also include a number of SMS messages per month.

Call and message volumes for each basket are:
Outgoing calls/month SMS per month
Low user 25 30
Medium user 75 35
High user 150 42
The information received showed that there is little difference between the
average pre-paid usage and the low user post-paid usage. The low user bas-
ket can therefore be used for both pre- and postpaid tariffs, allowing a simple
comparison also between the two types.
Only national calls are included in the profiles, with four different destinations:
· Local area fixed line calls: this is used to accommodate the tariffs that
have separate charges for the local area. When such charges are not
available, this proportion of calls is included in the national.
· National fixed line calls: this covers all fixed line calls outside the local
area, except in cases as noted above.
· Same network mobile calls (On-net): this includes all calls made to
mobiles in the same mobile network as the caller.
· Other network mobile calls (Off-net): this includes calls to all other
mobile networks in the caller’s country. When the charges are different
depending on destination network, the market shares based on subs-
criber numbers are used for weighting the charges. Up to three other
networks will be considered in each country.
Distributions per destination for each basket are:
% of total
Number of calls Fixed Local area Fixed National area On-net mobile Off-net mobile
Low user 28.0% 14.0% 40.0% 18.0%
Medium user 24.0% 12.0% 43.0% 21.0%
High user 26.0% 14.0% 42.0% 18.0%
As the information received produced little evidence on the split between local
and national fixed line calls, the assumption has been used that the ratio would
be 2:1 for local:national, i.e. 67% local and 33% national. This assumption is
taken from the averages in fixed baskets, and the scarce information received.

Instead of splitting time and day into distinct times and days, the following
approach will be used:
Peak time calls at weekdays, most expensive time during daytime.
Off-peak time calls at weekdays, cheapest time before midnight.
Weekend time calls, at daytime Sundays.
Distributions over time and day for each basket are:
% of total number of calls ToD Peak ToD Off-peak ToD Weekend
Low user 38% 35% 27%
Medium user 47% 30% 23%
High user 63% 22% 15%
There will be three separate call durations:
· Local and national fixed line calls
· Same network mobile calls (On-net)
· Other network mobile calls (Off-net)
Call durations for each basket are:
Minutes per call Dur Fixed National Dur Mobile On-net Dur Mobile Off-net
Low user 1.6 1.4 1.4
Medium user 2.1 1.9 1.9
High user 2.2 2.0 2.1
Any call allowance value included in the monthly rental will be deducted from
the usage value once the basket is calculated. The deduction cannot be lar-
ger than the actual usage value, i.e. negative usage is not allowed. No trans-
fer of unused value to next month is taken into account.
Any inclusive minutes will be deducted from the basket usage before starting
the calculation of usage cost. The inclusive minutes are assumed to be used
up with the same calling pattern that is described in the basket, i.e. the same
peak/off-peak ratio and the same distribution across destinations. Where the
inclusive minutes are clearly limited to specific destinations or times of day
this will be taken into account. No transfer of unused minutes is taken into
account.

Any inclusive SMS-messages will be deducted from the basket before starting
the calculation of the SMS message cost, up to the number of messages in
the basket.
For each of the operators covered, a set of packages shall be included so that
the cheapest package offered by that operator can be calculated for each of
the three baskets.
Multiple operators in each country shall be included, with at least the two ope-
rators with the highest number of subscribers in each country. The operators
included shall have a total market share of at least 50% based on subscriber
numbers.
Basket results are calculated for a period of one year.
6.2. Sources for Figure 10 - ARPU (H1 2004) of Selected
European Mobile Phone Operators
Operator Country Annual ARPU (EUR) Source Date
Orange (FR) France 387 Les Echos 28/07/2004
France Average France 409.2 ART / le figaro 27/07/2004
SFR (FR) France 436 Vivendi Universal H1
2004 results 29/07/2004
T-Mobile (DE) Germany 276 ddp.vwd Wirtschaftsdienst 12/08/2004
E-Plus (DE) Germany 288 German News Digest 09/08/2004
Vodafone Germany Germany 309 Europe Information
e-technologies 29/07/2004
O2 (DE) Germany 367 ddp.vwd Wirtschaftsdienst 21/07/2004
TIM (IT) Italy 343.2 PMF News 04/05/2004
Vodafone Italy Italy 362 Il Giornale 27/07/2004
Hutchison 3G (IT) Italy 516 Il Giornale 21/05/2004
Telefonica moviles (ES) Spain 363.6 Reuters 27/07/2004
Vodafone Spain Spain 389.1 Cinco Dias 27/07/2004
Virgin Mobile (UK) UK 211.58 FT 30/07/2004
Orange (UK) UK 408.26 francetelecom.com 27/07/2004
mmO2 (UK) UK 415.71 AFX International Focus 21/07/2004
Vodafone UK UK 460.41 Vodafone preliminary
results March 2004 25/05/2004

6.3. Selected Financials of Major Players in the Spanish
Telecom Industry
TELEFÓNICA DE ESPAÑA (fixed line business Spain only)
Millions 1998 1999 2000 2001 2002 2003
Sales 0.0 10,118.8 10,012.0 10,222.1 10,272.1 10,217.0
EBITDA 0.0 4,496.8 4,453.9 4,485.3 4,496.7 4,534.0
Depreciation 0.0 2,669.0 2,886.3 2,804.5 2,701.8 2,568.0
Financial result 0.0 691.3 626.1 403.1 398.5 450.1
Net income 0.0 -207.0 236.7 1,077.6 807.9 178.1
Long term debt 0.0 9,555.7 8,904.3 8,155.9 9,051.5 n/a
Investment in fixed assets 0.0 n/a 1,808.0 1,903.8 1,729.9 1,406.0
Share Capital 2,889.8 3,126.5 3,366.1 3,351.0 n/a
ROS -2.0% 2.4% 10.5% 7.9% 1.7%
ROE (at book value) -7.2% 7.6% 32.0% 24.1% n/a
Interest cover ratio -0.3 0.4 2.7 2.0 0.4
Debt/equity ratio (D/E) 3.3 2.8 2.4 2.7 n/a
Investment as % of sales 18.1% 18.6% 16.8% 13.8%
AUNA TELECOMUNICACIONES
Millions 1998 1999 2000 2001 2002 2003
Sales 849.0 925.0 1,076.0
EBITDA -100.0 -40.0 124.0
Depreciation 263.0 355.0 369.0
Financial result 69.7 93.4 63.0
Net income -343.0 -484.0 -220.0
Long term debt 2,000.0 2,116.0 2,873.7
Investment in fixed assets 1,037.0 601.0 464.7
Share Capital 666.8 447.0
ROS -40.4% -52.3% -20.4%
ROE (at book value) -72.6% -49.2%
Interest cover ratio -4.9 -5.2 -3.5
Debt/equity ratio (D/E) 3.2 6.4
Investment as % of sales 122.1% 65.0% 43.2%

ONO
Millions 1998 1999 2000 2001 2002 2003
Sales 0.4 6.8 51.5 143.6 253.4 358.6
EBITDA -9.0 -23.3 -55.8 -57.4 15.8 102.1
Depreciation 1.9 11.6 33.9 80.8 98.8 103.2
Net income -10.9 -45.3 -124.9 -216.9 -194.6 97.0
Long term debt 10.0 458.5 643.6 1,250.2 959.2 1,080.1
Investment in fixed assets 50.5 203.2 476.3 326.1 136.8 188.0
Share Capital n/a 632.1 410.8 745.8 720.8
ROS -666.2% -242.6% -151.1% -76.8% 27.1%
ROE (at book value) -19.8% -52.8% -26.1% 13.5%
Interest cover ratio -0.8 -1.1 -1.5 -2.1 0.9
Debt/equity ratio (D/E) 1.0 3.0 1.3 1.5
Investment as % of sales12,625.0% 2,988.2% 925.4% 227.1% 54.0% 52.4%
Telefónica Móviles España (uncons.)
Millions 1998 1999 2000 2001 2002 2003
Sales 2,835.0 3,799.0 4,874.7 5,840.9 6,770.0 7,495.5
EBITDA 1,183.8 1,346.5 1,790.9 2,817.3 3,490.3 3,940.8
Depreciation 384.8 443.5 578.0 651.0 666.4 698.1
Net income 482.9 561.1 774.4 1,043.5 -3,350.3 1,856.6
Long term debt 728.0 628.2 1,342.9 1,149.8 4,305.0 4,006.3
Investment in fixed assets 209.3 369.0 530.1 436.0 519.0 521.0
Share Capital 1,016.6 1,343.2 1,273.7 2,295.3 -2,445.0 -588.4
ROS 0.2 14.8% 15.9% 17.9% -49.5% 24.8%
ROE (at book value) 0.5 41.8% 60.8% 45.5%
Interest cover ratio 8.2 11.0 13.5 2.3 -8.1 6.3
Debt/equity ratio (D/E) 0.7 0.5 1.1 0.5
Investment as % of sales 7.4% 9.7% 10.9% 7.5% 7.7% 7.0%

Vodafone España*
Millions 1998 1999 2000 2002 2003
Sales 1,222.7 2,041.1 2,599.2 3,000.6 3,320.0
EBITDA 262.9 458.0 659.6 1,095.5 1,212.0
Depreciation 188.3 196.6 254.3 302.9 319.0
Financial result 46.8 31.4 48.9 47.9 23.6
Net income 147.8 275.0 114.0 546.0 587.0
Long term debt 588.7 604.0 596.4 3.2 30.9
Investment in fixed assets 256.0 524.0 600.0 329.9 967.0
Share Capital 568.5 716.4 991.8 1,652.3 2,239.9
ROS 0.1 13.5% 4.4% 18.2% 17.7%
ROE (at book value) 0.3 38.4% 11.5% 33.0% 26.2%
Interest cover ratio 3.2 8.7 2.3 11.4 24.9
Debt/equity ratio (D/E) 1.0 0.8 0.6 0.0 0.0
Investment as % of sales 20.9% 25.7% 23.1% 11.0% 29.1%
* Change in fiscal year end from Dec. 31 to Mar. 31. Fiscal year 2001 (Jan-Mar) not conside-
red representative.
Amena
Millions 1998 1999 2000 2001 2002 2003
Sales n/a 177.3 835.7 1,497.0 2,193.0 2,784.0
EBITDA n/a -353.7 -342.9 497.3 957.3 768.0
Depreciation n/a 36.0 135.1 277.3 301.3 358.0
Financial result n/a 3.1 51.9 103.7 127.2 111.0
Net income n/a -230.9 -451.5 -120.0 101.0 183.0
Long term debt n/a 754.5 1,588.2 2,736.5 2,569.1 n/a
Investment in fixed assets n/a 605.0 1,256.1 747.0 358.0 250.3
Share Capital 202.6 152.0 139.2 54.2 154.9 n/a
ROS -130.2% -54.0% -8.0% 4.6% 6.6%
ROE (at book value) -152.0% -324.3% -221.5% 65.2% n/a
Interest cover ratio -75.7 -8.7 -1.2 0.8 1.6
Debt/equity ratio (D/E) 5.0 11.4 50.5 16.6 n/a
Investment as % of sales 341.2% 150.3% 49.9% 16.3% 9.0%

Av. Pearson, 21
08034 Barcelona
Tel.: +34 93 253 42 00
Fax: +34 93 253 43 43
www.ebcenter.org

Reports from eb Center 6 15804

More Related Content

Viewers also liked

Similar to Reports from eb Center 6 15804

More from CMR WORLD TECH

Recently uploaded

Reports from eb Center 6 15804