NEW TELECOM BUSINESS MODELS

Rapid
Network Market Step-
Rise in Customer
Costs Appeal of Increase
Use Segment
Dramati- “All You In
of Profitability
cally Can Eat” Compe-
Subscription Changes
Lower Pricing tition
Pricing

Opportunity for Action for Carriers

• Develop a new value creation model for the business

• Develop new margin sources

• Realign costs with value creation

 BACKBONE NETWORK TRANSMISSION COSTS
ARE PLUMMETING

Average Cost of U.S. Backbone Network Capacity

Cost for NY-CA 10

circuit
(¢/ min, 1
log scale)
0.1 Cost for volume carried(1)

0.01
Cost of lit capacity
0.001
Cost of “theoretical” capacity
0.0001
Cash cost per unit of capacity
0.00001
1997 1998 1999

~$50 for a coast to coast

(1) Traffic cost assumes 5x peaking voice circuit for 1 year
Source: BCG analysis
 WIRELESS NETWORK COSTS ALSO FALLING
Long Run Incremental Cost Now Below 5¢/Min

Network Costs/Min for UK Carriers

$/min 0.175

0.150

0.125

Slope ~80%
0.100 Key
Orange
Cellnet
Vodafone
0.075
0.25 0.5 1.0 2.0 3.0 4.0
(bn mins p.a.)
Total traffic carried on network

Source: BCG Analysis

 NEW ENTRANTS CREATING PRICE COMPETITION IN WIRELESS

Overview Of Competition In Jacksonville Wireless Market

Powertel and PrimeCo
enter, joining BellSouth
and AT&T
PrimeCo offers Alltel enters with promotional
Price Index 1.2 Powertel soon $45/month for 400 $0.05 per minute rate and bundled
announces unlimited minutes services (wireless, paging, LD,
calls for $50/mo promo Internet)

BellSouth offers 250 minutes for

1 BellSouth takes out 14
$45/month with half price
promotion for first 3 months
page add to battle
customer confusion Powertel offers unlimited LD in-
region for $15/month Alltel announces
Nextel offers unlimited $39.95 bundle incl.
0.8 Direct Connect SMR AT&T announces 1000 minutes for Internet, in-region
for $54/month $99.99 per month wireless, paging, and
BellSouth lowers $0.09 residential and
unlimited in-region wireless LD
plan to $200 per
0.6 month AT&T announces
“One Rate” national
plan Sprint PCS enters

Nextel offers 800 min and

0.4 BellSouth offers unlimited SMR for
Nextel enters, unlimited off-peak $90/month
targeting small local calls for $24.99
business
Primeco offers 600 BellSouth announces
Alltel buys naming min/month until 2000 “One Bill” bundling
0.2 rights to Jacksonville for $54.99/month program
Jaguars stadium for Sprint launches national one rate-type plan
$6.2 million
BellSouth offers 2000 minutes mobile to
mobile for $50 per month
0
Late 1996 Early 1998 Current
 “ALL YOU CAN EAT” PRICING IS GROWING RAPIDLY
THROUGHOUT THE TELECOM BUSINESS

Annual Growth Rate

Most data circuits priced on flat-rate basis ~30%

Internet Service Providers ~100%

One-Rate plans in wireless Very High

Flat-rate long distance service New, Promising

Consumers like “no meter is running” …

And, lower network costs make subscription pricing

affordable for carriers
 IMPACT OF ONE-RATE ON WIRELESS ECONOMICS

Cost structure changes • Rapid growth in network volume (MOUs)

• Reduction of customer care, billing, and
marketing costs

Customer segment behaviors • High volume customers migrate to One-Rate

diverge • Low volume customers oriented to usage
pricing – pre- and post-paid

Customer segment profitability • Past profit sanctuary of high-volume

shifts customers gone?
• How profitable will low-volume customers be?

Distribution channel • One-Rate has the potential to be a simpler

requirements change product that could be handled by a higher
volume channel
 Preliminary Analysis

IMPACT OF SUBSCRIPTION PRICING

Cost Structure of a Typical Cellular Carrier

40
$
35
Monthly Cost per Subscriber ($)

30 G&A
Lower due to simplified offers, higher
25 channel volumes, & lower handset
Customer
Acquisition & subsidies (?)
20 Retention
Lower due to diminished importance of
15 call-detail

Customer Care & Billing

10 Higher due to volume and lost pass-
through of roaming and long distance
Network charges.
5

0
Now Future

Source: Industry Data, BCG Analysis

 Preliminary Analysis

IMPACT ACROSS MOBILE CUSTOMER GROUPS IS SIGNIFICANT

• Hi-volume ceases to be the profit spinner
• Low-volume customers are (still) a profit sink

120%

100%

80% Op Profit
G&A
Percent of Revenue

S&M
60% CC&B
Network

40%

20%

0%

-20%
Average Hi Volume Med Volume Low Volume

Source: Industry Data, BCG Analysis Note: low volume segment using pay-for-use plan.
 ACTIONS TO CAPITALIZE ON
AND RESPOND TO THE SUBSCRIPTION BUSINESS MODEL

1. Restructure marketing to take account of fundamental change

• More brand and offer differentiation between high and low volume
• Specific channel for experienced, high-volume users
• Managed acquisition cost as down customer base matures

2. Re-align cost structure with requirements of a subscription business

• Maximize scalability of network
• Streamline customer care and billing

3. Offer value added services for extra fee to increase margins

• E.g., text messaging, fixed-mobile VPNs

4. Develop a national offer based on alliances and roaming agreements

HOW MUCH ADVANTAGE DO NATIONAL PLAYERS HAVE?

Data we have seen over the years indicates that the number of national
roamers is low – on the order of 10%
• Probably heavy users and high-value customers, however

National brand and presence is a significant marketing advantage

• BellSouth also enjoys brand strength
• Opportunities exist to create value by linking mobile with fixed-line
services

Nothing “unbeatable” about the national players

• Economic issue: cost of national roaming
• National roamer marketing issues: share target, making the total BMI
offer compelling
BROADER ISSUES NEED TO BE ADDRESSED AS WELL …

The combined factors of increased competition, subscription business

models, and high penetration are changing the economics of wireless
telephony

Highly valuable to lay out the new economics and how to optimize them
• Profit sources in the business
• Segment focus to maximize value
• Best rate and sources of growth
• Target cost structure for the business

Work out how to maximize value … and set the right expectations ... with new
economic rules
 APPENDIX I
Hong Kong Telecom CSL:
A Segmented Approach to Mobile
 HONG KONG TELECOM:
AN EXAMPLE OF A SEGMENTED APPROACH
TO MOBILE COMPETITION

Market situation quite similar to current US developments

• Multiple PCS entrants
• Developed, sophisticated mobile market

Hong Kong Telecom CSL (the mobile business) defended its position
successfully with a strategy based on differentiated brands and offers for
high- and low-volume customers

Both brands believed to be profitable.

 MARKET OVERVIEW: FAST GROWTH, HIGH PENETRATION

. . . Intense
Hong Kong penetration nearly 40% . . .
Competition
3000 GSM (900MHz)
Number of
• HK Telecom
subscribers
2500 39% • Hutchison
penetration • SmarTone
2000 CDMA
• Hutchison
1500 DAMPs
• HK Telecom
1000 PCS
• New World
500 • Hutchison
• People’s
0 • Sunday
De M Ju S D M Ju S D M Ju S D M Ju
c- ar - n - e p - e c- ar - n - e p - e c- ar - n - e p - e c- ar - n
94 95 95 95 95 96 96 96 96 97 97 97 97 98 - 98
Nine Networks
GSM ( 800/900) PCS (1700/1800 MHz)
Six competitors
 HK TELECOM CSL SUMMARY

HK Telecom CSL historically a market leader among three GSM operators

Failing to win a PCS license led HK Telecom to take pre-emptive action to:
• Defend heavy user customer base
• Create vehicle for capturing ‘lifestyle user’ without PCS platform

Resulting strategy was to split GSM into two fully separate brands
• Different target segments, imagery, offers, channels

Two years on, results appear impressive, though with some cautionary areas

Impact of number portability, dual band phones, etc. yet to be seen

 HK TELECOM SPLIT ITS GSM INTO TWO DISTINCT BRANDS
Aim to both target “lifestyle users” while retaining heavy business users

Single GSM Platform

Business Brand: 1010 Lifestyle Brand: One 2 Free

Target: Targeted at business users • Targeted at younger users
3 different packages with disposable income
• 6 different packages

Image: Branded as a HK Telecom • No HK Telecom branding

service

Products/ Package access fees range • Package access fees range

packages: from HK$360-1480 from HK$228 or above

Distribution Sold through dedicated 1010 • Sold through dedicated

Outlets: stores and dealers One 2 Free stores and
dealers

Message: We recognize that time is

money, and that every call • We have a service to fit your
counts personal lifestyle, whatever
that happens to be
Each service has been designed to meet the needs of their target
segment across the entire customer experience
Note: US$1=HK$7.8
 HK TELECOM MADE THE SPLIT WELL BEFORE THE PCS
PLAYERS LAUNCHED

Nov, 96 Jan, 97 Apr to Aug, 97 Sept, 97 Oct 97

People Hutchison
Launched PCS PCS
One2 Free and
P-Plus Sunday
1010 Brands
PCS PCS

New World
PCS

“…denied a PCS license this year, (Hong Kong Telecom) has made an aggressive move into the
mass market for mobile phones with the launch of a service company called One2Free” - SCMP
(23/11/96)

Sources: South China Morning Post

 ONE2FREE TARIFF PLANS ORIENTED
TO FIT SUBSCRIBERS’ ‘LIFESTYLES’
Embodied in their array of tariff plans using advanced billing system

Tariff Plan Targeted Customers

Leisure Plan For those who use the service primarily off-peak

Reply Call Plan For those who carry pagers, and make return calls only

Zone Plan For those in suburban and home-cell locations

Standard Plan For those without a specific preference

“Make your own plan” People who have a combination of the above needs
• Specify desired
number of
monthly free
minutes and how
to allocate
Groups of friends--allocates free minutes among specific numbers
Call circle plan
 “TWENTYSOMETHING” FOCUS IS CONFIRMED
THROUGH ADS, PROMOTIONS, AND SALES CHANNELS

A&P features a variety of

Sales Channels support the image
twentysomething professionals

“One2Free allows customers to
experience the true freedom and
pleasure of personal
communications”
Sales outlets:
• Café-style, with internet kiosks and
music videos
• Staff dressed in athletic uniforms, all
of similar age to target segment
• Little or no use of HK Telecom brand
 BY CONTRAST, 1010 TARGETS HEAVIER USER BUSINESSMAN
Matter-of-Fact Approach with Focus on Service and Value-Added Bundles

New Thereafter
1010 Service Free Value-added Services
Monthly Call Charge
Packages Mins Included
Fee(HK$) (HK$/Min)
• E-Note
Low Usage 120 $360 $1.8 • InfoExpress
• Auto Int’ Roaming Other special

200 • E-Note services:

$450 $1.8 • InfoExpress
(less>30%)
• Auto Int’ Roaming • Free phone delivery
Medium Usage • VoiceMail • Repair phone pick-
300 • Call Waiting
$580 $1.8 • E-Note
(less>30%) up
• InfoExpress
• Auto Int’ Roaming • Free handset
• VoiceMail maintenance
• Call Waiting
High Usage 500 $880 $1.5 • E-Note • Handset trade-in
• InfoExpress
• Auto Int’ Roaming allowance
• Call Forwarding Bundle • Discount for re-
• Caller Display
• VoiceMail
“Supreme •
purchase of lost
1010 $1,480 $1.2 Call Waiting
1010” • E-Note
• InfoExpress
phone
• Auto Int’ Roaming
• FREE HANDSET*

Note: US$1=HK$7.8
 A&P AND CHANNELS FOCUS ON THE “SUCCESSFUL
BUSINESS LEADER” IMAGE

A&P Emphasizes a Recognition that

Business-Like Sales Channels
Every Call is a Potential Business Deal

-Connoisseur Centre decorated as business lounge

provides following services with coffee:
•Personal demonstration of value-added services
•A 4-hour guarantee on handset maintenance
•“Business Leaders Cannot Be Interrupted” •Free handset offered to stay in touch while
- TV Commercial repairing
-Over 80 outlets including Hongkong Telecom Shops,
the Connoisseur Centre, authorized agents

Note:US$1=HK$7.8
 BOTH HK TELECOM BRANDS HAVE STRONG ARPU
1010 Nearly 2x GSM Rivals, One2Free Beats Other GSM and PCS

Monthly ARPU By Operator (US$)

140

120 116

100

80
65 61
60
45
40 35
20 20

0
CSL 1010 CSL 123 GSM Smartone PacificLink D- People PCS Other PCS
GSM GSM AMOS

Note:US$1=HK$7.8
Source : BCG interviews, literature search, Yankee Report 1998
 1010 AND ONE2FREE HAVE ACHIEVED DISTINCTLY
DIFFERENT CUSTOMER PROFILES
One2Free’s Age Profile Younger than PCS Players
Customer Age Distribution Breakdown
% HK Telecom Age
100
16 40 or above
25 24 24
31 35
80 37

35
60 30 - 39
40 42
42
41 34
40
40

45
31
20 - 29
20 25 29
25 34
21
3 4
6
3 5 2
15 - 19
0
• Male
1010 One2Free 1+1 Smartone Hutchison People Sunday
• Elder GSM GSM PCS PCS
• More professionals,
• Quite equally spilt
executive and
between male an d
managers female
• Better educated • Younger
• More white collar

Source: A.C. Nielsen Mobile Phone Study 1997; BCG Analysis

HKT HAS HELD SHARE BETTER THAN OTHER GSM PLAYERS

Comparative Subscriber Market Share, GSM Players

Dec 96 Dec 97 March 98

HK Telecom 27% 26% 25%

• 1010 - 17% 16%

• One2Free - 9% 9%

Smartone GSM 27% 21% 21%

Hutchison GSM 26% 17% 16%

 APPENDIX II
Background on Mobile Market
 US MOBILE MARKET TRENDS

Increased competition: 4-6 carriers in each market

• Lower prices, especially for high-volume customers

Growth strong: past and forecast

• New entrants are taking a large share of the growth

Rapid move to digital service  well-received by customers

• Increases capacity and usage

Leading carriers driving for seamless nationwide coverage

Substitution of mobile for fixed phones beginning

New “One Rate” pricing plans1 very attractive to customers

1) Refers to a plan that offers a large bundle of minutes for a fixed monthly price with no extra charges for peak, roaming, long distance, or interconnection.
 DECLINING PRICES LIKELY TO FUEL GROWTH, HOWEVER ...

Decreased Price Produced Lasting Volume Increase in Isreal

Usage (minutes of 800

Israel ‘95 Duopoly pricing. 6x
use per month per
increase in price results
subscriber) 700 in .33x decrease in
usage.
600

500 Israel ‘97

400

300 ?
U.S ‘98
200
U.S ‘97
2.5 to 3 ¢ / min calling U.S ‘96 U.S ‘95 U.S ‘94
100 U.S ‘93
plans. 8x drop in price
leads to 20x increase Israel ‘94
in usage. 0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
Price ($/min of use)

Decrease in price seems to have permanently

changed consumer behavior in Israel

Source: FCC, Literature search, BCG analysis

 CELLULAR BECOMING SIGNIFICANT
AS A SUBSTITUTE FOR FIXED LINES
Example: Israel
Cellular prices are expected to Estimates suggest that cellular penetration will surpass fixed penetration while
become even more competitive fixed volume declines

Arrival of Partner Group as third Penetration

70
(% of
cellular service provider population) Bezeq’s fixed-
• “Speculation centers on how far 60 line domestic
partner will bring fixed rates call volume was
down.” - Nesuah analyst 6.5% lower in
50
• Partner “hopes to attract first half of 1997
than same
800,000 customers within three 40 period in 1996
years by offering lower prices • Attributed to
and quality services.” - Datapro cellular by
30
Bezeq
Cellcom international rates are chairman
20 Izzy Tapoohi
already cheaper than Bezeq’s
• Due to interconnection with new
10 Fixed
international carriers Barak and
Golden Lines Cellular
• Anticipated to feel additional 0
1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001
downward pressure

“There is a price point in cellular which is higher than fixed, but at which people
are still prepared to make a mobile call instead of using the fixed network.”
- Industry analyst

Source: Literature search, BCG analysis

 COST STRUCTURE OF A TYPICAL CELLULAR CARRIER

35
Monthly $
Cost per 30 General and administrative (11%)
Subscriber
25

20
Marketing and customer acquisition (46%)

15
Billing and customer care (9%)
10

5 Network (34%)

Source: Industry Data, BCG Analysis

NEW TELECOM BUSINESS MODELS

A slide book
prepared for

BELLSOUTH MOBILITY

by

The Boston Consulting Group, Inc.

January 6, 1999
NEW TELECOM BUSINESS MODELS

Discussion Notes

January 6, 1999
***Extras***
 HOWEVER, REVENUE PER SUBSCRIBER IS DROPPING
Price Per Minute Declining Faster Than Usage Is Increasing

Average subscriber Average subscriber

Average price per minute
minutes of use per month revenue per month
Mins/ $/ $/
month 200 minute 0.8 month 70
180 61.48
180
0.7 60 56.21
160 51
0.6 47.7
140 50
122 42.7
0.5 39.6
120
104 40
100 94 0.4
88
82
30
80
0.3
60 20
0.2
40
0.1 10
20

0 0 0
93 94 95 96 97 98 92 93 94 95 96 97 98 93 94 95 96 97 98

Source: BCG analysis, FCC CMRS Competition Report, 1998

 IMPACT OF “ONE-RATE” PRICING
Cost Structure of a Typical Cellular Carrier

35 $32.80
Monthly $
Cost per 30 Billing and customer
care costs fall due to
Subscriber diminished importance
25
of call-detail
20
$~1.50
15
$3.00
10

0
Now Future

Source: Industry Data, BCG Analysis

 IMPACT OF “ONE-RATE” PRICING
Cost Structure of a Typical Cellular Carrier

35 $32.80
Monthly $
Network costs rise due
Cost per 30
to increased volume
Subscriber and loss of pass-
25 through of roaming and
long distance charges.
20
$~14.50
15

10

5 $11.00

0
Now Future

Source: Industry Data, BCG Analysis

 AUTOMATION ENABLES LOW COST CUSTOMIZATION
Consumer can Design Plan, and Switch Among Plans

Subscriber can configure the amount and type Subscriber can switch plans
of the monthly free minute allocation by automated interface

Flexi- Minutes Unit Thereafter

Plan categories# Costs call charge Reasons of switching
Package (50mins per unit) (HK$) (HK$/min)

Off peak hours+ 30 1.2 Change of life style

Leisure Call hotline and use the
Plan automated phone
Peak hours 70 1.98
system
Outgoing calls 30 1.2 Change of address
Reply
Call Plan
Incoming calls 70 1.98

Zone B++ 30 1.2 Change of work location

Zone
Plan
Zone A 70 1.98

1.2 (off peak

Standard hours) Change of work time
Combined 75
Plan 1.98 (peak
hours)

+Off Peak Hours: Mon-Fri:6pm-9am the following day; Saturday Enables churn among plans rather than
and Public Holidays (whole day) away from HK Telecom
++Zone B: Suburban areas in Hong Kong

Note: US$1=HK$7.8
 1010 USES INTELLIGENT BILLING TO DYNAMICALLY
SWITCH PLANS WITHOUT CUSTOMER INVOLVEMENT
Concept: Customer Never Worries about Being in an
Unattractive Plan Despite Fluctuations in Usage

New Monthly Fee Thereafter call Value added

Free Minutes
(HK$) charge (HK$/Min) Services

•Voice messgae
•call forward
600mins 1000 1.5 •E-note
•Info-express
•Auto Int’l Roaming

If the usage is lower than 400 minutes, the monthly fee will be automatically lowered to
$850(thereafter call charge $1.7/min); if it falls below 180 minutes, the monthly fee will be
decreased to $650(thereafter call charge $1.8/min)

Note: US$1=HK$7.8
 1010 AND ONE2FREE HAVE HELD SHARE POST-PCS
BETTER THAN OTHER GSM OPERATORS
Subscriber Count Share Breakdown By Operator And System Used
100% P Plus
Sunday
Sunday
New World New World
90% People People
Pacific Link
Pacific Link
80% Pacific

P Plus
CDMA
70% CDMA
GSM Hutchison Sunday PCS
PCS PCS
Hutchison
Hutch New World PCS
60%
GSM GSM People PCS

50% Pacific D-AMPS

One2Free Hutchison CDMA
One2Free
(GSM)
40% (GSM) HK Hutchison PCS
1010 Tel
HK Telecom HK Telecom
One2Free Hutchison GSM
1010
30% (GSM)
(GSM)
HK Telecom
One2Free
PCS HK Telecom 1010
20%

GSM Smartone PCS

Smartone Smar
10% GSM Smartone GSM tone Smartone GSM

0%
96 Dec 97 Dec 98 Mar

No. of players 4 8 6
Note: HK Telecom acquired Pacific Link in Jan 1998 and renamed the system to HK Telecom 1+1 subsequently; SmarTone
bought out P-Plus in Mar 1998 and named it Smartone PCS
Source : Yankee Report; BCG interviews; literature search
 HK TELECOM EXAMPLE RAISES
IMPORTANT MARKETING QUESTIONS

What is the right customer segmentation strategy for my market?

When should one consider creating new brands? How independent can they
be?
• How to build the business case, and determine if investment is
worthwhile?

What pre-emptive marketing moves can thwart new competition?

What degree of consistency across sales, customer service, etc. is required

to support a successful brand?

How to use intelligent billing system capabilities effectively as part of an

overall marketing effort?
 HONG KONG MARKET OVERVIEW

Among world’s highest penetration at 39%

Intensely competitive, more so with recent launch of four PCS networks on

top of four cellular networks

Multiple standards present, including GSM, PCS, CDMA, D-AMPS

Large presence both of internationally-travelling business users, and

consumers who value mobility broadly (given small apartments and long
commuting times, people prefer to be away from home)

Competition has forced significant innovation among competitors

HK Telecom CSL’s innovations in GSM branding and service offers yield

insightful lessons
 1010 VALUE-ADDED SERVICES ARE
MORE BUSINESS ORIENTED

International Roaming Services

•Automatically registered with existing phone number and SIM card
•Roaming covering 66 countries including China and U.S.

Electronic Mobile Mail Services

•Using handset to send and receive short internet mail message
•Available anywhere in the world

Connoisseur Centre
•An one-stop customer services centre covering 5000sq ft
•A personal mobile consultant will take care of all your needs
(network connection, value-added services, handset repair or just bill
payment) in comfortable, business-like setting
•Service personnel in coat and tie
Built-in Secretarial Service
•Messages taken by secretaries are sent to the handset through E-
note