The Belgian Telecom Landscape

Study on the Belgian Telecom Sector - 1st edition 12 January 2015

Arthur D. Little Benelux S.A. / N.V. Avenue du Bourgetlaan 42 B - 1130 Brussels Belgium Telephone 32.2.761.72.00 Telefax 32.2.762.07.58 adlittle.brussels@ adlittle.com Reference: P14004116

Content

1

The telecom sector is at the core of the Belgian society and economy

2

Telecom is the main engine for the digital eco-system

3

Despite a difficult environment, telecom operators are sustaining their level of investment

4

For a digital New Deal fostering Telecom investments

2

1

The telecom sector is at the core of the Belgian society and economy

Telecom services are part of our daily life By end 2013:

80%

68%

of Belgian households have a

broadband internet connection and

61,5%

uses the Internet on a daily basis

have interactive digital TV Around

54% 65% 52%

of the Belgian population

97%

of companies in

Belgium have Internet access

of Belgians use high-speed mobile data and

watch videos

48% of Belgians are active on

of people have bought something online

last year while the e-Commerce revenues of Belgian

social media companies account for

14%

1) Population of 18+ persons living in Belgium Source: SPF Economie, ICT barometer 2014; Our mobile planet report 2013 by Google; Global Digital Statistics 2014 by We are Social; Havas MMS 2014 report; Arthur D. Little analysis

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1

The telecom sector is at the core of the Belgian society and economy

Telecom services usage is strongly growing while prices are falling down Telecom use strongly growing

Telecom’s prices falling down

Mobile voice

SMS

Mobile internet

Billion minutes +30%

Billion SMS +86%

Billion Mb x15

17,3

29,3

Base 100 in 2006, consumer price index evolution

Not including discounts on Telecom packs

150

10,6

140

13,3

134; Electricity 15,8 0,7

2009

2013

Fixed voice1 Billion minutes -2%

2009

2013

Fixed broadband Million of lines +22%

129; Postal services

130

2013

2009

126; Natural gas

120

117; Inflation

Digital TV

109; Rail transport

110

107; Financial services

Million of users +87% 100

11,6

11,3

3,8

99; Parking

3,5

3,1

93; Telecom services2 90

1,9

80 2009

2013

2009

2013

2009

2013

2006 2007 2008 2009 2010

2011 2012 2013

Source : Operators, IBPT, SPF Economie; Arthur D. Little analysis 1) Including VoIP, 2) Telecom services: Fixed telephony, mobile telephony, internet and undiscounted telecommunication packs 4

1

The telecom sector is at the core of the Belgian society and economy

The share of Telecom services slightly decreased in Belgian households spending Evolution of Belgian Households Spending Average yearly spending per household, in € Share of wallet% 0,1% 1,1%

35.430

3,0%

Telecom Services Share of households spending (%)

100%

Postal services

4,2% 5,0% 6,4% 7,7%

Digital and multimedia devices 2 Telecom services 1

3,24% 2,96%

Health

-0,29 pts

Clothing and shoes

12,1%

Furniture, household equipment and maintenance 15,2%

Culture, leisure and training Transport Food, beverages and tobacco

16,7%

Other goods and services

3

Housing, water, electricity, gas and other fuels 2006

2012

28,7%

2012 Source : SPF Economie, Arthur D. Little analysis

1) 2) 3)

Excluding telecom devices Including telecom devices, radios, televisions, computers and cameras Including: traveling, body and personal care, hotel, restaurant and bar expenses, financial services…

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1

The telecom sector is at the core of the Belgian society and economy

Operators provide a substantially better offering that generates 4 to 7 times more value for money to the consumers Mobile “Customer Surplus”

Fixed “Customer Surplus”

Comparison of mobile post-paid offerings 2009-2013 >250-600 min AND unlimited SMS AND 1-2 GB 3G/4G data (avg. speed of 21 Mbps)

+119€ 150-400 min OR 300-400 SMS + paid access to 2G/3G (avg. speed of 3 Mbps)

36€

2009

1.5-2x more minutes Unlimited SMS 7x more speed + 0.5-2 GB 3G/4G mobile data

20€ 2013

Comparison of fixed offerings 2009-2013 Internet speed of 56 Mbps AND TV everywhere AND Homespot Wifi AND National + EU voice

5x more speed + out-of-home TV and Internet + EU voice

+171€ Internet speed of 11 Mbps AND Basic TV AND National voice

67€ Excl TV

56€ Excl TV

2009

2013

Monthly average invoiced amount per user1 Source: Operators, Arthur D. Little analysis

“Customer surplus”: average 2013 telecom usage at 2009 prices, per user1 (1)

Based on actual revenues and usage

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1

The telecom sector is at the core of the Belgian society and economy

Business and administration productivity is supported by the telecoms industry Improved productivity for businesses and employees improvement for SMEs +15% Profitability due to telecoms:

+7% due to cost savings (supply, marketing…)

+8% increase of revenues (client segmentation, geographic zones)

-7%

Reduction in transport costs thanks to telecommunication services (phone, mail, conferences…)

Savings for the Belgian Administration

50% of the population was in contact with the public authority via internet over the past year Over 65% use Internet-based vehicle registration and over 73% tax-on-web submission 80

% of population 73

70

65

60

Tax-on-web

50 40

58%

of employees carry out 75% of their work with connected tools

30

28

0 2005 Source : Cisco, Google, IDC, Arthur D. Little analysis

Vehicles e-Registration 21 2006

2007

2008

2009

2010

2011

2012

Source : SPF Economie, ICT Barometer 2013; Arthur D. Little analysis 7

1

The telecom sector is at the core of the Belgian society and economy

Continuously increasing average broadband speeds, with the addition of new services Increasing bandwidths Average bandwidth, 2009-2013

Enriched Content Offering Up to 80 TV channels available

New Services Smart Home

Premium applications included

Fixed Broadband x5

Possibility to watch live and catch-up TV on mobile devices

Cloud storage services

Fixed broadband speed: average speed, weighted according to the number of subscribers that have a broadband connection with a certain bandwidth

Transformation of the TV-box

Mobile Broadband x7

WiFi homespots and hotspots

Integrated hard drive PVR: Personal video recording

Mobile broadband speed: average speed for the 3 mobile operators according to Commsquare

Replay offer: TV on demand and catch-up TV

Multi SIM offers with several complementary SIM cards for tablets included in the contract

Source : Commsquare; Arthur D. Little analysis 8

Content

1

The telecom sector is at the core of the Belgian society and economy

2

Telecom is the main engine for the digital eco-system

3

Despite a difficult environment, telecom operators are sustaining their level of investment

4

For a digital New Deal fostering Telecom investments

9

2

Telecom is the main engine for the digital eco-system

Globally, the digital sector is enjoying strong growth across all segments Revenues of the digital ecosystem by sub-sector1 In billion dollars

Internet

82 280

Software & IT services

371

Devices Equipment Network operators

+39%

2,900

Content

Growth 2007-2013

3,127 92 283

3,106 102 263

414

399

3,372 127 275

3,959 212 286

4,028 286

+2%

501

500

+35%

1,316

1,322

+59%

208

205

191

-17%

+33%

3,702 166 285

830

938

432

1,076

229

225

205

212

1,199

1,249

1,362

1,439

1,471

1,107

1,190

2007

2008

2009

2010

2011

2012

2013

Source: Thomson Reuters, Arthur D. Little analysis

+215%

481

1,201 924

259

Illustrative companies

1) Top 30 per category by 2013 revenues 10

2

Telecom is the main engine for the digital eco-system

Growth is strong in all parts of the world except in Europe Revenues of the digital ecosystem by region1,2 In billion dollars

Oceania

+39%

2,900 20

3,127 24

3,106 21

1,123

1,150

3,372 21

Growth 2007-2013 3,702 27 1,409

3,959 26

4,028 24

+18%

Oceania

1,527

1,544

+57%

Asia

67

68

1,274

Asia

984

South America

34

30

36

1,145

1,257

1,237

1,368

1,566

1,692

North America

717

693

661

652

646

2007

2008

2009

2010

2011

Europe

Source: Thomson Reuters, Arthur D. Little analysis

56

54

+102%

South America

1,786

+56%

North America

647

606

-16%

Europe

2012

2013 1) 2)

Top 30 per category by 2013 revenues Nationality according to HQ location 11

2

Telecom is the main engine for the digital eco-system

Globally, telecom operators generate the vast majority of investment, while they benefit only from a third of the added-value Investment by sub-sector1

Free cash flows by sub-sector1

% of total ecosystem investment

% of total ecosystem FCF

+8 pts

-2 pt

+6 pts

-14 pts 68% 66%

30%

28%

28% 22%

22%

+2 pts +2 pt 17%

19%

14% +0 pt 2% 2%

-1 pts 6% 5%

Network Devices Equipment Software operators 2007

2013

Source: Thomson Reuters, Arthur D. Little analysis

-1 pt

+3 pt 5%

4% 3%

2%

Content

Internet

+5 pts

- 6 pts 11% 13%

10%

6%

4%

Network Devices Equipment Software operators 2007 1)

11%

Content

Internet

2013 Top 30 per category by 2013 revenues 12

2

Telecom is the main engine for the digital eco-system

The relative share of telecoms in the digital ecosystem varies dramatically by region of the world; Europe is overweighed in telecoms (or underweighted in other segments…) Turnover and market capitalization of top 30 players in each category by nationality1 Turnover – 2013

Market capitalization – 2013

In €B

In €B 4,204

1,786 Internet Content IT services and software

225

1,544

917

Content

403

184 350 IT services and software

853 Devices

Internet

1,097 1,410

469

12 161

606 Telecom equipment Network operators

89

26

4 54

82 75

469

North America

527

Asia

Source: Thomson Reuters, Arthur D. Little analysis

391

Europe

Devices 0

936

199

Telecom equipment

197

Network operators

654

436 20 581

North America

Asia

824 102

127

8 0 81

506 Europe

1) Top 30 players by 2013 revenues in each category, geographic breakdown according to headquarters location 13

2

Telecom is the main engine for the digital eco-system

In the Belgian digital ecosystem, telecom operators generated 59% of the revenues while accounting for 87% of investments, 75% jobs and 90% of taxes in 2013 2013 Digital Eco-system Turnover, Investment, Employment and Taxes Turnover1

Investments2

6%

7% 5% 0% 0%

12%

Direct employment3

1%

3%

16%

0%

7%

5 OTT Internet players

Taxes4

6%

5 content providers 2%

1%

19%

5 device manufacturers

4%

89%

87% 75%

5 equipment vendors

59%

5 telecom operators

Source : Trends Top, BelFirst, Annual Reports, National Bank Central Balance Sheet Office Arthur D. Little analysis

1)

For LG Electronics and Apple, Benelux turnover pro rata of the share of the Belgian population. Facebook revenue calculated on the basis of the EU ARPU. Amazon revenues calculated as a share of turnover in FR with respect to Belgian site visits. Google publicised revenue rescaled for reseller margin

2) 3) 4)

Yearly average in terms of FTEs Incl estimates for own content production, incl. estimate for Google Data Center expansion investment 2013-2014 14 Corporate taxes, excluding license fees for telecom players

2

Telecom is the main engine for the digital eco-system

1 euro invested in new high-speed broadband (fixed and mobile) networks creates 3 euros of GDP which represents 1,5 euros of revenue for the State Multiplier effect of telecom investment on the economy and revenues for the Belgian State Examples of induced effects on the economy

In billion euros, cumulated from 2013 to 2022

Time and productivity gains for enterprises Belgian GDP in 2022:

45,4% of compulsory levy on GDP

+0,65pts to +0,83pts

Time savings and customer experience improvement

15-19 7-9

6-7 Investments of telecom operators in new very high speed networks (fixed and mobile)

Creation of cumulated GDP in Belgium

∑(2013 – 2022)

Compulsory taxes

Emergence of new sectors of activities and new players Next to this, operators will invest in the same time frame €13-14 billion in IT, services, the existing network… with a multiplier of 1,5 to 13

Source : Akamai, IDATE, Arthur D. Little Ericsson Chalmers university of technology « Socioeconomic effects of broadband speeds », Eurostat « Taxation trends in the European Union », Etno Agenda for Europe, Arthur D. Little analysis 15

2

Telecom is the main engine for the digital eco-system

Besides, Belgian operators kept their employment levels stable (the 5 main telecom operators employed >28.000 FTEs in 2013) Employment Evolution in Belgium1 Base 100 in 2009 101

102 100

100

98 96

94

94 92

86 84

The 5 main telecom operators in Belgium employed >28.000 FullTime Equivalents in 2013

Water distributors

+ 0%

Railway network

- 6%

Motorway network

- 6%

Gas and electricity

- 10%

Postal services

- 18%

82

82 80 2009

+1%

90

90 88

Telecom operators

2010

Source : NBB, Annual reports, Arthur D. Little analysis

2011

2012 1)

2013

Telecom operators: Base Company, Belgacom, Mobistar, Telenet and Voo; Water distribution: Watergroep, Société Wallonne des eaux, TMWV, Antwerpse waterwerken, Vivaque; Railway network: Infrabel; Motorway network: Wegen en Verkeer; Gas and electricity: Electrabel, Elia, EDF Luminus; Postal services: Bpost

16

2

Telecom is the main engine for the digital eco-system

Telecom operators contribute heavily to Belgium’s GDP growth, unlike the “GAFAM1” Share of added value made in Belgium accounted for in the national GDP2,3 - 2013

Value injected by the telecoms into the economy In billion euros 45 bn€ 7% 15%

21%

21%

100% 3 bn€ other expenses (marketing, distribution fees) to other suppliers 6,6 bn€ to private shareholders 9,5 bn€ in the deployment, enhancement and maintenance of the telecom networks 9,7 bn€ to the state in taxes (excluding VAT), licenses and dividends

9% Operators

10,2 bn€ direct land indirect labour costs and benefits

GAFAM

22% 6,2 bn€ to the state in effective net value-added tax (VAT) 14% >90% of the added value realised in Belgium by the “GAFAM(1)” are not accounted in the Belgian GDP growth

2007 - 2013 Source : Annual reports, TrendsTop, BelFirst, National Bank Central Balance Sheet Office, Arthur D. Little Analysis

1) 2) 3)

Google, Apple, Facebook, Amazon, Microsoft Publicised added value share of estimated added value. Estimated is the added value scaled for the effective revenues of internet players in Belgium 17 GDP is the sum of all publicized added value in Belgium

Content

1

The telecom sector is at the core of the Belgian society and economy

2

Telecom is the main engine for the digital eco-system

3

Despite a difficult environment, telecom operators are sustaining their level of investment

4

For a digital New Deal fostering Telecom investments

18

3

Despite a difficult environment, telecom operators are sustaining their level of investment

Despite decreasing margins in the industry, operators have continuously increased the level of investment, raising the question of medium-term sustainability Evolution of Turnover, CAPEX and cash flows - telecom operators in Belgium1,2 In percentage of Turnover

7,2

7,3

7,5

7,9

8,0

7,8

7,7

Turn-over Investments Cash Flow3

34% 27% 14%

16%

28%

25%

15% 17%

2007

2008

2009

Source: Annual reports, Operators, Arthur D. Little analysis

2010

22%

22%

23% 15%

20%

18%

2011

2012

1) 2) 3)

2013

Base Company, Belgacom, Mobistar, Telenet and VOO VOO is not included in 2007 and 2008 due to the unavailability of the data Cash Flow = EBITDA - Investments

19

3

Despite a difficult environment, telecom operators are sustaining their level of investment

Telecom Operators have rolled out high-performance networks and are investing in the networks of tomorrow Fixed High-speed Broadband Coverage

Mobile Broadband Coverage Coverage as % of the population

Coverage as % of households

100%

100%

90%

90%

High-speed internet coverage (≥30Mbps)

80% 70%

3G Outdoor 3G Indoor

80% 70%

4G 60%

60%

50%

50%

40%

40%

30%

30%

WiFi Homespot /hotspot coverage

20% 10%

20% 10% 0%

0%

2008

2009

2010

2011

2012

2013

H1 2014

2008

2009

2010

2011

2012

2013

H1 2014

Source : Operators, IBPT, European Commission (Broadband coverage in Europe reports), Arthur D. Little analysis 20

Despite a difficult environment, telecom operators are sustaining their level of investment

Belgium is leading in fixed Next-Generation Access broadband coverage and catching-up on 4G Fixed High-speed Broadband Coverage Next-Generation Access broadband coverage/availability in 2013, as % of households 100%

Mobile: 4G Coverage Outdoor coverage as % of the population 100%

SE

90%

PT

80%

80%

CH

70%

NO

60%

BE

60%

UK FR

50% DE

40%

40%

30% IT

20%

20%

10% 0%

0% MT BE NL LT LU LV PT DK UK CY HU NO DE EE SI FI SE AT BG RO ES CZ EU 27 IS SK IE PL FR HR EL IT

3

Q1 11

Q2 11

Q3 11

Q4 11

Q1 12

Q2 12

Q3 12

Q4 12

Q1 13

Q2 13

Q3 13

Q4 13

Q1 14

Q2 14

Source : European Commission digital agenda, Exane, Arthur D. Little analysis 21

3

Despite a difficult environment, telecom operators are sustaining their level of investment

Telecom’s investment level in Belgium has reached a new record in 2013, exceeding that of other network infrastructures Telecom’s investment in Belgium

Investment in network infrastructures in Belgium

2007 – 2013, in billion euros1

Yearly average, 2009 – 2013, in billion euros2

1,8

1,8 1,6

1,6

1,5

1,3

1,4 1,2

2,0

1,2 1,0

1,5

1,4

1,1

1,1

1,0

1,0

0,8

0,8 0,7

0,6 0,5

0,4 0,2

0,0

0,0 2007

2008

2009

2010

2011

2012

Source : NBB, Annual reports, Operators, Arthur D. Little analysis

Telecom

2013

1) 2)

Railway

Electricity transmission and distribution

Motorway network

Excluding mobile license fees Telecoms: Base Company, Belgacom, Mobistar, Telenet and Voo; Railway: Infrabel; Motorway network: Wegen en Verkeer and Direction générale routes et batiments; Electricity transmission and distribution: 22 Elia, ORES, Tecteo, Régie de Wavre, AIESH, AIEG, Sibelga, Eandis and Infrax

Content

1

The telecom sector is at the core of the Belgian society and economy

2

Telecom is the main engine for the digital eco-system

3

Despite a difficult environment, telecom operators are sustaining their level of investment

4

For a digital New Deal fostering Telecom investments

23

4

For a digital New Deal fostering Telecom investments

Given the strong growth in telecom services usage and the economic context, it is critical to support the investment effort of the telecommunication operators Usage of telecom services is growing strongly

Value received increases Operators have nonetheless maintained their investment level in an uncertain environment The telecom sector has a major boosting effect on the Belgian economy

x 15

Mobile internet volume from 2009 to 2013

x 10

Number of fixed fast broadband (>30Mbps) users from 2009 to 2013

x 4-7

Digital bonus: Operators provide a substantially better offering that generates 4 to 7 times more value for money to the consumers

24%

Of the operators’ turnover have been invested in 2013

15-19 bn€

Of cumulated GDP will be created between 2013 and 2022 by the operators’ investment in new super fast broadband networks

Source: BIPT, Operators, Arthur D. Little analysis 24

4

For a digital New Deal fostering Telecom investments

Legal and regulatory cycles are not in line with the long cycles of telecom investment Misalignment between the length of economic, technology, regulatory and fiscal cycle

Investment cycles1)

~15years

Technology cycles

1994 : 2G 2004 : 3G 2012 : 4G

~10 years

European Regulatory Cycles Belgian Regulatory Cycles Belgian Legislative Cycles

2002 : 1st Telecom Package 2007 : Roaming I, amended in ‘09 2007 : 2nd Telecom Package

~5 years

2012 : Roaming II 2013: Projet de règlement CE 2014 : 3rd Telecom Package

Market analysis by regulators

~3 years

2005-2014 : New telecom Act with yearly amendments 2012 : Telecom Law 2012 : VAT increase on digital TV 2013 : Walloon regional and municipal tax on GSM masts

~1 year

Source : Operators, BIPT, European Commission, Thomson 1) Reuters, Moniteur Belge, Arthur D. Little analysis

Average years needed to effectively amortize telecom assets. Calculated as being the inverse of the return on capital for Mobistar, Belgacom and Telenet as provided by ThomsonOne NB: For technological cycles, licenses attribution in Belgium 25

4

For a digital New Deal fostering Telecom investments

For a digital New Deal that will foster telecommunication investment

1

Guarantee regulatory predictability to ensure necessary visibility for the telecom investments

2

Set-up fiscal and financial incentives (reduction of over-taxation) to stimulate private investment in high-speed networks

3

Set-up regulatory and fiscal level-playing field for all actors in the digital ecosystem

4

Build trust in the networks in this digital age

5

Public Authorities to stimulate the development of the digital economy

26

Contact details

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