The Economics of Mobility

Mark RoettgeringSenior Director, Corporate Strategy & Analysis

T-Mobile USA

© 2009 T-Mobile USA, Inc.

The Economics of Mobility

• Is the traditional economic structure of the wireless communications space finally coming to an end?

• What is the potential for reshuffling the margin pools in the industry and how can emerging communications players from across the value system survive and thrive?

• In this talk, we examine the fundamental sources of value creation in the mobile value system and consider what changes are on the horizon

© 2009 T-Mobile USA, Inc.Slide: 2

Traditional View: Communications Market is Maturing

Proliferation of regional providers has given way to consolidation

New entrants & new business models (Leap, Metro, Clearwire) MNO’s share a $150B revenue pool, and enjoy 20% FCF margins. ARPU has declined from $137 to the low $50’s (1997 - 2007). Despite 90M industry gross adds in 2007, net adds have declined 2 years running

Source: US Census, CTIA, Merrill Lynch, T-Mobile estimates

US wireless penetration and ARPU trends

$1

$51

$137 87%

Wire

less

Pen

etra

tion

ARPU

$0

$0$0$0$0$1$1$1$1$1

1985 1990 1995 2000 2005 2010

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00$160.00

100

827

3.7 Mb

Data

usa

ge

1

MOU

1

1985 1990 1995 2000 2005 2010

Monthly MOU and data usage

© 2009 T-Mobile USA, Inc.Slide: 3

A broader view shows colliding industries…

Fixed broadband networkoperator

TV creation & distribution

SearchOther CE

creation & distribution

Software & applications

Fixed narrowband

network operator

Social Networking

ePayments

Home networkin

g & automatio

n

Games

Fixed video network operator

Music creation &

distribution

Print creation & distribution

Movie creation &

distribution

Mobile device creation &

distribution

MNO

© 2009 T-Mobile USA, Inc.Slide: 4

U.S. Communications Value Chain Today

Product Retail/ServiceIP

Web 2.0 app / service players (000s)

© 2009 T-Mobile USA, Inc.Slide: 5

$58B

Consumer demand driving high investment

Source: T-Mobile estimatesIncludes wireless “Big 6” 2001-2004 and “Big 4” 2005-2008“Big 2” cable – Comcast, Time Warner, “Big” satellite – DirectTVTop 2 RBOCs – AT&T & VZ

Total U.S. Communications Capex + Spectrum Spend

Leading national players

Wireless CapExWireless Spectrum

$20B

$17B$19B

$22B $22B

$18B

$21B$19B $20B

$29B$30B

$18B

2002 2003 2004 2005 2006 2007

$53B$47B

$34B$33B$33B

Other CapEx

© 2009 T-Mobile USA, Inc.Slide: 6

Broadcast

Communications space defined

• The purest – and highest value – communication is the exchange of information between specific senders and specific receivers

Specific

SenderAnonymous

Receiver

Sp

eci

ficA

no

nym

ou

s

Information content / retrieval

Direct communication

Direct communication

© 2009 T-Mobile USA, Inc.Slide: 7

Consumer willingness to pay (per bit) falls quickly as we move away from direct communication

Method Size (kB) Cost Revenue Margin % Margin $

Mobile Payment 1 $0.00 $0.25 100% $0.25

SMS 0 $0.00 $0.05 100% $0.05

Text eMail 5 $0.00 $0.02 98% $0.02

3min Voice Call 150 $0.02 $0.15 90% $0.14

Picture Message 100 $0.01 $0.07 86% $0.06

Web Page Load 200 $0.02 $0.05 60% $0.03

3min MP3 3,000 $0.30 $0.25 -20% ($0.05)

3min Video 8,000 $0.80 $0.25 -220% ($0.55)

Cost and Revenue figures are crude estimates for illustrative purposes only

• Note that mobile advertising is a business model change rather than an economic windfall

© 2009 T-Mobile USA, Inc.Slide: 8

The Communications Ecosystem: Who is in control ?

The state of the ecosystem is dictated by the level of ownership at control points

3rd - party

Carriers

OEMs

“Closed Access”

“Open Access”

“Closed Development”

“Open Development”

Communications Ecosystem

Control Points

Distribution/Sales

Applications

Network Access

UI

OS

Hardware Development

© 2009 T-Mobile USA, Inc.Slide: 9

Status quo modes of communication and entertainment Status quo applications / servicesDedicated devices / use cases

New modes of communication / entertainmentRich applications / servicesDevice convergenceFixed-mobile convergence

IntegrationLow competitionAsset scarcityClosed networks/devices/OSSignificant barriers

Open standardsOpen networks/devices/OS

High competitionSubstitutability / modularity

Low barriers

Industry evolution is certain – direction not fully known

Competitiveness / industry structure

Cons

umer

nee

ds /

ser

vice

con

verg

ence

“Integrators rule”

B

“Communications 2.0”

C

“Simple services bazaar”

D

“No news”

A

2008

2013

© 2009 T-Mobile USA, Inc.Slide: 10

Matching consumer needs with system economics will determine direction of emerging communications

Status quo modes of communication and entertainment Status quo applications / servicesDedicated devices / use cases

New modes of communication / entertainmentRich applications / servicesDevice convergenceFixed-mobile convergence

IntegrationLow competitionAsset scarcityClosed networks/devices/OSSignificant barriers

Competitiveness / industry structure

Consu

mer

need

s /

serv

ice c

onverg

ence

“Integrators rule”B “Communications 2.0”C

“Simple services bazaar”D“No news” A

Open standardsOpen networks/devices/OS

High competitionSubstitutability / modularity

Low barriers

3rd - party

Carriers

OEMs

“Closed Access”

“Open Access”

“Closed Development”

“Open Development”

Device Ecosystem

B

A

DC

© 2009 T-Mobile USA, Inc.Slide: 11

Consumer / Economics matching process is a funnel

1

2

3

4

Critical value chain position Bottleneck for customer need Barriers to entry - modularization Growth

Synergies with partners Category/revenue

synergies Cost synergies

Fit with strategy On position / segment Delivers against brand

aspiration

MNO Options to pursue Build / innovate Partner Buy Ignore

Opportunity

T-Mobile Committed to Open Development

© 2009 T-Mobile USA, Inc.Slide: 12

T-Mobile thanks eComm sponsors for making this conference possible…

© 2009 T-Mobile USA, Inc.Slide: 13