BRA-200410

MVNOs in the Brazilian Mobile Market

Exploring the opportunity

This document has been created by NEREO BUSINESS CONSULTANTS. It is not complete unless supported by the underlying detailed analyses and oral presentation.

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MVNO Regulationin Brazil

INTRODUCTIONPurpose of the Document

NEREO presents the following document to highlight the MVNO opportunity presented by the current market and regulatory situation in Brazil

• We are Strategy and Investment advisors in the TMT and Renewable Energy sector

• We have assisted clients in launching over 20 MVNOs in more than 12 countries

• Currently, in Latin America

– We are developing the 1st Full-MVNO in Central America

– We are assisting one of the prestigious operators, with presence across the continent, in defining the strategy for wholesale business

– Analyzing MVNO opportunities in more than 6 countries in Latin America

• Biggest mobile market in Latin America and among the biggest in the world

• 4 major mobile operators with mature operations in the country

• Country broken up into regions ; each with its own license for mobile telephony

• Rapidly approaching 100% penetration

• ANATEL has recently launched a public consultation for MVNOs in Brazil

• MVNO regulation is expected to be in force by the 3rd quarter of 2010

• ANATEL has proposed 2 models, Credenciado de Red Virtual & Autorizado de Red Virtual, which will cover the following MVNO types:

– Reseller

– Branded Reseller

– Light MVNO

– Full MVNO

NEREO intends to introduce the MVNO opportunity in Brazil through different conferences to be held in Sao Paulo and Rio de Janeiro

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MVNO OPPORTUNITY - BRAZIL

NEREO’s MVNO EXPERTISE

INDEX

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MVNO OPPORTUNITY - BRAZILMVNO

• Agreement at price level

• Quality management (SLAs/KPIs)

• Mechanisms to garantee the relationship’s evolution (new services, price update procedures,…)

• Value proposition (SAC, products and services)

• Efficient management of the customer’s retention (churn, SRC, customer care)

Essentially, MVNO business consists in managing two key relationships:Mobile Network Operator (MNO) and the end-user

MVNO

MNO END-CUSTOMERS

A Mobile Virtual Network Operator (MVNO) provides mobile services without owning spectrum and usually relies on the Mobile Network Operator’s network infrastructure.

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Services &IT Platform

Ownershipand OperationOf the MobileNetwork

CustomerCare

Service

Marketing& Sales

Services &IT Platform

CustomerCare

Service

Marketing& Sales

Ownership of Miblie Network

Distribut.

Distribut.Push

Leveraging on selected partners through outsourcingSpecific offers for each

market segment

Only one Market

Market Segments

Executed in-house Outsourced to an external partner (MVNO)

Befor

Currently

...by creating offersaligned to the needs ofeach of the existingsegments

...by dividing the valuechain and allowing theentrance of new playersthrough:

Radically reducing costs(increasing the EBITDA)

Reach new consumers inmarket segments not yettapped into (newdistribution channels)

In saturated markets, competition becomes a market-share game, so this new challengeleads MNOs to seek for MVNO partnerships to sustain the overall market growth…

MVNO allow MNOs to address specific market niches which they have not yet tapped into, while incurring lower Subscriber Acquisition Costs (SAC) —adding efficiency to the value chain

Operation of Mobile Network

Pull

Distribut.

Distribut. Push

Pull

Pull

MVNO OPPORTUNITY - BRAZILHow MVNOs create value for MNOs

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Selecting an specific MVNO operational model depends mostly on the commercialstrategy that the new player wishes to implement in order to tap into the market…

-

+Reseller Service Provider Full MVNO Network Operator

Alternative MVNO structures

Level of ownership of the mobile network infrastructure

MNOsTelecommunication companies.

Multimedia Companies

Utilities RetailersNiche Operators

SIM: not self owned Prices: are based on

negotiations with an MNO under a retail-minus regime for the MNO prices

Brand: own brand or co-branding with the MNO (« powered by »).

Business Model:─ Revenues: based on

revenue sharing with the MNO

─ Costs: marketing, sales, distribution

Branded Reseller

SIM: self owned Prices: own and independent

from the MNO Brand: own brand or co-

branding with the MNO ( powered by »). Client ownership possible

Business Model:─ Revenues: from traffic of

it’s own customers─ Costs: wholesale access

tariffs, marketing, sales, distribution. OPEX and CAPEX associated to IT platforms

No network infrastructure Can potentially have a VSplatform No capability to set prices No ownership of the client

Radio Access Network Complete network infrastructure

No network infrastructure Own VAS platform Own billing platform Own Customer Care Ownership of the client

With network infrastructure(no radio) Own VAS platform Own billing platform Own Customer Care Ownership of the client

SIM: self owned Prices: own and independent

from the MNO Brand: own brand. Complete

ownership of the client Business Model:

─ Revenues: from traffic of

it’s own customers

─ Costs: wholesale access

tariffs, marketing, sales,

distribution. OPEX and

CAPEX associated to IT

platforms

SIM: self owned Prices: own and independent

from the MNO Brand: own brand. Complete

ownership of the client Business Model:

─ Revenues: from traffic of

it’s own customers

─ Costs: wholesale access

tariffs, marketing, sales,

distribution. OPEX and

CAPEX associated to IT

platforms and network

elements

MVNO OPPORTUNITY - BRAZILFunctional model Characterisation

No network infrastructure Can potentially have a VSplatform Capability to set prices Possible ownership of theclient

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MVNO OPPORTUNITY - BRAZILMVNOs in Europe

Number of MVNOs and their market share in Europe (end of 2009)

MVNOs have been quite successful in garnering market share in most European countries

Source: Nereo Analysis with company data

<1%

1% - 5%

5% - 10%

10% - 15%

>15%

MVNOs Market share

Spain: 22

(Simyo, Lebara)

Portugal: 5

(UZO, Tele2)

France: 11

(Carrefour, Tele2, Virgin)

Luxembourg:2

(KISS, Transatel)

Belgium: 35

(Simyo, Transatel)

Netherlands: 39

(Simyo, Tele2)

Norway: 16

(Mobyson, Sense Talkmore)

U.K.: 25

(Virgin, Tesco)

Finland: 9

(Saunalahti, Oyj)

Sweden: 18

(ACN, Sense)

Germany: 29

(Ay yildiz, Simyo)

Austria: 5

(Yesss!, Tele2)

Denmark: 16

(CBB Mobil, Telmore)

Italy: 14

(COOPVoce)

Switzerland: 5

(COOP Mobile, Tele2)

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Brazil is among the leading countries in terms of mobile penetration in Latin America

Mobile Penetration – Brazil v/s LATAM

BRAZILIAN MOBILE MARKETKey Indicators

Communications Market Situation - Brazil

Market Leader

(2009E; market share in terms of subscriptions in %)(Penetration in %; GDP per capita in 000s USD; 2009 E)

Brazil has a favorable mobile penetration-GDP ratio in comparision with other countries in LATAM

Source: TRAs, CIA Factbook, NEREO Analysis

0%

20%

40%

60%

80%

100%

120%

- 5,0 10,0 15,0 20,0

Mobile Fixed Broadband

Telefonica/Vivo

Embratel/Claro/Net

Oi/Brasil Telecom

TIM

30.1 %

25.4 %

23.7 %

20.4 %

27.2 %

13.0 %

51.6 %

0.0 %

23.2 %

25.1 %

37.3 %

0.0 %

Each of the Fixed Line players is a leader in their license region─Region 1- Oi─Region 2 – Brasil Telecom─Region 3 - Telefonica

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Mobile position evolution (2007 – 2009)

• Oi has made impressive gainsin its position in the market inthe recent years

• Vivo has been able tomaintain its position in themarket inspite of slipping in2008

• TIM has been slippingsignificantly and has not beenable to arrest its slide

• Claro is poised to take overthe no. 2 position based onrecent trends

% subscriber share;% value share

Brazil currently has over 179 million subscriptions; a market penetration of 93%

MVNO OPPORTUNITY - BRAZILMobile Positioning – Leading Operators

10%

15%

20%

25%

30%

35%

10% 15% 20% 25% 30% 35% 40%

% Value share

% S

ubsc

riber

Share

VIVO is the market leader both in terms of revenues and subscriptions

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CATEGORIES

ARPU

Pricing Capabilities

Interconnection

MVNO OPPORTUNITY - BRAZILMVNO Models Comparison

Customer Ownerships

N/A

CREDENCIADO DE RED VIRTUAL

BRANDED RESELLERRESELLER

% revenue sharing over basic services’ ARPU

Outbound ARPU

N/A

N/A

N/A

N /A

AUTORIZADO DE RED VIRTUAL

FULL MVNOSERVICE PROVIDER

Outbound + Inbound (rev. Sharing) ARPU

Outbound + Inbound ARPU

Does not rely on MNO infra. for price differentiation

YES

Own rating & billing capabilities

Advertising & Marketing

expenses

MNO bears all the operational and markeriting cost

The MNO partially contribute to the SAC expenditure

MVNO bears all the operational and markerintg cost

MVNO bears all the operational and marketng cost

NO NO YES YES

Traffic Costs

OwnNumberingResources

N/A Wholesale cost (diff. Cost per destination)

N / A N/A

Wholesale cost (diff. Cost per destination)

Wholesale cost (airtime) + Interconnection cost

Short codes/premium numbers for Customer Care

Own IMSI range, NRN, SPC

ANATEL has proposed the following two models which will serve to categorize the types and characteristics of permitted MVNOs

10

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MVNO OPPORTUNITY – BRAZILProjected Evolution of the Brazilian Mobile Market

Mobile Revenue Projections – Brazil

(2010-2014; USD millions)

Projections – Brazilian Mobile Subscriptions

MNOs MVNOs

(2010-2014; millions of SIMs; % of SIMs)

186 189 193 198 203

- 4 6

8 10 0,0% 2,0% 3,1% 4,0% 4,6%

2010 2011 2012 2013 2014

MVNO Business in Brazil will account for more than 600 million USD by the end of 2014

Source: www.eMarketer.com, IBGE, NEREO Analysis

MVNO Market Share

Brazil will continue to maintain a CAGR of 4.1% to reach 212.3 million subscriptions byend-2014

2010 2012 2014

28,146 29,376 30,440

Mobile Revenues MVNO Revenues

MVNO Revenues 0 228 630

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MVNO OPPORTUNITY - BRAZIL

NEREO’s MVNO EXPERTISE

INDEX

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MVNO Experience Geographical Distribution of MVNO projects

MVNO Functional Model

Branded Reseller

Service Provider

Full-MVNO

PROJECTS EXECUTED

3

4

15

EUROPE

18 Projects

Middle-East & Asia

3 Projects

We have executed over 20 projects in the last 4 years leveraging on our MVNO Specialisation

NEREO has assisted clients in identifying business opportunities, negotiating with Host Network operators and launching MVNOs of all models in over 12 countries….

Central America

1 Project

OUR MVNO EXPERTISENEREO in the MVNO World (I)

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www.nereoconsulting.com