How does the investment community view spectrum assets? Dr. Jerzy Kalinowski

July 2, 2013

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Mobile communications has dominated the sector today. Exploding demand for data is driving the demand for spectrum

Number of active SIM cards used for mobile broadband now far exceeds the number of broadband fixed lines, and is growing at a much faster rate…

The adoption of smartphones and tablets enables a plethora of mobile data services including video streaming, email, messenger services, online gaming, and social networking.

Fixed Mobile

Number of customers Usage of mobile data

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Considerable number of auctions/allocations initiated by governments these days

Western Europe Asia Pacific Latin America

North America Central & Eastern Europe

Middle East & Africa

Source: KPMG Radio Spectrum Monitor; Number of allocations 1999-Sept 2012

■ After a peak at the turn of the millennium there has been a resurgence of the number of allocations from 2008 until now

■ This trend is driven twofold by auctions related to: – 4G licenses in the developed regions – 3G licenses in emerging market

■ This trend will carry on over the next few years as: – Trend towards mobile broadband will lead to

demand for additional spectrum globally – Renewal/prolongation of frequencies

granted in the first wave (1990/2000) will trigger further activity over next years

2011 2012

2010 2001

2009

Number of spectrum allocations

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Proceeds from recent frequency auctions

Western Europe Asia Pacific Latin America

North America Central & Eastern Europe

Middle East & Africa

Source: KPMG Radio Spectrum Monitor; Allocation proceeds 1999-Sept 2012

■ Levels in the turn of the millennium remain far away from the proceeds realized since then

■ Over the last years, above 50 % of proceeds realized in auctions resulting from Western European countries

■ Today proceeds realised in emerging markets substantially lower compared to developed countries

– The maturity of the economies pursuing auctions is a main influencing factor

■ Allocations of frequencies on the basis of non-financial criteria is still a basis for the frequency granting in certain countries

10

5

15

25

30

35

100

105

110

115

2001

2000

2010

2011

Proceedings from spectrum allocations (in Euro bn)

5 © 2013 KPMG Advisory Spółka z ograniczoną odpowiedzialnością sp.k., a Polish limited partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

0.7 - 0.9 GHz 1.7 - 2.1 GHz 2.3 - 2.8 GHz

Euro

/MH

z/C

apita

Euro / MHz / Capita (01/2008-09/2012)

Emerging countries (min/max)

Developed countries (min/max)

Still high volatility of frequency prices even within homogenous frequency bands

Emerging countries average (mean)

Developed countries average (mean)

Price points for relevant spectrum areas 2008 to 2012

Source: KPMG Radio Spectrum Monitor; Euro/MHz/Capita 2008-Sept 2012

■ The physical nature of attractive frequency band is reflected in pricing

■ ‘Digital dividend’ spectrum price levels significantly above other areas on the frequency band

■ Overall a high volatility within and across various frequency bands observable

■ Each country needs to be analyzed separately, considering also the specific auction model

EUR

O/M

Hz/

Cap

ita

2.3-2.8 GHz 0.7-0.9 GHz 1.7-2.1 GHz

Euro/MHz/Capita (2008-Q3/2012)

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Value drivers of spectrum in auctions

INFLUENCING FACTORS ON

THE VALUE OF THE

SPECTRUM

Industry and governments see increased need for spectrum

Freeing up gaps across a crowded spectrum could generate income but also dilute the value per MHz

Considerable uncertainty in the future business case

Many regulators are consulting on award procedures and auction rules. A variety of factors could influence the value of spectrum at auction

BUSINESS CASE FOR

OPERATORS

DEMAND FOR SPECTRUM

SUPPLY SIDE ISSUES

AUCTION RULES

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How investors value frequencies?

Connected home

Consumer price sensitivity Fixed/mobile penetration Existing infrastructure Number of licences

Competitive environment

Macroeconomic country profile

Conditions of frequency auction

Bandwidth Frequency band Licence period Paired/unpaired Coverage obligations

GDP Population Urbanization/population density Political risk Regulatory environment Economic/capital market climate

Internal factors • Cost of capital • Cost structures • Available

resources • Synergies • Strategic

premiums

External factors

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• Verification of new technologies • Cost of new technologies

• Adoption of new services by customers • Substitutes for telco services • New business models

• Availability of new frequencies • Opportunities for new entrants • Scenarios for market developments

• Financial turbulences on the money market • Investors sentiment • Financial standing of operators/systematic margins erosion

• Changes of regulatory frameworks • Decisions on frequency sharing, infrastructure sharing, etc.

Technology risk

Market risk

Competition risk

Financial risk

Investor discounts in pricing reflect uncertainty of doing business based on granted frequencies

Regulatory risk

9 © 2013 KPMG Advisory Spółka z ograniczoną odpowiedzialnością sp.k., a Polish limited partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Emerging trends have the impact on the relationship between demand and supply… and influence spectrum value

Cognitive radio

Competition and state aid

Licensed/unlicensed

Broader communications issues

Spectrum trading

Refarming

Backbone capacity

Health studies

Demand shocks based on innovation

From tower to network to spectrum sharing

Infrastructure / sovereign funds interest

Disruptive entry of new market participants

Dr. Jerzy Kalinowski Partner Head of Technology, Media and Telecommunications Central & Eastern Europe E: jerzykalinowski@kpmg.pl T: +48 22 528 1122 M: +48 502 259 250

Discussion Material Only Ideas and conclusions contained in this draft document are entirely provided for discussion purposes. This material is intended solely for the purpose of illustration and it can be used exclusively for the purposes for which it is prepared.