TELEFÓNICA S.A.Regulatory Strategy 1

FUTURE OF COMPETITION POLICY

International Institute of CommunicationsTELECOMMUNICATIONS AND MEDIA FORUMBrussels, 29 April 2010

TELEFÓNICA S.A.Regulatory Strategy 2

…How we s ee competition : , , - Beyond connectivity g lobal convergent cus tomer centric & innovative01

User InterfaceContent Rights1 ConnectivityOnline Services2Enabling

Technology / Services3

User-Generated Content

• Text/Images/Voice/Video

Media Rights Owners

• Video• Audio• Books• Gaming• Adult Content• Editorial Content

Search

Transactions

Advertising• Online ad agencies• Online ad networks/

exchanges• Third party ad servers• Ratings/Analytics Services

Support Technology• Web-hosting• Web-design/development• Content Management

Applications• Sof tware• Media Players• Internet browsers

Billing & Payments• Online billing and

payment system providers

Devices• PCs• Smart phones• Games consoles• Other Internet access

hardware• Operating systems

Communications

Entertainment

General/Vertical Content

User

Retail Internet Access

Core Network

Interchange

S ource : ATKe arne y . Inte rne t Value Chain – March 2010

TELEFÓNICA S.A.Regulatory Strategy 3

What capital markets are te lling us about our pros pective growth Uneven dis tribution

( 100 2004)Evolution of Market Cap by Value Chain Market Bas e in

0

100

200

300

400

500

2010200920082007200620052004

User Interface5

Connectivity4

Enabling Tech. /Services3

Online Services2

Content Rights1

Notes to Diagram: (1) Average for Disney, NewsCorp, Time Warner ,Warner Music Group, Vivendi & Electronic Arts; (2) Average for Amazon, Google, Yahoo, eBay, Baidu, Expedia & PartyGaming; (3) Average for Akamai, CyberAgent, Google, ValueClick, Verisign & WPP; (4) Average for AT&T, Vodafone, NTT, British Telecom, Deutsche Telecom & France Telecom; (5) Average for Microsoft, Apple, Dell, Acer, Nokia & McAfee

02

x 5

x 0,9

x 3

TELEFÓNICA S.A.Regulatory Strategy 4

ARPU

Network cost per user

$ / U

sers

/ M

onth

0

10

20

30

40

2006 2008 2010 20122007 2009 2011

Source: Bell Labs Modeling and Network Planning

Increasing pressures over margins

Time

Revenues

Voice dominates

Data dominates

Traffic

Decoupling Strong traffic increasevs

revenue stabilisation

Increasing investment need in network capacity

Why? The model supporting this success story is now close to exhaustion with uneven consequences for each parties…03

TELEFÓNICA S.A.Regulatory Strategy 55

As current pric ing models bas ed mainly on flat rates paid by final cus tomers incentivizes “uncontro lled” traffic growth with no effic iency incentives

ADSLADSL 2

ADSL 2+VDSL

Fiber

Curre nt mode l is not sus tainable in the long te rm

How to continue ?

Flat rates Traffic Growth Capacity problem

03

TELEFÓNICA S.A.Regulatory Strategy 6

Some ways forward to deal with the problems…04C

HALL

EN

GES F

OR

MAR

KET

PLA

YER

S

Effic ie nt traffic manage me nt

Ince ntiv ise traffic e ffic ie ncy across the v alue chain

Exploit te chnolog ical choice s av ailable

Be yond flat rate s

Optimise pote ntial income s tre ams (e .g . base d on QoS )

Value -base d income dis tribution

Change Revenue models

Inve s tme nt ne w ne twork capacity

Maximise ne twork e ffic ie ncy

Exploit mos t e ffic ie nt te chnology choice s

ExpandNetwork Capacity

ManageTrafficGrowth

Constraints

Access Regulation

Public investments

Competition

Access Regulation

Net Neutrality

TELEFÓNICA S.A.Regulatory Strategy 7

[ ] ?What about Competition &Regulatory Policy

Competition policy and te lecom regulation s hould play an enabling role while protecting

cons umers from abus e

, Firs t and Foremos t s ee the wood for the:trees

— Frame the policy challenge in the right context— Understand what the problems are and what they

are not

, Second be cons is tent with the challenges we :need to face

— Challenge nº1: Expand the market— Challenge nº2: Set win-win relationships amongst

players in the new Internet ecosystem, i.e. solving current conflicts (decoupling, investment incentives, etc).

05

325

62

262

Enabling Technology& Services

User Interface

Connectivity

Online Services

Content Rights

Consumer

732

151

61

242

16

Business

1,195

158

956

19

Total

1,927

309

61

1,198

34

Internet Revenues by Source/Nature(2008 in $bn)

• All Segments and Categories that are part of the Internet economy have been included. These are markets and companies that exist/operate as a direct result of the existence of the Internet

• In addition we have included Categories that have a partial link to the Internet economy. In these cases we have apportioned an appropriate percentage of total market value to the Internet Economy. For example:— For PCs we have apportioned a

percentage of based on the proportion of PC usage that is related to the Internet

— For e-Commerce we have deducted the direct cost of goods sold and fulfilment from transaction revenues

• For the purpose of this analysis Enabling Technology and Services has been included in the B2C Internet Value Chain, as companies in this Component are primarily concerned with providing services to Consumer-focused Online Services

• The remainder of this analysis is focused on the Consumer Internet Value Chain

Approach1

Revenues Generated by the Internet Industry (2008)

S ource : ATKe arne y . Inte rne t Value Chain – March 2010

Both challenges are yet unmet !

TELEFÓNICA S.A.Regulatory Strategy 8

NGA regulatory framework is a key miles tone upon which – building a new regulatory culture in Europe ’ Let s s tart with the

bas ic things

FOCUS ON CUSTOMER CHOICE & SERVICESNOT THE INCUMBENT ACCESS PLATFORM

WHEN IT COMES TO INTERNET ACCESSFOCUS ON GENERIC BROADBAND

NOT ON FIBRE

Understand Relevant Markets

Defined on the basis of consumer (use) experience:

Telephony Access to the Internet TV Others…

Smart(De) Regulation

In Practice

Three Criteria Test:

Barriers to entry

Competition behind the barriers

Sufficiency of Competition Law

Regulatory structures need to be prepared to capture all these transformations:focus in the medium term to change relevant market definitions

and analysis with focus on the consumer experience of access to services and use both regarding products/services (no platform distinctions) and geographic scope

05

TELEFÓNICA S.A.Regulatory Strategy 9

“ The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year.”

John Foster Dulles,US Secretary of State 1953-1959

TELEFÓNICA S.A.Regulatory Strategy 10

And a final thought: Does fragmentation of European telecom industry say anything to us about how proper our regulation is?

Population (Millions)Operators (Number)

Note: includes mobile + fixed operators, excluding MVNOs and B2B operatorsUS: 4 major mobile players accounting for 95% of the market, 3 major fixed and 8 major cable operators included

Operators

~ 17

17

Operators

> 170

Consequences of fragmentation

• Short term price declines to benefit consumers; long term disadvantage due to lag in development of information society infrastructure and services

• Less internal market (development of pan-EU solutions)

A sustainable middle ground

is possible

05

TELEFÓNICA S.A.Regulatory Strategy 11

No grand ide a was e v e r born in a confe re nce , but a lot of foolish ide as have die d the re”

F. Scott Fitzgerald

Q&A

TELEFÓNICA S.A.Regulatory Strategy 12

Many Thanks for your attention !Jerónimo González

E: jeronimo.gonzalezgonzalez@ telefonica.es

M: + 34 669856098