IGS Communications Sector – Strategic Outsourcing © 2003 IBM Corporation Path-to-a-Penny Wireless Telecom Strategy for Survival October 20, 2003 Dean Douglas IBM Vice President, Telecom Industry IBM Global Services

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 2 I.The Wireless Carrier’s Challenge II.Overview of the Path to a Penny Agenda

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 3 Management’s ability to create shareholder value is a function of two predominant variables  Ability to generate cash available to shareholders  Free cash flow  Superior investment returns  Degree of predictability of future cash generation  Low volatility of cash and accounting results  Visibility of business metrics  Resilience to market challenges and surprises

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 4 While operating in the midst of an inhospitable business environment  Subscriber growth rates are declining, while churn remains high  Voice revenues per minute continue to fall, while costs structures are stubborn  Revenues are calculated by the minute, while costs follow their own metrics  Networks are engineered and optimized for voice, while the market demands data applications and bandwidth  Service quality and new technologies require investment, while capital is scarce and expensive  New services must be offered ubiquitously, while revenues grow only one user at a time

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 5 Users pay for coverage, brand and service differentiation US Wireless Carriers -- Lifetime EBITDA Bubble Size is Relative to Total Revenue Source: IBM Analysis, Merrill Lynch, Mar 2003, Deutsche Bank, Feb 2003 AWE Cingular Nextel Sprint PCS Verizon T Mobile ,200 1,500 -5,00010,00015,00020,00025,00030,00035,000 Lifetime EBITDA / Sub Subscriber Base Relationship between scale and lifetime EBITDA for 5 of 6 national carriers AWS Cingular Nextel Sprint PCS Verizon T Mobile 2002 Revenues ($m) 14,483 13,748 8,213 10,672 17,747 4,908 Sub Base (#k) 20,859 21,925 10,619 14,760 32,491 9,916 ARPU ($) Monthly Churn 2.4% 2.7% 2.1% 3.5% 2.1% 3.5% Life (Months) EBITDA Margin 24.4% 28.8% 40.6% 26.3% 40.1% 9.1% Lifetime Rev / Sub ($) 2,500 1,889 3,286 1,771 2,333 1,429 Lifetime EBITDA / Sub ($) , Q 2002 Operating Statistics Price per MOU ($)

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 6 I.The Carrier’s Challenge II.Overview of the Path to a Penny Agenda

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 7 With a Path to a Penny strategy Carriers can achieve several key benefits  Accelerated Cost Reduction  Initial objective is to reduce absolute cost levels  Elimination of “Basis Risk”  Align cost with revenue methodologies, improving ability to manage overall business  Common denominator allows clearer decision criteria  Conversion of Fixed Costs to Variable  Reduce fixed cost components  Predictability of costs  Technology Migration  Manage convergence of data and voice applications and network infrastructure  Improved Operating and Financial Controls

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 8 Path to a Penny addresses the carriers’ fundamental challenges  Business environment presents significant challenges to the carriers’ business model The wireless industry is a maturing market New technologies provide competing access to data services There is a pressing need to rationalize cost structure (costs and revenues are not aligned) Point-specific operational improvements are delivering diminishing returns  Addressing carrier cost structure requires a strategic perspective Considering the business as a coordinated aggregate, rather than distinct parts Applying a wide array of solutions and capabilities in a new analytical framework Ties high-level strategy to a tactical operational and delivery steps Transforms the carrier business infrastructure

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 9 Achieving a penny per minute of use requires changing the trajectory and speed of cost reductions, and alignment of revenue and cost metrics In order to achieve change in trajectory and speed, carriers must address their cost structure at a strategic level rather than through incremental solutions Carriers have to make potentially difficult decisions to change speed and trajectory:  Transform Network Operations Outsource core network Share core network Eliminate roaming costs  Pursue New Vertical Integration/Re-Integration Create technical cooperatives Device manufacturers Content providers/media Rethink Customer Operations Outsource customer care Establish carrier supply consortia Rely more on device manufacturers and channels *Source: US Wireless Industry, Deutsche Bank, Feb 2003 (US EBITDA) Reduction in Cost per MOU* (Status Quo vs. Path-to-a-Penny) Cost (In $0.01/MOU) Status quo cost reduction trend line Path-to- a-Penny

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 10 Path to a Penny takes a strategic and integrated view of the four primary functions of a wireless carrier Supply Chain Interoperability BSS/OSS Roaming Management BSS/OSS Supply Chain Marketing (Business & Consumer) Channel Management General & Administrative (Strategy, Business Development, Finance and Human Resource management) Customer Care Core RF Network Engineering NOCs and Traffic Mgmt. Taking on Customers Providing Wireless Service Supporting & Retaining Customers New Product & Service Investments Core RF Network Engineering Marketing & Sales Cell-Site Ops and Maintenance Product Development Addressing the cost structure at a strategic level will transform the entire carrier business model

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 11 Success will depend on new technologies that provide the ability to put all of the pieces together  Management that can address complex solutions  Customer relationship management  New software platforms that operate in a passive mode  Financial resources  New management methodologies  Operations focus and corporate controls  Risk management practices  Solution customization

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 12 IBM and its partners are working with carriers around the world to provide solutions in these categories Cable & Wireless Application development services Nokia BCS B2B on-line supplier network China Telecom broadband content delivery platform Hutchison (Australia) BCS Strategy & Change for new market entry UAB Omnitel (Lith.) WebSphere wireless application development British Telecom IGS systems consulting and server deployment Orange (Sweden) Wireless content distribution solution Cable & Wireless ITS design and deploy service testing capability T-Mobile (Germany) Integrated wireless LAN/Public Network Telus IBM Global Financing low cost of ownership Nextel SO managed operations of CRM and call centers Bell Canada on-Demand data storage and content management Cable & Wireless BCS cross-functional info-sharing Vodafone Enterprise storage server for customer data Cingular Wireless e-Learning to train sales consultants uniformly Cellway Komm. GmbH DB2 Intelligent Data Miner and Business Intelligence consulting on customer behavior, retention and sales Nextel SO managed operations of CRM and call centers Taking on Customers Providing Wireless Service Supporting & Retaining Customers New Product & Service Investments

IGS Communications Sector -- Strategic Outsourcing © 2003 IBM Corporation 13 Summary  Carriers face a real threat to their ability to compete and survive  Dramatic changes in strategy provide trajectories that change the landscape and market dynamics  Broad new initiatives that incorporate new software and technology are required to address this burgeoning need  Many carriers are transforming their businesses which places greater pressure on fast followers and laggards  Nothing that has taken place in the past should be viewed as a prologue to the way carriers need to manage today