1. Macquarie Research Equities
The economic outlook and trends for the Australian mobile telecommunications industry
Tim Smart
Macquarie Research Equities
Phone: (612)
In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.

2. Presentation outline Overview of recent developments
Assessing the current market in Australia
Snapshot – key industry metrics
Subscriber growth – racing towards the end of the track
Retention costs – handset subsidies fuelling subs growth and shorter handset refresh cycle
ARPU
Voice revenues under threat
Data revenues – where is the vision?
Economic outlook – is consolidation needed?

3. Recent developments and trends - local
Attempt to reduce/eliminate handset subsidies in 2002
Telstra introduces “more4you”
Vodafone introduces “no plans” and reduces contract subsidies
Optus wins market share, improves margins
Handset subsidies reintroduced aggressively
Fuels market growth (sub adds for 6 months to June 03, 7.5% greater than in corresponding 6 months in 02)
Penetration now up to 71.8%

4. Recent developments and trends - local
Hutchison 3G launches in April in Sydney and Melbourne and in July launched in remaining capital cities
Telstra, Optus, Vodafone marketing 2.5G services
Vodafone announces it will supply 3G services by 1H05, preference to share, rather than build infrastructure
Telstra,Optus remain non-committal on 3G timing – not in FY04
ACCC investigates mobile termination rates

5. Recent developments and trends - global
European regulators aggressively reduce mobile termination rates
Hutchison launches 3G services in UK, Italy and Sweden
Wi-fi growth accelerates – carriers looking to integrate with mobile data offering
Performance and take up of new data services (2.5G, MMS, 3G) mixed
The outlook for mobile carriers continues to be difficult globally

6. Global wireless indices
Notes:
Asian index excludes Japan
All indices are in US$
Source: Bloomberg

7. Australian mobile market snapshot – key metrics
Source: MRE
Penetration at 71.8% at June 2003
Telstra and Optus remain dominant
ARPU falling as prepaid increases and voice yields fall

8. = MOBILE PROFITABILITY
Mobile profitability – a three part equation
SUBSCRIBERS: mobile penetration x market share
TIMES
ARPU: outgoing voice revenues + incoming termination revenues + data revenues
MINUS
COSTS: cost of retention / acquisition (incl. handset subsidies) + other operating costs
= MOBILE PROFITABILITY

9. Subscribers – racing towards the end of the track
Subscriber growth – has been the dominant component of the mobile profit equation…
…BUT growth is finite
Reintroduction handset subsidies and H3G entry has accelerated growth again
Australia now at 71.8% penetration
Penetration forecast to reach 80% by FY05
Having been the dominant component in industry profitability equation, it will soon become least important part of equation
Singapore market growth has slowed dramatically since penetration neared 80%

10. Singapore market – growth slowing
Source: Infocomm Development Authority, Singapore
With minimal market growth, focus of players is on winning share from each other
Competition intensifying

11. So, where is Australia?
Source: MRE
Subscriber growth is likely to slow dramatically after 2004, with penetration growing slightly above 80% level

12. ARPU – voice under pressure
Voice yields falling at double digit rates and likely to continue. Why?
Lack of industry subs growth will intensify competition for existing subscribers. Reducing voice one way to win market share.
3G introduces massive new capacity. Little incremental cost so voice will be priced down to increase network utilisation.
Incoming voice revenues subject to regulatory threat (ACCC review)
Source: MRE
Source: MRE

13. Data ARPU – key to the industry’s future
Source: MRE
Steady data growth driven by SMS
Little take-up of new data services

14. Data ARPU – key to the industry’s future
If voice yields fall at double digit rates (10%) as we expect and incoming termination rates decline at 5% pa (or worse), then data ARPUs would need to grow at a compound rate of 20% pa just to maintain overall ARPU in 5 years time.
MMS, 2.5G, 1x and 3G networks all in place…BUT service delivery is poor and take up minimal
SMS remains main component of data revenues
Issue: Can telcos deliver content and services that customers actually want?
Evidence in Australia to date is not positive
Some offshore carriers appear to doing a better job
Sprint PCS Vision saw a 62% subscriber growth from 1.3m in 1Q03 to 2.1m in 2Q03. Data ARPU per subscriber also grew during the same period by 29%.

15. Costs – retention / acquisition costs increasing
Handset refresh cycle is shortening
Estimate 5.2m handset sales in 2003, an increase of 25% on Subscriber growth in 2003 is 16%.
Colour screen phones, cameras and polyphonic ringtones encouraging refresh cycle BUT accompanied by increasing subsidies.
Potentially dangerous combination – handset life cycle down, handset subsidies up…
…good for handset vendors (and dealers) but not good for carriers.

16. Economic outlook
Good news: Average annual revenues growth forecast to be 6.3% pa for the next 5 years – above GDP level
Bad news: Good revenue growth does not mean attractive returns eg. aviation industry
Key issue: How much capital is invested in the industry
Consolidation – is it needed?
…not at the service layer – sufficient industry size, diversity and niches to justify many service providers
…issue is at the infrastructure level
Number of 3G networks will be the dominant factor in determining returns for the industry over the next 5-10 years.

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