1. This research has been prepared for the use of the wholesale clients of Macquarie Bank Ltd and its wholly-owned subsidiaries (“the Macquarie Group”). In preparing this research, the Macquarie Group has not taken 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. Broadband: serious business Network Insight Institute conference 24 November 2003 Scott Ryall (612) 8232 7124 scott.ryall@macquarie.com

2. Macquarie Research Equities Page 2  Role of a telco equity analyst  Current broadband take-up  Reasons for broadband growth being slower than expected given global growth  Growth projections  Planning investment  Threats to sustainable broadband growth Outline

3. Macquarie Research Equities Page 3  Assess whether listed telecom stocks are  Under valued; or  Over valued; or  Fairly valued  Keep adept of technological, competitive and regulatory issues impacting telecom operators  Form a view on the prospects of a company from studying a wide range of sources including  Senior management  Line Management  Suppliers  Competitors  Investors  Regulators Role of a telco equity analyst

4. Macquarie Research Equities Page 4  What is clear about broadband take-up? There is no one perfect source of information  ACCC data has the potential for double-counting and the splits appear dubious  ABS data has obvious statistical shortcomings  Similar to dial-up, there are many providers – there has even been restatements of customer numbers by major carriers  Even potential SME customer numbers is a source of debate  MRE’s estimate for SME broadband subs is ~225K at Sept 2003  >20% penetration of businesses  MRE’s estimate for consumer broadband subs is ~400K  ~5% household penetration  Internet penetration is ~55% (just under PC penetration) Current broadband take-up

5. Macquarie Research Equities Page 5  There has been a lot of noise about Australian broadband growth lagging other OECD countries  Some has been self-interest  There have been some historical reasons for such growth levels  Pricing – may be too high, but most importantly too uncertain  Entry level DSL near dial-up cost on a second line with call costs  Bigger issue is uncertainty of pricing from download limits (17% of revenue) – customers are not used to measurement by the MB  ISPs are throttling speeds, some are offering unlimited downloads  Content and applications – critical, but not mass market yet  As content and applications become bandwidth hungry, broadband becomes more compelling (and price less important)  SMEs have compelling reasons for take-up, mass market does not Broadband growth has been slow

6. Macquarie Research Equities Page 6  Stable technology is a must  Telstra’s broadband offerings have had much poor publicity – this cannot be good for take-up or its own brand  Lack of network competition  Particularly noticeable in the US  Looks set to change – new networks being built or considered  Consumer education has improved significantly  Capital market discipline  Part of the reason for the demand register  Could be short sighted view – state governments are taking matters into their own hands Broadband growth has been slow

7. Macquarie Research Equities Page 7  Telstra is expected to hit its target of 1m subs by 2005  Current run rate is sufficient  Optus selling DSL will increase take-up Broadband growth projections

8. Macquarie Research Equities Page 8  Key points to note  All SMEs with internet are expected to have a broadband connection by FY08  Telstra’s recent launch of business grade DSL services will assist  Household broadband penetration expected to be >35% by 2010 (overall internet penetration >70%)  Dial-up internet is expected to continue to have a place in the market – the alternative is a low cost broadband product (eg SingTel’s $19 entry level plan)  For Telstra, the retail vs wholesale split will be critical in its attempt to achieve $1bn of broadband revenues in 2006 Broadband growth projections

9. Macquarie Research Equities Page 9  Market is unsure whether new broadband applications will provide material incremental earnings growth  Revenue substitution  Upfront cost of connection  Need to control churn in the long term  Does have the potential for redistribution of revenues  Between carriers/SPs  Between business lines  Primary areas of potential network investment over 1-2 years  Roll out of competing DSL infrastructure  Wireless broadband networks (Unwired and Personal Broadband)  Regional HFC networks (Neighbourhood Cable, TransACT)  Some FTTH pilots emerging Planning investment

10. Macquarie Research Equities Page 10  DSL infrastructure roll out made possible by ULL/LSS regimes  We expect ISPs to use Telstra’s wholesale products as a means of building scale (some more aggressively than others)  When scale is reached in a particular exchange, an ISP can make a build vs buy decision using either the ULL or LSS price  For large service providers (eg Optus, Primus) we have estimated that 18 month breakeven could be achieved with <100 customers in an exchange using LSS  This is a threat to Telstra’s wholesale revenues and illustrates why it needs to maintain retail scale as well  Potential voice revenues (through VoIP/VoDSL) will be a crucial source of revenue for considering ULL or building new networks  Retention is a HUGE issue for the DSL industry Planning investment

11. Macquarie Research Equities Page 11  While broadband subscriber growth is expected to be strong, other key metrics for value creation are  Broadband ARPUs (currently $70-90/month)  Acquisition and retention costs  Key threats to the other metrics arise from high levels of competition  Too much infrastructure – either DSL, HFC, FTTH or wireless  Too many players with insufficient scale that price to achieve scale  Lack of brand equity and therefore ease of churn Threats to sustainable broadband growth

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