Telecommunications Market: Slowing Innovation, Growing Personalization

1. July 2017 TELECOMMUNICATIONS MARKET SECTOR REVIEW

2. SLOWING RATE OF INNOVATION, GROWING DEMAND FOR PERSONALISATION • Telco markets are mature, intensely competitive, highly regulated: • 2016 mobile revenues of £6.6bn, predicted to be static to 2021 • Slowing pace of innovation: broadband showing fastest growth as use of multiple devices grows • 5G roll-out in 2020 is next major innovation likely to shake up market: predicted 12 x increase in speed creating $12 trillion value across globe • Consumer ‘bargaining power’ is on the rise: • Rise of personalised viewing and content download suggests future innovation should be focused more on catering to individual needs • Brand choice/loyalty more likely driven by quality of service than by price or brand • Greater range of packages reflects consumer demand for more choice based on their needs: • Smartphones remain the fastest growing technology product: 82% penetration vs 93% for standard mobile, with record high 48% customers on 2 year contract • SIM-only deals (23% share currently), family packages (mobile and quad-play) and subsidised data are new propositions gaining traction • High demand for more data and fast broadband: 30% have superfast broadband connections • Growing incidence of bundling/partnerships to grow the quad play market e.g. Sky with O2, BT with EE • Voice control (Alexa, Siri, Bixby) now more important in brand choice Streaming and downloading TV content: “We think that 5G will have an impact far beyond [3G],” said Ben Timmons, Senior Director, Business Development of Qualcomm Europe. “It’s not going to be about personal communication anymore. It’s much more of a transformational technology that will have a huge impact on an enormous range of industries." Proportion of consumers who have spent extra money on home electronics/home entertainment systems: Source: Mintel ‘Mobile Network Providers’ 2016, Bundled Communications’, ‘Mobiles UK’ 2017; Ofcom Comms Report 2016, McKinsey reports

3. PARTNERSHIPS/MERGERS CONSOLIDATE ESTABLISHED BRANDS’ DOMINANCE • Long established brands continue to dominate telco markets: • Big 4 share of mobile service market is 86% • Samsung and iPhone share of handset market is 66% • iOS and Android share of mobile OS market is 87% • Further market concentration (merger or partnership) likely, given opportunity to meet ‘quad play’ demand and improve content offer: • 88% currently subscribe to household bundle, only 11%have quad play • BT/EE and Sky/O2 partnerships have boosted shares in mobile and broadband markets • EE/Spotify and Vodafone/Apple tie-ups are examples of service/content partnerships • Smaller brands (Plusnet, Giff Gaff etc) may be swallowed up by dominant rivals, as a way of capturing new technology and/or growing customer base Source: Mintel ‘Mobile Network Providers’ 2016; ‘Bundled Communications’, ‘Mobiles UK’ 2017; Deloitte - Telecoms Industry Outlook 2016

4. LIMITED DIFFERENTIATION IN TELCOS: LOYALTY DRIVEN MORE BY INERTIA? • Brand loyalty relatively strong in telco markets: • 51% loyal to mobile network provider • 73% have not switched bundled provider in last 3 years • Future brand emphasis likely to shift from acquisition to retention • But inertia/market dynamics may be real drivers: • 70% customers on 2 year mobile contract say they will upgrade with the same manufacturer • Only 29% smartphone users prioritise brand over price, with 25% in tablet market, 14% in TV, 12% in PC • High brand awareness levels across telco markets but limited differentiation: • 2016 decline in adspend to £84m (Samsung: 38% SoV, Apple: 24% SoV, Google: 14% SoV) means brands relying on salience created to date • Samsung is most trusted, despite Note7 battery fires; Sony awareness high, but trust and differentiation low • Apple is most differentiated: positives include style, functionality, exclusivity, but seen as over-rated, costly Source: Mintel ‘Mobile Network Providers’ 2016; ‘Bundled Communications’, ‘Mobiles UK’ 2017’

5. eSIM LAUNCH LIKELY TO DISRUPT MARKET BY GIVING CONSUMERS MORE CONTROL • Predicted decline in 2 year contracts coincides with growth in SIM-only deals: • Few brand initiatives currently offered which promote loyalty, reflecting historic focus on acquisition and consumer fears over data security • Post-Brexit slowdown and rising inflation may re-focus consumers on headline prices • Future launch of Embedded SIM (eSIM) is likely to disrupt market further: • Reprogrammable eSIMs are embedded in devices (mobile, home, car etc.) replacing physical SIM card • 2011 launch by Apple in US/UK iPads was resisted by rest of industry until now • 2016 eSIM launch in parts of Europe, with UK launch due soon • eSIM volumes predicted to grow x25 to 2022, overtaking SIM cards • Decline in numbers of 2 year contract likely to change nature of relationship between customer and handset/network provider: • eSIM benefits include size, as it can be planted in small devices more easily • Critically allows mobile users to compare networks, products and prices and select preferred choice at will • If GDPR helps overcome consumer fears over data share, eSIM will facilitate more personalised offers/packages based on analysis of customer behaviours at granular level Source: Mintel ‘Mobile Network Providers’ 2016; ‘Bundled Communications’, ‘Mobiles UK’ 2017; McKinsey: eSIM for consumers

6. ‘INTERNET OF THINGS’ GROWING BUT SECURITY FEARS STILL AN ISSUE • Smart devices approaching mass household penetration: • 40%of UK homes now contain 5+ internet-enabled devices • Smart set-top boxes (36%) and TVs are most popular (35%) • 70% people buying first smart home device expect to buy more • 2015: 78.1m ‘wearables’ globally; predicted to grow 5x by 2020 • Current fears over data confidentiality likely to dissipate, if security issues are addressed: • 60%of consumers believe that connected home brands would share personal information with advertisers without permission • 54%believe that hackers could compromise home security • Critical for brands to demonstrate benefit of data collection & analysis through offering personalised plans, and reassure re: data confidentiality: • 73%say that they would be interested in taking out an energy tariff that included installation of a smart thermostat in exchange for lower premiums • 67%say that they would be interested in a home insurance policy that included installation of a smart security device in exchange for lower premiums “If we had computers that knew everything there was to know about things—using data they gathered without any help from us—we would be able to track and count everything, and greatly reduce waste, loss and cost. We would know when things needed replacing, repairing or recalling, and whether they were fresh or past their best.” Kevin Ashton, digital innovation expert credited with coining the term ‘Internet of Things’ Hive family of home services and smart products makes daily living easier, adapting to your lifestyle so you always have time for the things you love most. Hive Actions allows you to set them up to work together, giving you a truly connected home experience. Source: Mintel ‘Mobile Network Providers’ 2016; ‘Bundled Communications’, ‘Mobiles UK’ 2017; Mintel ‘The Connected Home’ May 2016 and Ofcom 2016 ; Forbes April, 2017

7. GDPR WILL HAVE A BIG IMPACT ON DATA USAGE AND COMMS CHANNELS "The key issue for making the data industry sustainable is about trust. Brands must be transparent about the way they use customers' data and use it to improve the customer experience, offering great services that demonstrate the value to consumers of sharing their data. Every bit and byte of people's data is going to become available. The Internet of Things, cars, telecom, health, finance, the internet, you name it. DNA, family history, everything that you can create is going to be here." Richard BenjaminsChief Data Officer Telefonica Spain • May 2018 General Data Protection Regulation (GDPR) will impact advertising channels and 3rd party permission data: • Focussed on putting consumers first: marketing consent must be clear and a recorded action • Direct mail and door drops free from opt-in as they are classified as ‘legitimate interest’ • Digital channels likely to be hardest hit: permission will need to be opt-in • Relevance to marketers: • Consumers have control about which brands can market to them, for how long and by which channel. • Permissions Marketing becomes a discipline to master. i.e. marketing the benefits for consumers to opt in and remain opted in with greater penalties for errors and abuse. • Brexit will not impact GDPR as it came into force prior to the referendum Source: Information Commissioners Office (ICO) 2016

8. PERSONALISED PACKAGES: A MAJOR Customers moving beyond ‘innovation for the sake of it’ to ‘packages best meeting my needs’: Brand partnerships can improve relevance/quality of content provision, facilitate multi-channel access: Sky/O2 and EE/Spotify good examples ‘Smart’ devices offer consumers an easy, cost-effective way of accessing content and managing costs Collecting/analysing data critical to satisfying desire for ‘personalisation’, eSIM the catalyst for this: Data capture and analysis from multiple devices allows targeting of personalised TV and different bundles to customer segments, based on real habit/preference Focus on building relationships: deliver strong service to support value proposition: Consider more targeted communications to engage by life stage e.g. younger segments (16-34 year olds) less satisfied with their current provider are more likely to research competitor deals Offer lapsed customers flexible bundles which don’t tie them in (e.g. Now TV) but do re-engage with brand Develop relationships by tailoring and refining individual ‘packages’ over time, and reminding people of the value of long-term brand loyalty Role of mail/door-drops highly distinctive in increasingly digital world: Communicating complex/detailed product information demands a proven medium to explain and build trust Can surprise and delight, convey exclusivity, be personalised, acknowledge and reward loyalty GDPR awareness and implications: Clearly communicate the positive impact and benefit to customers Direct mail and door drop help engage and target new customers without requiring specific data opt-ins BRAND OPPORTUNITY

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