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BRASIL TELECOM1st Investor’s Day
NY
Competitive Environmentand
Growth Opportunities
Ulisses KameyamaDirector of Investment Analysis
and Operational Costs
Agenda
Competitive Environment1
2 Growth Opportunities
Competitive Environment
LAUNCH OFLAUNCH OF BrT’SBrT’S MOBILE OPERATIONMOBILE OPERATION
• Market is responding very well to Brasil Telecom’s convergence approach
• 622 thousand subscribers by 2004 year-end, 24% higher than estimated
• We have performed better in all indicators that we estimated in October
• Other mobile companies reacting with plain vanilla discounts – product-wise BrT GSM has unique offerings
• More than 20% of the clients have already subscribed to at least one of the convergence offerings – powerful retention tools
CONVERGENCE
• FMCA has grown from the 6 original founding members (includingBrT) to 16 leading carriers as of today:
• Other companies worldwide have officially adopted convergence asthe fundamental corporate strategy
• Handset integration under intensive development by vendors in both Bluetooth and Wi-Fi fronts
• BrT• NTT• Rogers• BT• KT• Swisscom
• Cegetel• France Telecom• Deutsche Telecom• KPN• China Com
• Optus• AT&T• Czech Telecom• PCCW• Bezeq
Competitive Environment
Competitive Environment
VOICE
• Local voice traffic recovered throughout 2004
• Fixed – mobile migration effect will continue in the short term, but should stabilize as mobile market becomes more mature
• Strategy being implemented to keep traffic within the group –convergence concept
2.7302.715
2.586
1Q 04 2Q 04 3Q 04
Exceeding Local Pulses (million)
Competitive Environment
LONG DISTANCE
• DLD traffic over BrT’s network increased % in 2004
• BrT’s CSP reached impressive market shares in Inter-Regional and International LD calls in less than 12 months
• BrT consolidated in 2004 its position as leading long distance carrier with the complete range of services
43,3
34,0
16,1 24,020,3
15,0
1Q 04 2Q 04 3Q 04
Inter Region International
Competitive Environment
BROADBAND
• BrT reached 536 thousand broadband subscribers by year-end (89,9% growth YoY)
• ARPU is still the highest in the Brazilian market (approx. R$80)
• Cable broadband competition limited to 4 cities in BrT region
• Regulation still pending for unbundling
165195
239281
324383
536
456
1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04
+ 221.2%+88.6%
Competitive Environment
IP TRAFFIC
• BrT has a leading position in IPservices, as a result of the infrastructure and services (ADSL, internet) investments made over the last 3 years
• BrT has more IP content in its network than each of the other threeBrazilian incumbents
Monthly volume of IP traffic Exchange with other Brazilian incumbents (Gbytes)
324
458
771
173193
384
Company 1 Company 2 Company 3
Out In
Out = Traffic generated by other companies obtaining content in BrT’s networkIn = Traffic generated by BrT when obtaining content in other companies’ networkSource: e-Health tool, 1-Dec-04 through 31-Dec-04
Competitive Environment
INTERNET• BrT is the leading internet company in Latin America and one of the 15 largest
ISPs worldwide
Terra-Lycos
Subs
crib
ers
(milli
on)
25.0
20.0
15.0
10.0
5.0
0AOL US T-Online Wanadoo Net Zero MSN Tiscali Spinway AOL Eu BrT EarthLink Comcast
Source: company info and Brasil Telecom estimates
Competitive Environment
INTEGRATED PORTFOLIO
Local DLD / ILD Data CyberData
Center
Broadband InternetBroadband
Access
InternetDial-upAccess
MobileService
Portal
Agenda
Competitive Environment1
2 Growth Opportunities
Growth Opportunities
• Mobile, internet and data will be key growth drivers in 2005
• The Brazilian mobile subscriber base is expected to grow 20% in 2005
• We estimate that BrT GSM will add 1.2m new clients to its subscriber base in 2005
• ADSL broadband penetration is expected to penetrate 10% of the fixed-line base. For BrT it represents doubling the existing client base
• BrT is supporting the Brazilian Government’s ‘digital inclusion’ efforts – very relevant growth driver for dial-up traffic in 2005
• Increasing opportunities for paid services (including access) in the dial-up internet market
• Value-added services (VOD, entertainment)
Growth Opportunities
REGIONS I AND III, INTERNATIONAL
• MetroRED
• Competitive solution in data transmission + data center
• Successful implementation of a change of focus from carrier to corporate market
• GlobeNet
• Performance in line with acquisition business plan
• Relevant international growth opportunities in the Caribbean with marginalcapex
• Internet
• More than 80% of iG e iBest clients are in Regions I and III – relationship channel to sell new products and services
Broadband and Internet
• In the next 4 years, the number of internet access is expected to increase byan annual compounded average rate of 9% and the Brazilian internet market is expected to increase by an annual compounded average rate of 16%, reaching US$2.2 billion in 2008
• The global market of broadband Internet access should triple up to 2009• In Brazil, a great part of the population still don’t have Internet access• Dial-up access is the gateway for the target population of the digital inclusion
projects in development89%
46%
30%21%
16%11% 8% 6% 4% 3%
1999A 2000A 2001A 2002A 2003A 2004E 2005E 2006E 2007E 2008E 2009E
Broadband Dial-up Growth
1.804
3.4114.989
6.4757.863
9.08210.124
10.88811.494 11.984 12.352
Broadband and Internet
INTERNET
• Development of synergies of the Internet businesses: iG, iBest andBrTurbo
• Focus on development of paid access and paid services
• Turbo Video and other entertainment services
ACCESS
• Aggressive growth target for ADSL: 500.000 new clients in 2005
• “Connected PC” Government Program: key growth driver for dial-up traffic
Brasil Telecom’s Network Evolution
Marcelo FrassonDirector of Network Planning
Agenda
Strategic Drivers1
Target Network2
Positioning Outside Region II3
Strategic Drivers
Increase the installed base of Broadband access and provide new services with higher added value;
Compensate for the migration of traffic from the fixed network to wireless networks;
• BrT GSM
• Fixed Mobile Convergence (FMC)
Maximize the use of resources now available in the fixed network, that could otherwise become under-utilized as a consequence of the migration of voice traffic to wireless networks.
Ability to rapidly provide fully integrated Points Of Presence (POPs) outside Region II.
What is expected from Broadband…
• Videotelephony
• MMS, SMS
• Video on demand
• VoIP
• Internet over TV
• Personalized Services
• Interactive TV
• Gaming on demand
• Music and video Broadcast
Strategic Drivers
Increase the installed base of Broadband access and provide new services with higher added value;
Compensate for the migration of traffic from the fixed network to wireless networks;
• BrT GSM
• Fixed Mobile Convergence (FMC)
Maximize the use of resources now available in the fixed network, that could otherwise become under-utilized as a consequence of the migration of voice traffic to wireless networks.
Ability to rapidly provide fully integrated Points Of Presence (POPs) outside Region II.
Legacy Network
Mobile Network
xDSL
Frame Relay
IP Network
PSTN
Metro EthernetATM Network
SDHTransportNetwork
• A network for each service or group of services (variousdistinct networks);
• Implementation of new services is slow and expensive, as a consequence of the need to perform modifications in the different networks;
• Difficulties providing homogenized services across networks.
Agenda
Strategic Drivers1
Target Network2
Positioning Outside Region II3
Target Network
Services
IP Network
Control
Fixed-line telephony
xDSLaccess Mobile
telephony
Data Center
OSS/BSS Framework
Fulfillment Assurance Billing
Wireless MANCorporate customer
Metro Ethernet network
SB
• One single network, capable of providing access to any communication service, to any customer, in any location
• Architecture comprised of independent layers and based on open-standards
• Service convergence (voice, video and data)
• Fixed-mobile convergence
• Centralized service creation and control environment
Network Interconnection
* Initial WiMax deployment planned for 2005.
Rede IP
Rede ATM
xDSL Rede Determinística
Redes
Metropolitanas
Internet
RTPC
Corporate
IP Network
ATM Network
xDSLFrame Relay
MetroEthernet
Dialup network
Internet
PSTN Trunk Gateways
ResidentialLarge
EnterpriseSOHO
WiMax (*)
MediumEnterprise
WiFiWiFi
Wi-Fi EnviromentsResidential Residential
New Business Opportunities with the NGN
Value Customized Services
Deg
ree
of S
ervi
ce In
nova
tion
Degree of user retention
Transport
Commodity
Added value
Access
HostingHosting
Content Content DistributionDistribution
Content and Content and ApplicationsApplications
Evolution up the value chain
Agenda
Strategic Drivers1
Target Network2
Positioning Outside Region II3
Transport Network
Belo Horizonte - MG
Rio de Janeiro -RJ
São Paulo - SP
Maiquetia - VENEZUELA
Boca Raton - USA
S. David - Bermudas
Porto Alegre - RS
Florianópolis - SCCuritiba - PR
Campo Grande - MS
Cuiabá - MT
Porto Velho - RORio Branco - AC
Goiânia - GOBrasília - DF
Rondonópolis - MT
Brasil TelecomSubmarine Cable
Fortaleza - CE
DWDW
SDH
Backbone Nacional DWDM
MetroRED Network
• Long Distance Optical Network: 1,453 Km
• Urban Optical Network: 299 Km (São Paulo, Rio de Janeiro, Belo Horizonte and São José dos Campos)
• Installed FTTP (commercial buildings): 695
• Long Distance Transmission Capacity: 15.5 Gbps
Changes and Impacts of the New Rules in the
Telecommunications Sector
Adriano Gonçalves de PinhoDirector of Governmental Affairs
Agenda
1 Extension of the Concession Contracts
Regulatory Aspects for the Convergent Business Model2
Extension of the Concession Contracts
• ANATEL has a work schedule that aims to adequate the existing rules to those foreseen in the Concession Contracts to be extended (2006-2025) and according to the General Telecommunications Law, Decree 4,733 of June 10, 2003 (directive) and the Decree 4,769 of June 28, 2003 (Universalization Plan);
• Brasil Telecom is actively participating of the discussion regarding the new rules, with proposals based in internal and external studies, beyond intense simulations and analysis;
Objective:Objective:
• Encourage incumbents to be the developing and modernizing instrument of the Brazilian telecommunications sector;
• Ensure that the transition to new conditions preserves the economic-financial equilibrium of the contract.
Extension of the Concession Contracts
Main conditions to the extension of the Concession Contracts:
1. PUBLIC TARIFFS2. INTERCONNECTION3. LEASE OF MEANS4. UNIVERSALIZATION
Extension of the Concession Contracts
1. PUBLIC TARIFFS
a) Tariff Readjustment
Public Consultation 544 – Separation and Accounting Allocation
IST (“Índice do Setor de Telecomunicações”) –Telecommunications Sector Index
Productivity Index
WACC Determination
b) Changes in Tariff Rules
Extension of the Concession Contracts
2. INTERCONNECTION
Network usage tariffs (fixed and mobile) definition based on cost methodology.
a) Public Consultation 544 – Separation and Accounting Allocation
b) Public Consultation 549
Interconnection General Regulation
Rules to remunerate operators of fixed telecommunications services for the usage of their network;
Rules to remunerate operators of mobile telecommunications services (PCS) for the usage of their network.
Extension of the Concession Contracts
3. LEASE OF MEANS
Public Consultation 548 – IEDL Offering – Industrial Exploration Dedicated Line.
a) Prices (rates) based in cost
b) SMP Definition - Significant Market Power
c) Prohibition to discounts (volume, period, value)
Extension of the Concession Contracts
4. UNIVERSALIZATIONUniversalization Goals for 2005 (current contract)a) Individual attendance in localities with population above 300 inhabitants
b) Collective attendance (TUP – Public phones) in localities with population above 100 inhabitants
Universalization Goals as of 2006 (PGMU 2006)a) AICE (“Acesso Individual Classe Especial”) – Special Class Individual
Access
b) PST (“Posto de Serviço de Telecomunicações”) urban and rural –Station of Telecommunications Sercices
The Universalization obligations will be accomplished offering flexible products and adequate to the payment capacity of the population still not served.
Extension of the Concession Contracts
Services that are still not foreseen in the new regulations:
• VOIP
• TRIPLE PLAY
Regulatory Aspects for the Convergent Business Model
What is Convergence and the BrT’s Model
SERVICE SHOULD ALWAYS BE USER-FRIENDLY AND SIMPLE TO THE CLIENT UTILIZATION.
1. Current existing limits and restrictions for the services offering:
• Necessity to constitute subsidiary companies, attainment of distinct licenses and obligations by services.
2. Possibility to offer services and products, independent of the infrastructure that supports them.
Regulatory Aspects for the Convergent Business Model
1. Convergent Business Models and the Competition Rulesa) Obligatoriness of public offerb) Isonomic offers among Companies in the marketc) Non-discriminatory offersd) Prohibition of subsidies among productse) Prohibition of bundlef) Losses in the Economic Orderg) Dumping
The BrT and BrT GSM Case
2. Perspectives of Evolution
Disclaimer
This presentation contains forward-looking statements. Such statements are not statements of historical fact, and reflect the beliefs and expectations of the Company's management. The words "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "plans," "predicts," "projects" and "targets" and similar words are intended to identify these statements, which necessarily involve known and unknown risks and uncertainties. Accordingly, the actual results of operations of the Company may be different from the Company's current expectations, and the reader should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date they are made, and the Company does not undertake any obligation to update them in light of new information or future developments.
BRASIL TELECOM1st Investor’s Day
NY