© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Research Forecast Report Central and Eastern Europe.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Research Forecast Report Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 July 2013 Pablo Iacopino, Hilary Bailey, William Hare and Rupert Wood

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Contents 6.Executive summary 7.Service revenue in Central and Eastern Europe will peak in 2013, five years after Western Europe, and will decline slightly thereafter 8.Many revenue streams will grow significantly, but voice services are predominant in CEE and their decline will offset any growth in data 9.Key implications 10.Key implications – mobile operators 11.Key implications – fixed operators 12.Forecasts: drivers, inhibitors and trends 13.Five key drivers of decline in telecoms revenue in CEE [1] 14.Five key drivers of decline in telecoms revenue in CEE [2] 15.Significant changes since our previous forecast (fixed and mobile) 16.3G non-M2M connections will overtake 2G in 2016, and LTE take-up will be slow 17.By 2018, more than 60% of fixed broadband lines will be superfast, and FTTH/B will lead the growth 18.Fixed voice connections will continue to decline but at slower rate, as service bundles increase and VoBB gains momentum 19.Spend per connection on mobile services will decline as competition drives prices down and OTT threatens voice and messaging 20.Handset data ARPU will double by 2018 as smartphone penetration increases and higher income will be partially spent on advanced data 21.The dramatic increase in handset data revenue will not prevent an overall decline in handset ARPU 2 22.Mobile broadband penetration will peak in 2016: large-screen devices will decline, and tablet take-up will be slower than in Western Europe 23.Fixed broadband revenue will continue to increase because many countries are under-penetrated, and ASPU will benefit from NGA 24.Business revenue will decline despite a better outlook for GDP growth, because core services are subject to the same price erosion as residential 25.Country comparisons 26.Retail revenue will only increase in Turkey and Ukraine during the forecast period, where the mobile handset market is under-penetrated 27.Mobile handset ARPU will decline in all countries apart from Russia, where declining multiple-SIM ownership will improve customer base quality 28.Disposable income will drive LTE handset take-up long-term 29.Fixed broadband penetration will continue to increase and 33% of CEE households will have a NGA connection by 2018 30.Individual country forecasts 31.Czech Republic: Heightened competition will drive down mobile revenue 32.Czech Republic: Summary of forecast drivers 33.Czech Republic: The number of handset or mobile broadband connections will only increase slightly 34.Czech Republic: Fixed voice penetration is the lowest in Europe, with all three mobile operators offering naked DSL 35.Czech Republic: Stronger competition and further MTR cuts will drive mobile revenue down further Slide no.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Contents 36.Czech Republic: Fixed revenue will stabilise as broadband revenue offsets further losses in fixed voice 37.Poland: Retail revenue erosion is moving from fixed to mobile as unlimited voice and messaging offers drive ARPU down 38.Poland: Summary of forecast drivers 39.Poland: Handset penetration will start to decline after 2014, but smartphone adoption will hit 75% by 2018 40.Poland: The fixed broadband market will remain competitive as different technologies, including mobile, compete 41.Poland: Mobile retail revenue will decline from 2014 as voice price competition increases and OTT threatens messaging 42.Poland: Fixed revenue will continue to decline, but at a slower rate than mobile revenue, where price competition will be stronger 43.Russia: Retail revenue is close to its peak, and will decline from 2014 as price reductions hit the voice market 44.Russia: Summary of forecast drivers 45.Russia: The SIM market is saturated and will decline; the move towards more advanced devices and networks will be slow 46.Russia: Fixed broadband penetration is catching up with the rest of CEE, driven by low roll-out costs for fibre access 47.Russia: Mobile ARPU will increase throughout the forecast period 48.Russia: The strong economy will boost for business network services, but competition will keep broadband ARPU down 49.Turkey: Telecoms retail revenue growth will continue through to 2018, but at a decreasing rate 3 50.Turkey: Summary of forecast drivers 51.Turkey: Mobile operators have not addressed low-end consumers; high- end customers have embraced advanced services 52.Turkey: Continued slow growth in fixed broadband connections will ultimately sustain fixed voice 53.Turkey: Mobile revenue growth will remain high, driven by new users entering the market, and strong take-up of data services 54.Turkey: Legacy voice revenue will continue to be undermined by mobile; broadband growth will remain underwhelming 55.Market definition 56.This report provides forecasts for fixed and mobile telecoms services in 14 individual markets 57.Our forecasts build on Telecoms Market Matrix, a comprehensive source of trusted quarterly market data 58.Our comprehensive forecast model is supported by a sound knowledge of markets 59.Forecast model outline 60.About the authors and Analysys Mason 61.About the authors [1] 62.About the authors [2] 63.About Analysys Mason 64.Research from Analysys Mason 65.Consulting from Analysys Mason Slide no.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 List of figures Figure 1:Revenue by retail and wholesale and as a proportion of GDP, Central and Eastern Europe, 2010–2018 Figure 2:Retail revenue by service type, Central and Eastern Europe, 2010–2018 Figure 3:Growth rates of retail revenue by individual service types in Central and Eastern Europe, 2010–2018 Figure 4:Mobile connections by service type and technology, Central and Eastern Europe, 2010–2018 Figure 5:2G, 3G and 4G share of active handsets Figure 6:3G and 4G share of active SIMs for mobile broadband Figure 7:Fixed broadband connections by technology, Central and Eastern Europe, 2010–2018 Figure 8:Fixed voice channels by service type, Central and Eastern Europe, 2010–2018 Figure 9:Mobile handset ARPU by service type, mobile broadband and blended mobile ARPU, Central and Eastern Europe, 2011–2018 Figure 10:Average spend per active residential fixed connection, Central and Eastern Europe, 2011–2018 Figure 11:Handset data ARPU and price per megabyte, Central and Eastern Europe, 2011–2018 Figure 12:3G and 4G smartphones as a share of total handsets, Central and Eastern Europe, 2011–2018 Figure 13:Handset ARPU by service category, and share of elements, Central and Eastern Europe, 2011–2018 Figure 14:Handset ARPU by market segment, Central and Eastern Europe, 2011–2018 4 Figure 15:Mobile broadband connections and ARPU by device type, Central and Eastern Europe, 2010–2018 Figure 16: Fixed broadband revenue by service type, Central and Eastern Europe, 2010–2018 Figure 17: Fixed broadband ASPU by connection type, Central and Eastern Europe, 2011–2018 Figure 18: Business retail spend by service type, Central and Eastern Europe, 2010–2018 Figure 19: Annual change in nominal retail revenue (local currency), 2011 and 2012 Figure 20: Index of nominal retail revenue (local currency), 2012–2018, central Europe Figure 21:Index of nominal retail revenue (local currency), 2012–2018, eastern Europe Figure 22: Mobile handset ARPU, 2012 and 2018, handset data ARPU 2018 and smartphone share of handsets, 2018 Figure 23: Handsets with active 4G SIMs as percentage of handsets with active SIMs, 2013 and 2018 and GDP per capita, 2012 Figure 24: Fixed broadband household penetration by country, central Europe, 2011–2018 Figure 25: Fixed broadband household penetration by country, eastern Europe, 2011–2018 Figure 26: Retail revenue by service type, Czech Republic, 2010–2018 Figure 27: Growth rate of retail revenue by service type, Czech Republic, 2012 and 2018 Figure 28: Mobile device connections by type, Czech Republic, 2010–2018

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 List of figures Figure 29:Mobile device connections by technology generation, and mobile penetration rate, Czech Republic, 2010–2018 Figure 30: Fixed voice and fixed broadband penetration of households, Czech Republic, 2010–2018 Figure 31: Fixed broadband connections by technology, Czech Republic, 2010–2018 Figure 32: Mobile service revenue by type, ARPU and ASPU, Czech Republic, 2010–2018 Figure 33: Fixed service revenue by type, Czech Republic, 2010–2018 Figure 34: Retail revenue by service type, Poland, 2010–2018 Figure 35: Growth rate of retail revenue by service type, Poland, 2012 and 2018 Figure 36: Mobile device connections by type, Poland, 2010–2018 Figure 37: Mobile device connections by technology generation, and mobile penetration rate, Poland, 2010–2018 Figure 38:Fixed voice and fixed broadband residential penetration of households, Poland, 2010–2018 Figure 39: Fixed broadband connections by technology, Poland, 2010–2018 Figure 40: Mobile service revenue by type, ARPU and ASPU, Poland, 2010– 2018 Figure 41: Fixed service revenue by type, Poland, 2010–2018 Figure 42: Retail revenue by service type, Russia, 2010–2018 Figure 43: Growth rate of retail revenue by service type, Russia, 2012 and 2018 Figure 44: Mobile device connections by type, Russia, 2010–2018 5 Figure 45:Mobile device connections by technology generation, and mobile penetration rate, Russia, 2010–2018 Figure 46: Fixed voice and fixed broadband penetration of households, Russia, 2010–2018 Figure 47: Fixed broadband connections by technology, Russia, 2010–2018 Figure 48: Mobile service revenue by type, ARPU and ASPU, Russia, 2010– 2018 Figure 49: Fixed service revenue by type, Russia, 2010–2018 Figure 50: Retail revenue by service type, Turkey, 2010–2018 Figure 51: Growth rate of retail revenue by service type, Turkey, 2012 and 2018 Figure 52: Mobile device connections by type, Turkey, 2010–2018 Figure 53: Mobile device connections by technology generation, and mobile penetration rate, Turkey, 2010–2018 Figure 54: Fixed voice and fixed broadband penetration of households, Turkey, 2010–2018 Figure 55: Fixed broadband connections by technology, Turkey, 2010–2018 Figure 56: Mobile service revenue by type, ARPU and ASPU, Turkey, 2010– 2018 Figure 57: Fixed service revenue by type, Turkey, 2010–2018 Figure 58: Countries covered in this report Figure 59: Key factors influencing forecast assumptions

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 6 Executive summary Key implications Forecasts: drivers, inhibitors and trends Country comparisons Individual country forecasts Market definition About the authors and Analysys Mason

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Service revenue in Central and Eastern Europe will peak in 2013, five years after Western Europe, and will decline slightly thereafter  Telecoms operators in Central and Eastern Europe (CEE) are now facing the same challenges of market maturity as Western Europe (WE). We expect service revenue to peak in 2013, five years after WE, and to decline thereafter, at a CAGR of –0.6% in 2012–2018.  Service revenue growth throughout the forecast period will only occur in Turkey and Ukraine, in which the mobile market is under-penetrated. Russia will reach the peak in 2014.  Five main factors will contribute to this decline.  GDP per capita will continue to grow, but non- commoditised goods will tend to absorb most of the extra income, leaving little extra for telecoms expenditure.  Price competition will remain strong because voice and messaging services have reached maturity, and new MNOs and MVNOs might enter the markets.  Smartphone penetration will increase, but this will drive cannibalisation from over-the-top (OTT) services.  The influence of EU policy and regulation (cut to MTRs, spectrum auctions, MVNOs) is putting pressure on revenue.  Fixed–mobile convergence is gaining momentum in some CEE countries and is likely to bring value-destruction for the market, particularly for mobile operators. 7 Figure 1: Revenue by retail and wholesale and as a proportion of GDP, Central and Eastern Europe, 2010–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Many revenue streams will grow significantly, but voice services are predominant in CEE and their decline will offset any growth in data Revenue (EUR billion)CAGR Service type201220182010–20122012–2018 Mobile voice29.924.80.7%–3.0% Mobile messaging4.42.76.4%–7.8% Handset data5.110.533.1%12.6% Mobile broadband2.42.821.7%2.7% M2M0.20.511.1%22.4% Fixed voice13.39.5-4.5%–5.5% Fixed broadband7.18.58.9%3.0% Other2.83.64.8%4.1% Total telecoms65.263.03.3%–0.6% Pay TV5.36.66.4%3.8% TOTAL70.569.63.5%–0.2% Figure 3: Growth rates of retail revenue by individual service types in Central and Eastern Europe, 2010–2018 [Source: Analysys Mason, 2013]  The main difference since 2010–2012 is that mobile voice and messaging revenue will decline in the next six years because of service maturity and substitution to OTT services.  Mobile handset data revenue will double by 2018, driven by increased appetite for data services, improved bandwidth coverage (3G and LTE take-up) and increasing smartphone adoption. However, voice services will remain predominant, which will drive total retail revenue down. Figure 2: Retail revenue by service type, Central and Eastern Europe, 2010– 2018 [Source: Analysys Mason, 2013] 8

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Key implications – mobile operators  Operators will need to strengthen their position in the main growth areas – handset content and data services, in a context of higher pressure on mobile revenue and declining ARPUs. CEE is more dependent on mobile services than WE because of poorer fixed infrastructure coverage, lower population density, and mobile voice prices that fell below fixed prices earlier than in WE. In 2012, the ratio of mobile–fixed telecoms service revenue was 65%–35% in CEE, compared with 48%–52% in WE. Even the CEE countries less dependent on mobile services (Croatia, Estonia, Lithuania and Turkey) had the same ratio as the WE countries with the highest mobile contribution (Austria, Finland and Switzerland) at about 60%–40%. This has driven growth in CEE, but mobile operators are facing the same challenges as WE: market maturity, price competition on traditional services, and regulatory impact.  Operators need to encourage users to take packages with a high data element, and avoid device and service revenue becoming separate revenue streams. However, given that voice services will continue to be predominant in CEE (about 60% of total retail mobile revenue in 2018), operators will still need to protect their ‘cash cow’ traditional services, by offering bundles of voice, messaging and data.  Operators will have to rely on monetising devices to maintain revenue: Smartphone penetration and the use of apps in CEE is lower than in WE, but there may be scope for higher spend among those who download and use apps. In Poland, for example, where older smartphone models are still dominant and a high share of smartphone users do not download apps at all, those who download and use apps spend more. A recent Analysys Mason survey showed that nearly 10% of Polish respondents who download apps spend at least an additional EUR5 per month (mobile handset ARPU in Poland was EUR9 per month in 2012). If operators can monetise handset content and data services, increased usage will drive revenue growth. Tiered pricing structures will enable operators to monetise the higher-end smartphone users, while also encouraging entry-level service adoption.  Handset penetration in CEE reached about 120% in 2012, but in a few countries – chiefly Russia – the high number of multiple SIMs inflates penetration (Russia had about 150% handset penetration in 2012). Limited scope for further increases in penetration implies that operators will have to focus on quality rather than quantity, a trend already in place in Russia, and to stimulate the transition to high-end devices such as smartphones and tablets. Ongoing cuts to MTRs, which are still higher than in WE, has made cross-network minutes cheaper, and consequently some users are reducing multiple-SIM usage to optimise the cost of making calls. Smartphone growth will also lead to some handset ownership consolidation. 10

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Key implications – fixed operators  Operators must bundle voice with broadband and pay TV in order mitigate fixed-line erosion and preserve revenue: Mobile voice prices in CEE have fallen below fixed prices more quickly than in WE. In 2012, mobile voice prices were about 40% lower than fixed in CEE, whereas in WE they were 20% higher. A recent Analysys Mason survey showed that Poland has the lowest satisfaction ratings for fixed voice among the six countries analysed, 1 probably because of the dominance of inexpensive mobile services. Keeping voice charges artificially high or separate from broadband and pay-TV charges has only a short-term revenue benefit, but encourages subscribers to abandon fixed-line services in the long term. Voice services, whether VoIP or PSTN, need to be repositioned as a supplementary and optional service, and VoBB is preferable because the underlying costs are much lower. Evidence from WE indicates that this strategy can be successful, but only where fixed voice has not already been eroded to the point where it is irrelevant to consumers.  Fixed operators must position broadband and pay TV at the centre of the consumer proposition: Fixed broadband operators will keep their competitive edge in terms of access speed and data download capacity, and they should capitalise on it. They will continue to provide choice for customers wanting downstream speeds capable of handling high-quality video until mobile networks can offer similar throughput on larger scales. Fixed operators should continue to emphasise the unique capabilities of fixed broadband, not only through improved headline access speeds, but also by making deeper network resources reflect the evolving patterns of content consumption. CEE has higher average fixed broadband usage than WE, and the trends indicate fast growth. Fixed operators and cablecos have an opportunity to exploit this trend.  Integrated operators will have to focus on convergent services to extract the highest value from customers, and to compete with mobile-only, given the dominance of mobile services in CEE. Quadruple play might be disruptive for mobile players, but is an important tool for fixed incumbents to retain customers and revenue. Integrated operators are well-placed to capitalise on the growing demand for any type of voice and broadband connectivity. However, most fixed-only operators will have to work harder and sell ever more connections to maintain the same amount of revenue. It is imperative for them to develop a mobile connectivity strategy to generate more revenue from access, and/or increasingly focus on value-added services as drivers for growth. Developing widespread public Wi-Fi is an important first step towards adding mobility  this has already proven a useful in WE countries such as Portugal. 11 1 The other countries were France, Germany, Spain, UK and USA. See our report The Connected Consumer Survey 2013: voice and messaging. Available at www.analysysmason.com/CCS-2013- voice.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Five key drivers of decline in telecoms revenue in CEE [1] ▪ Growth in GDP per capita will be absorbed by expenditure on non-commoditised goods, leaving little extra for telecoms. After a slowdown in 2012, GDP growth is expected to improve during the next six years in CEE – varying between 3% and 5% at regional level in real terms – and this will drive up income per capita in all countries. Russia, Turkey and Ukraine will have the strongest growth in 2012–2018, whereas growth will be lowest in the Czech Republic and Slovenia. However, we expect that only a small part of this increase in income per capita will turn into telecoms revenue because people will be likely to spend most of the extra income on non-commoditised services such as luxury goods. Mobile handset data and broadband will benefit from higher available income, but their contribution to total spending on telecoms services will remain lower than voice revenue. Consequently, the gap between GDP and telecoms growth is expected to increase, and telecoms service revenue as a percentage of GDP will decline from 2.2% in 2012 to 1.3% in 2018.  Price competition will remain strong because voice and messaging services have reached maturity, and new MNOs and MVNOs might enter the markets. In 2012 mobile voice prices were about 40% lower than fixed in CEE, whereas in WE the mobile premium was still positive at about 20%. Price competition among established mobile players will continue to be strong, and new MNOs and MVNOs may enter markets in the next two years, such as in the Czech Republic and in Slovakia, playing on pricing to gain market share. In the Czech Republic, the arrival of MVNOs during 2012 means that we can expect ARPU to continue on a downward trajectory, and this trend will be reinforced further by a new entrant joining the market after the 4G auctions, probably during 2014. Markets for mobile voice and SMS messaging are also becoming characterised by inelastic demand: an increase in usage, which is often the consequence of bundles of minutes, does not fully offset declining spend per minute, resulting in overall revenue loss. ▪ Smartphone penetration will increase but this will drive cannibalisation from OTT services, and mobile operators will lose influence in device distribution. Smartphones will represent 69% of mobile handsets by 2018, up from 20% in 2012, and all countries will have a similar level of smartphone penetration, with the exception of Ukraine where 3G and 4G coverage lag behind CEE overall. Poland has a strong unofficial (OTT) fixed VoBB market, and we expect that this appetite to try alternative communications methods will make this mobile voice and messaging market ripe for cannibalisation from OTT services. In countries such as Bulgaria and Slovakia where messaging is expensive, customers are likely to move straight to alternative methods such as instant messaging, email and OTT messaging applications such as WhatsApp Messenger. 13

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Five key drivers of decline in telecoms revenue in CEE [2] ▪ The influence of EU policy and regulation is putting pressure on operators’ revenue. Croatia joined the EU in July 2013, and consequently, 11 of the 14 countries in our CEE coverage are EU countries. Growth rates in the non-EU countries in the region (Russia, Turkey and Ukraine) are higher than in those countries that are under the influence of the EU. Policy has tended to encourage market entry, thereby driving down retail prices. MVNO activity in CEE has been limited, and lower than in WE, but many countries are now imposing obligations on MNOs to open their networks to third-party service providers. Estonia and Slovenia have the highest proportion of MVNO subscribers in the region, whereas in Poland, MVNOs have been active for several years but have had limited impact, because the last MNO entrant Play has taken away much of the potential market for low-cost MVNOs with its aggressive pricing. Spectrum auctions indicate that new entrants might enter the market in a few countries such as the Czech Republic and Slovakia. Interconnect mobile revenue will decline at a CAGR of 3% in CEE during 2012-2018, because of reduced mobile termination rates (MTRs) in all countries. ▪ Fixed–mobile convergence is gaining momentum in some CEE countries and is likely to bring value-destruction to the market, particularly for mobile operators. Convergence is still rare in CEE as a whole, but take-up of fixed–mobile bundles in the Czech Republic and Poland is significantly higher than in some WE countries such as Germany and the UK. About 20% of fixed broadband households in the Czech Republic subscribed to bundles that include mobile voice in 2012, followed by Romania at about 15%. We expect fixed–mobile convergence to bring value-destruction to the market, particularly for mobile operators because mobile revenue is much higher than fixed in CEE and therefore more vulnerable to price reduction and substitution by OTT services. We expect the Czech Republic to have one of the strongest declines in service revenue during 2012–2018 (CAGR –2.1%, compared with –0.6% for the whole CEE region) as a result of a new mobile player entering the market and fixed–mobile convergence. 14

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Significant changes since our previous forecast (fixed and mobile)  Mobile  Messaging retail revenue will decline at a stronger rate, because recent operator results suggest that the threat of cannibalisation from OTT messaging services is even stronger and might accelerate in the mid-to-long term along with the growth of smartphone penetration. We forecast messaging revenue in CEE will decline at a CAGR of –8% in 2012–2018, but with double-digit contraction in the last three years of the forecast period.  LTE services, already launched in 11 of the 14 countries in our CEE coverage, will slightly increase growth in handset data spend. The handset mix (smartphones and basic phones) and LTE forecasts have remained broadly unchanged, but we forecast an increase in expenditure associated with the use of LTE handsets. A specific 4G premium is likely to be short-lived, but we expect that 4G handsets will generate higher volumes of data, and will therefore attract higher levels of spending on data services. Our new 2017 forecast for handset data revenue is 15% higher than our previous projection.  The decline of voice retail revenue will be stronger, because we forecast more price competition in the context of voice service maturity. Fixed–mobile traffic substitution will continue at a higher rate because operators are increasingly offering bundles of mobile minutes, messaging and data, but this uplift will not turn into higher voice revenue because of inelastic demand.  The number of mobile broadband connections is lower because the number of large-screen mobile broadband subscriptions will decline in favour of tablets (both connected over mobile networks and on Wi-Fi), smartphones and fixed broadband. However, the take-up of tablets will be slower than in WE and consequently the total number of mobile broadband connections in CEE will peak later (in 2016) and decline thereafter.  Fixed  Fixed broadband penetration will increase more strongly because the reduction in the number of large-screen mobile broadband devices will result in more fixed broadband connections, and GDP per capita growth in all countries will lift the available income for Internet services. We now forecast a residential fixed broadband household penetration of 47% in CEE by 2017, compared with our previous estimate of 44%. FTTH/B will drive most of this uplift. 15

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 3G non-M2M connections will overtake 2G in 2016, and LTE take-up will be slow 16 Figure 5: 2G, 3G and 4G share of active handsets [Source: Analysys Mason, 2013] Figure 6: 3G and 4G share of active SIMs for mobile broadband [Source: Analysys Mason, 2013]  Handset penetration will remain nearly stable during 2012– 2018 at about 120%, as growth in under-penetrated countries such as Turkey and Ukraine will be offset by the reduction in others, chiefly Russia. There, multiple-SIM ownership is expected to decline as operators are increasingly focusing on quality rather than on quantity, and the adoption of high-end devices will lead to some handset ownership consolidation. The mix of handsets will change dramatically, with the smartphone share reaching 69% by 2018, up from 20% in 2012. LTE commercial services are now available in 11 countries but we expect a slow take-up and 4G will account for only 22% of handsets by 2018 (54% in WE). Figure 4: Mobile connections by service type and technology, Central and Eastern Europe, 2010–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 By 2018, more than 60% of fixed broadband lines will be superfast, and FTTH/B will lead the growth  Residential fixed broadband penetration will continue to increase in CEE and will reach 49% by 2018, up from 36% in 2012, because household budgets for Internet connectivity will increase along with the growth in GDP per capita. Strong infrastructure competition might also spur the take-up. However, CEE will continue to lag behind WE  The fixed broadband technology mix will also improve. We forecast that by 2018 most fixed broadband lines (64%) will be NGA (FTTH/B, cable, VDSL), 1 up from 48% in 2012, because leading fixed operators in the largest countries are investing substantially, mainly in FTTH/B but also in VDSL.  FTTH/B has a significantly higher penetration in CEE than WE: 31% of fixed broadband connections in 2012, versus 3% in WE. Many countries in CEE extensively use FTTB/LAN, primarily Russia, the Baltics and Romania. In Russia, FTTH/B (nearly all FTTB/LAN) accounted for half of fixed broadband connections in 2012. The drivers of this high penetration are: lack of mandated bitstream access or access to copper loops; skipping technology generations where fixed-line infrastructure and broadband take-up is limited; and the low cost of roll-out because of less expensive labour, looser planning regulation and high-density housing. 17 Figure 7: Fixed broadband connections by technology, Central and Eastern Europe, 2010–2018 [Source: Analysys Mason, 2013] 1 For the purposes of this report we count all cable as NGA. By 2012 almost all cable networks had been upgraded to DOCSIS3.0.  However, cable will remain a leading technology in many countries – specifically Hungary, Poland and Slovenia. In Hungary, UPC and Magyar Telekom have successfully gained market share and cable connections will account for about half of the total market in 2018.  Fixed broadband in the region is characterised by heavy usage levels (Romania has one of the highest usage levels in the world at more than 99GB per month in 2012). This drives demand away from ADSL and onto NGA platforms.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Fixed voice connections will continue to decline but at slower rate, as service bundles increase and VoBB gains momentum  Residential fixed voice penetration has declined during 2012 in all CEE countries with the exception of Hungary and Bulgaria.  In Hungary, incumbent Magyar Telekom has reduced its rate of PSTN line loss during the last 12 months, thanks to a successful portfolio review (such as the launch of the Hoppá package, which includes up to 5000 minutes of fixed-line calls) and a diversification into energy services (electricity and gas). Cable operator UPC has continued to gain fixed voice subscribers thanks to its triple-play proposition.  In Bulgaria, the main reason for the fixed voice penetration increase is the successful performance of the largest mobile players MobilTel and Globul, which have been able to gain fixed voice subscribers via fixed wireless access. Bundles of services are gaining momentum in Bulgaria, which has helped to mitigate PSTN line erosion.  Residential fixed voice penetration stood at 55% in 2012 in CEE and will decline to 50% by 2018. However, the rate of decline will be slower than in the previous years because fixed voice services are increasingly offered via bundles that combine voice with fixed broadband and, in many cases, also with pay TV. Fixed voice is often sold at a such a low incremental cost to fixed broadband that customers retain it. 18 Figure 8: Fixed voice channels by service type, Central and Eastern Europe, 2010–2018 [Source: Analysys Mason, 2013]  Primary VoBB will take an increased share of the total number of fixed voice lines. This has little to do with end-user demand, and everything to do with long-run network costs. By 2018, primary VoBB will represent 16% of total fixed voice connections, while narrowband lines will decline at a CAGR of 3% during 2012–2018, compared with 4% in 2010–2012.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Spend per connection on mobile services will decline as competition drives prices down and OTT threatens voice and messaging  We expect handset ARPU to decline in all countries because competition will remain strong, new players might enter the markets, and quadruple play, where available, will accelerate mobile revenue erosion. Handset data revenue will climb with the transition onto smartphones and 4G, but this is not sufficient to offset declining traditional services. OTT services are threatening voice and messaging elements.  The average handset ARPU in CEE will fall from EUR8.2 in 2012 to EUR7.6 in 2018 (CAGR of –1%). Increasing penetration of connected tablets will also have a dilutive impact on mobile broadband ARPU (because tablets yield lower ARPUs than USB modems)  Fixed residential spend per connection has grown, driven by the increasing share of data. However, we forecast a stabilisation in the later years of the forecast period because of further migration of high-traffic users to less-expensive mobile voice services and lower-ARPU fixed VoBB services, not offset by still-growing spend per capita on data. 19 Figure 9: Mobile handset ARPU by service type, mobile broadband and blended mobile ARPU, Central and Eastern Europe, 2011–2018 [Source: Analysys Mason, 2013] 1 1 Blended mobile ARPU = Total mobile service revenue (handset + MBB + M2M) divided by average handset + MBB connections. Figure 10: Average spend per active residential fixed connection, Central and Eastern Europe, 2011–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Handset data ARPU will double by 2018 as smartphone penetration increases and higher income will be partially spent on advanced data  We forecast that handset data ARPU will double by 2018 compared with 2012, reaching EUR1.8, and its share of total handset ARPU will grow from 11% in 2012 to 24% in 2018.  The transition of handset ownership onto smartphones and the likely adoption of data-focused tariff plans are the main drivers for handset data ARPU. Mobile handset data and broadband will likely be the only telecoms services to benefit from the growth in GDP per capita in all countries during the next few years, because commoditised voice and messaging services will suffer price competition and substitution to OTT services.  LTE commercial services are now available in 11 of the 14 CEE countries included in our forecasts, and coverage is already extensive in a few countries, primarily Estonia. TeliaSonera’s subsidiary EMT, the first operator in Estonia to launch a 4G network, has recently announced a coverage of more than 95% of the territorial area in the country.  There is scope for a 4G premium, but this is unlikely to last for a long period after the launch of 4G handsets. We forecast an increase in expenditure associated with the use of LTE handsets, because we expect that 4G handsets will generate higher volumes of data, and will therefore attract higher levels of spending on data services. 20 Figure 11: Handset data ARPU and price per megabyte, Central and Eastern Europe, 2011–2018 [Source: Analysys Mason, 2013] Figure 12: 3G and 4G smartphones as a share of total handsets, Central and Eastern Europe, 2011–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 The dramatic increase in handset data revenue will not prevent an overall decline in handset ARPU Figure 14: Handset ARPU by market segment, Central and Eastern Europe, 2011–2018 [Source: Analysys Mason, 2013]  Strong take-up of smartphones will result in handset data ARPU doubling from EUR0.9 in 2012 to EUR1.8 in 2018. However, this is not sufficient to offset losses in traditional revenue streams, and overall blended handset ARPU will fall from EUR8.2 in EUR7.6. Further cuts to MTRs will also continue to squeeze interconnection revenue.  Residential customers will increasingly shift from prepaid to contract SIMs because smartphones are often sold with multi-year subscriptions. This will result in a more resilient residential ARPU and a lower gap between residential and business ARPUs. Figure 13: Handset ARPU by service category, and share of elements, Central and Eastern Europe, 2011–2018 [Source: Analysys Mason, 2013] 21

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Mobile broadband penetration will peak in 2016: large-screen devices will decline, and tablet take-up will be slower than in Western Europe  Mobile broadband penetration was 7% in CEE in 2012, compared with 9% in WE, but a few countries such as Estonia (16%) and Poland (11%) are significantly ahead.  Mobile broadband penetration will peak in 2016 at 8% of the population and decline slightly thereafter because we forecast the number of large-screen mobile broadband connections will decline, as in WE, driven by:  handset tethering on smartphones, offering an alternative to USB modems, and the advent of both 4G and multi-device tariffs, making this a viable alternative for light users.  public Wi-Fi increasingly obviating the need for USB modems.  Growth in connected tablets will be strong (CAGR of 25%), but take-up will be slower than in WE because of lower economic prosperity, and the lack available good-quality low- end tablets such as the Kindle Fire HD and Google Nexus 7 (and the corresponding content ecosystem). We estimate that mid-screen mobile broadband penetration (connected tablets) will reach 3% of the population in CEE by 2018, compared with 6% in WE.  The growth of mobile broadband connections until 2016 will have a dilutive impact on ARPU (CAGR –1%), heightened by the strengthening share of mid-screen devices, and consequently, revenue will peak in 2016 in line with the peak in subscribers. 22 Figure 15: Mobile broadband connections and ARPU by device type, Central and Eastern Europe, 2010–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Fixed broadband revenue will continue to increase because many countries are under-penetrated, and ASPU will benefit from NGA  Fixed broadband revenue in CEE will increase at a CAGR of 2% during 2012–2018, driven by increasing penetration in all countries. Household budgets for Internet connectivity will tend to increase with the growth of GDP per capita in all countries, and the availability of different technologies will yield higher coverage and choice. Growth will be higher than the CEE average in Turkey and Ukraine, at 4% and 5% respectively, because their fixed broadband markets are under-penetrated. High demand for data, and migration from USB modem or router-based mobile broadband will drive take-up.  Higher take-up of the two principal value-added services, VoIP and IPTV, whose revenue will grow at a 3% CAGR, will also boost growth.  ASPU will decline for both residential and business users (at CAGRs of –2% and –4% respectively during 2012–2018) because later adopters are likely to be lighter users, and competition in the fixed broadband market might drive prices down. However, we expect ASPU reduction to slow in the later years of the forecast period because a higher portion of subscribers will use NGA. By 2018, more than 60% of fixed broadband lines will be superfast, with FTTH/B leading the growth. Better-quality service might reduce churn and justify the price increases. Figure 16: Fixed broadband revenue by service type, Central and Eastern Europe, 2010–2018 [Source: Analysys Mason, 2013] Figure 17: Fixed broadband ASPU by connection type, Central and Eastern Europe, 2011–2018 [Source: Analysys Mason, 2013] 23

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Business revenue will decline despite a better outlook for GDP growth, because core services are subject to the same price erosion as residential  Following a 2% growth in 2012, business revenue will decline throughout the forecast period in CEE, mainly driven by fewer fixed voice lines, and price competition on mobile as enterprises will likely try to optimise costs. However, revenue will continue to grow for business network services, which will account for 22% of total business revenue by 2018, up from 16% in 2012.  Business revenue is largely influenced by GDP dynamics, but we expect a bigger gap between GDP and business revenue growth during the next six years, because about 80% of the market (represented by mobile services and fixed voice) is subject to the same downward price pressure that affects residential revenue.  Mobile spend among businesses will decline at a CAGR of –1%, whereas spend on business fixed voice services will decline rapidly (CAGR of –6%), although voice–data convergence means that some spend will shift to the business networks services category rather than disappear.  Business network services revenue will grow at 4%, because these services can be understood as a necessary cost that fuels enterprises’ competitive advantage, so enterprises are prepared to invest a given proportion of opex to maintain this. 24 Figure 18: Business retail spend by service type, Central and Eastern Europe, 2010–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Retail revenue will only increase in Turkey and Ukraine during the forecast period, where the mobile handset market is under-penetrated Figure 20: Index of nominal retail revenue (local currency), 2012–2018, central Europe [Source: Analysys Mason, 2013] Figure 21: Index of nominal retail revenue (local currency), 2012–2018, eastern Europe [Source: Analysys Mason, 2013]  Several countries in CEE have already reached the peak in retail telecoms revenue, as in WE. Romania and Russia will peak in 2013. Turkey and Ukraine are the only countries where growth will occur during the forecast period, mainly because of mobile handset under-penetration (79% and 107% respectively in 2012, compared with 120% for CEE). The countries with the strongest decline are those where mobile voice prices are more under pressure, such as Lithuania, or where convergent offers are gaining momentum, such as Bulgaria. Revenue will also decline strongly in the Czech Republic because of the arrival of MVNOs in 2012 and a likely new entrant in 2014. Figure 19: Annual change in nominal retail revenue (local currency), 2011 and 2012 [Source: Analysys Mason, 2013] 26

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Mobile handset ARPU will decline in all countries apart from Russia, where declining multiple-SIM ownership will improve customer base quality  Average mobile handset ARPU in CEE was EUR8 in 2012, but ARPU differs greatly between countries, mainly reflecting income per capita (Slovenia has by far the highest GDP per capita in CEE at EUR18 000, compared with an average of EUR9000, and handset ARPU is higher than in Germany and Italy), and the relative penetration of mobile services compared with fixed (the Czech Republic and Slovakia are more dependent on mobile  mobile handset penetration exceeds fixed voice penetration in these two countries to a much greater extent than other countries).  We expect mobile handset ARPU to decline in all countries apart from Russia, where multiple-SIM ownership is expected to drop as operators increasingly focus on quality rather than on quantity, which will improve the quality of the customer base. The rate of decline will vary because a few countries, such as Turkey and Ukraine, will benefit from mobile handset under-penetration, and will have a lower ARPU contraction.  The following factors will drive the decline in ARPU.  GDP per capita evolution, which will determine the available income for advanced data services.  Voice price competition, which must also be seen in the context of voice–messaging–data bundles.  Smartphone penetration will increase data usage but will generate a higher risk of OTT cannibalisation. 27 Figure 22: Mobile handset ARPU, 2012 and 2018, handset data ARPU 2018 and smartphone share of handsets, 2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Disposable income will drive LTE handset take-up long-term  The establishment of 4G will take longer in CEE than in WE because of uncertain timetables for spectrum auctions and lower economic capacity. LTE commercial services are now available in 11 of the 14 CEE countries, but we expect slow take-up – and 4G will account for only 22% of handsets by 2018 (54% in WE). LTE services are planned in Bulgaria and Ukraine either in the second half of 2013 or in 2014, whereas they are not expected until 2015 in Turkey, with no timeline in place for the prerequisite spectrum licensing process.  Countries with a higher GDP per capita, such as Slovenia and the Czech Republic, will have a higher LTE penetration because the budget for high-end cellular and advanced services is larger. However, in the Czech Republic, the postponed 4G auction will cause a short-term delay and an acceleration from 2015 onwards. We expect Ukraine and Turkey to lag behind CEE because the mobile handset market is under-penetrated and operators are more likely to focus on serving untapped demand in the short term (2G and 3G networks) rather than technology upgrades. In the case of Ukraine, low income levels will also limit LTE take-up.  LTE penetration will also be driven by operators’ investment in both population and territorial coverage. We expect high 4G penetration in Estonia because EMT, the first operator in Estonia to launch a 4G network, announced coverage of more than 95% of the territorial area in June 2013. 28 Figure 23: Handsets with active 4G SIMs as percentage of handsets with active SIMs, 2013 and 2018 and GDP per capita, 2012 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Fixed broadband penetration will continue to increase and 33% of CEE households will have a NGA connection by 2018  Fixed broadband penetration will continue to increase in all CEE countries, because the household budget for Internet connectivity will likely increase along with the growth of GDP per capita, and the availability of different technologies will grant higher coverage and choice.  Russia will see the largest growth in residential penetration during 2012–2018 (up six percentage points to 52%). The country has a favourable climate for NGA roll-out: liberal planning regulations, a predominance of multiple-dwelling units, and low labour costs that make deployment less expensive than in many other countries. This will help Russia maintain its status as one of the leading fibre markets in the region, with most emphasis placed on FTTB and LAN.  The technology mix will improve, and an average of 33% of all CEE households will have an NGA connection (cable, VDSL or FTTH/B) by 2018, which is below the 43% average in WE.  However, NGA coverage may become an issue affecting future growth. CEE cities often already have good NGA coverage, but little investment has been made in more rural areas, which contrasts with many countries in WE. Incumbents are more likely to look to wireless to fulfil any coverage obligations for voice and broadband than in WE. 29 Figure 24: Fixed broadband household penetration by country, central Europe, 2011–2018 [Source: Analysys Mason, 2013] Figure 25: Fixed broadband household penetration by country, eastern Europe, 2011–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Service type Revenue (CZK million)CAGR 201220182009–20122012–2018 Mobile voice38 877 29 105–6.0%–4.7% Mobile messaging 9652 5224–0.3%–9.7% Handset data 4310 11 3240.3%17.5% Mobile broadband 2337 18812.4%–3.6% M2M 170 6688.0%25.7% Fixed voice (incl. VoBB) 7355 5702–16.0%–4.2% Fixed broadband (incl. IPTV) 13 093 13 5454.6%0.6% Fixed BNS/other 5274 5220–3.2%–0.2% TOTAL 81 068 72 668–4.4%–1.8% Czech Republic: Heightened competition will drive down mobile revenue 31 Figure 27: Growth rate of retail revenue by service type, Czech Republic, 2012 and 2018 [Source: Analysys Mason, 2013]  The emergence of MVNOs during 2012 and the future prospect of a fourth entrant joining the market will result in hefty erosion of mobile revenue.  There is still further room for growth in fixed broadband connections. Some further fixed–mobile substitution in voice is likely (along with further price erosion in response to mobile price trends), but overall the fixed market will remain stable relative to mobile. Figure 26: Retail revenue by service type, Czech Republic, 2010–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  General  The economic climate in the Czech Republic has been more challenging than in many countries in CEE, and this will dampen consumer spending, most acutely in the mobile sector (where there is more discretionary spend). 1  Mobile  Competition was heightened by the launch of the country’s first MVNO (BLESKmobil on O2) in November 2012. The reseller MOBIL.CZ and MVNO Tesco joined in May 2013, and in June 2013, Vodafone announced collaboration with Quadruple, opening up the possibility of quadruple play. The established operators respond quickly to market pressure: when O2 launched its FREE tariff plans in April 2013, Vodafone responded with its unlimited ‘Red’ tariffs in May 2013.  In January, regulator CTU cancelled the 4G auction, citing excessive prices. The new process announced in April 2013 is designed to encourage a fourth entrant in 2014, which we forecast will result in further price drops, particularly in mobile voice.  Fixed  The fixed voice market has already suffered the effects of fixed–mobile substitution, but the introduction of mobile packages with unlimited calls will pull more calling away from the fixed network, and put further pressure on voice prices.  O2 has deployed VDSL-CO, primarily as a mechanism to mitigate churn, and intends to increase VDSL coverage via selective FTTC deployments in order to strengthen its market position. However, O2 has not expressed an intention to enter the FTTH/B arena, which is currently occupied by RIO Media and Netbox.  The fragmented fixed-wireless broadband market is gradually becoming consolidated: O2 has acquired a number of smaller operators, and migrated those customers onto DSL (O2 reported investing CZK123 million (EUR4.9 million) in 2012 on Wi-Fi acquisitions, and CZK235 million (EUR9.6 million) in 2011). However, we expect fixed-wireless to remain a significant technology in the Czech Republic, since a number of the smaller operators remain reluctant to sell. 32 1 According the February 2013 EC growth forecast, after a fall in real GDP in 2012, the Czech economy is expected to stagnate in 2013, and grow only slowly in 2014 European Commission (February 2013), European economic forecasts. Available at http://ec.europa.eu/economy_finance/eu/forecasts/. Czech Republic: Summary of forecast drivers

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  Mobile handset penetration stood at 123% in 2012, so the market is approaching saturation, and we do not expect the total number of subscribers to increase significantly. However, new cut-price offers from MVNOs and a potential new entrant could draw a small number of new customers in the short term. Thereafter, consolidation of handset ownership will cause handset penetration to tail off, to 120% in 2018. The smartphone share of handsets will increase from 31% in 2012 to 78% in 2018. Despite the dominance of mobile in the voice market, mobile broadband has never gained a foothold in the Czech Republic, largely because of the strength of broadband fixed- wireless access. We therefore expect very modest growth in mobile broadband connections, and that all growth will come from connected tablets.  The postponed 4G auction means that the established players have yet to acquire new spectrum, but they have still been in a position to launch LTE with refarmed spectrum. O2 has already announced plans to use refarmed 1800MHz spectrum for LTE, and T-Mobile plans to launch the technology in 2013 using its current frequencies. However, with the auction delayed, it will be 2015 before 10% of device connections are 4G. 1 33 Figure 28: Mobile device connections by type, Czech Republic, 2010–2018 [Source: Analysys Mason, 2013] 1 Handsets and mobile broadband, but excluding M2M. Figure 29: Mobile device connections by technology generation, and mobile penetration rate, Czech Republic, 2010–2018 [Source: Analysys Mason, 2013] 1 Czech Republic: The number of handset or mobile broadband connections will only increase slightly

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  The Czech Republic market has the lowest level of fixed voice household penetration in Europe (24% at 2012, compared with the CEE average of 56% and 74% in WE). Fixed–mobile substitution has been significant for voice, but not broadband.  O2, Orange and T-Mobile all offer naked DSL services, and therefore fixed broadband penetration significantly exceeds voice penetration, at 56%. This is high for the region (the CEE average is 36%), but broadband penetration of households in many Western European countries well exceeds 70%, so there is clearly still scope for the number of fixed broadband connections to grow further.  O2 launched VDSL-CO in May 2011, primarily in an effort to reduce churn, particularly to major competitor UPC. Subscribers were offered the opportunity to have faster Internet access with no increase in their monthly fee. We anticipate that VDSL will continue to grow strongly as this policy is pursued. Small fibre operators such as Netbox have been gaining customers, but O2 has not indicated any plans for extensive roll-out of fibre-based technologies, perhaps because of uncertainties over future ownership. Fixed wireless currently accounts for 33% of broadband connections. Some consolidation is already taking place in this sector, along with some migration onto DSL, so we expect this share to decline to 25% by 2018. 34 Figure 30: Fixed voice and fixed broadband penetration of households, Czech Republic, 2010–2018 [Source: Analysys Mason, 2013] Figure 31: Fixed broadband connections by technology, Czech Republic, 2010–2018 [Source: Analysys Mason, 2013] Czech Republic: Fixed voice penetration is the lowest in Europe, with all three mobile operators offering naked DSL

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  Mobile retail revenue has declined steadily in the Czech Republic since 2009, and cuts in mobile termination rates have led to significant reductions in mobile service revenue, which declined by13% in just two years from 2010 to 2012. The poor economic climate has also placed constraints on customers’ ability to pay, and price competition has been particularly strong in the business market during 2012.  The three main players have been quick to respond to each others’ competitive moves: recent tariff launches such as O2’s FREE portfolio now include unlimited on-net calls and SMS messages in every package. The arrival of MVNOs during 2012 mean that ASPU is expected to continue on a downward trajectory, and this trend will be reinforced further by a new entrant joining the market after the 4G auctions, probably during 2014.  Traditional messaging revenue is under threat from OTT applications. SMS volumes peaked in 2010 and have been declining since then.  Handset data revenue will increase with the adoption of smartphones, but not sufficiently to compensate for losses in traditional revenue streams. 35 Figure 32: Mobile service revenue by type, ARPU and ASPU, Czech Republic, 2010–2018 [Source: Analysys Mason, 2013] 1 1 ARPU and ASPU are calculated from total revenue divided by the average number of handset and mobile broadband connections (M2M connections are excluded from the denominator). Czech Republic: Stronger competition and further MTR cuts will drive mobile revenue down further

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  Fixed voice is such a small part of fixed line revenue that the risk of continuing sharp declines in fixed revenue is small. Fixed voice revenue declined by a CAGR of more than 15% between 2010 and 2012, as fixed–mobile substitution persisted. In 2004 40% of voice minutes originated on the fixed network, but this share had declined to 13% by 2012. We anticipate that the latest batch of mobile tariff plans that include unlimited voice will result in yet more calls migrating to the mobile network, but this transition will be limited, because a minority of customers remain entrenched in their fixed voice habits.  The number of fixed broadband customers will increase at a CAGR of 3% between 2012 and 2018, translating into a small overall revenue growth (CAGR of 0.6%). Competition has driven broadband ASPU downwards. We expect this decline to continue, but it will be ameliorated by network improvements, such as VDSL roll-out and a gradual transition from fibre-LAN to FTTH/B. Increased take-up of IPTV services will also contribute to sustained fixed broadband revenue. IPTV revenue will increase at a CAGR of 3.8% in the forecast period, as TV over broadband is an attractive entertainment option in challenging economic times.  The modest economic outlook means that business network services revenue will only grow slightly until 2016. 36 Figure 33: Fixed service revenue by type, Czech Republic, 2010–2018 [Source: Analysys Mason, 2013] Czech Republic: Fixed revenue will stabilise as broadband revenue offsets further losses in fixed voice

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Service type Revenue (PLN million)CAGR 201220182009–20122012–2018 Mobile voice13 35011 027–1.4%–3.1% Mobile messaging 3414 21381.8%–7.5% Handset data 986 26517.2%17.9% Mobile broadband 1425 146817.9%0.5% M2M 138 33413.5%15.9% Fixed voice (incl. VoBB) 4972 3588–10.1%–5.3% Fixed broadband (incl. IPTV) 2966 32476.1%1.5% Fixed other (BNS/dialup) 1996 22392.6%1.9% TOTAL 29 247 26 692–1.0%–1.5% Poland: Retail revenue erosion is moving from fixed to mobile as unlimited voice and messaging offers drive ARPU down 37 Figure 35: Growth rate of retail revenue by service type, Poland, 2012 and 2018 [Source: Analysys Mason, 2013]  The Polish telecoms market is dominated by mobile, which accounted for about two-thirds of total service revenue in 2012, because mobile voice prices are much lower than fixed (the premium turned negative in 2007) and mobile broadband allows connectivity in areas with poor fixed coverage.  However, mobile revenue will be under heavier pressure during the next few years (CAGR in 2012–2018 will be –2.7% compared with fixed at –1.4%) because price competition is increasing and operators are pushing unlimited voice and messaging offers to gain market share. Figure 34: Retail revenue by service type, Poland, 2010–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  General  The country has experienced remarkable economic growth in the last decade and was one of the few economies of the 27 EU member states that did not go into recession in 2009. However, in recent months the economic situation has worsened somewhat, which is having a negative impact on telecoms revenue. The European Commission (EC) downgraded its forecast for real growth in 2013 to +1.2% in its February 2013 forecasts, from the +2.6% forecast made a year earlier. 1  Mobile  The mobile market has recently been characterised by intense competition, as all operators have launched promotions offering unlimited voice calls and SMS messages to all networks in prepaid and contract segments. These offers are pushing down ARPU and will cause a deterioration of the revenue trend in the next few years. We estimate that mobile handset ARPU will decline by about 4% per year during 2012–2018.  Spectrum allocations for 1800MHz have been concluded, with 800MHz and 2600MHz set to follow (likely to take place in the second half of 2013). The fourth mobile player, Play, is likely to benefit most because extra spectrum will help it deal with its high level of data traffic. This will put further pressure on mobile broadband ARPU and drive higher competition on handset data.  Fixed  Mobile dominates the Polish voice telecoms market, both in terms of lines and call volumes. The decline of fixed voice penetration is likely to continue because mobile voice prices are much lower than fixed, and fixed broadband services are also available without telephony voice subscription.  The fixed broadband market is likely to remain very competitive because cable operators are performing particularly well, aided by their strong position in the TV market and ability to offer attractively priced triple-play bundles as well as infrastructure that has been extensively upgraded to NGA via DOCSIS3.0. Mobile broadband has been very successful, partly because of non- comprehensive fixed broadband coverage, and supplanted DSL as the technology with the most subscribers during 2012. 38 1 European Commission (February 2013), European economic forecasts. Available at http://ec.europa.eu/economy_finance/eu/forecasts/. Poland: Summary of forecast drivers

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  Handset penetration in Poland has grown substantially during the last few years – reaching 121% in 2012 – as inexpensive mobile prices compared with fixed (the mobile premium turned negative in 2007) have supported a strong fixed-mobile line and traffic substitution. Smartphone share of handsets will grow strongly from 26% in 2012 to 75% in 2018.  However, we expect handset penetration to peak in 2014 (126%) and then decline slightly (123% by 2018), as the ongoing cut of MTRs and the offer of unlimited voice calls and SMS messages to all networks, should reduce the need for more than one SIM to optimise the cost of making calls.  Mobile broadband penetration is high in Poland (11% of population in 2012), partly because of non-comprehensive fixed broadband coverage. The fourth mobile player, Play, has played an important role in boosting penetration with its data-focused strategy, but it has had a disruptive effect by driving down prices. Mobile broadband connections will continue to increase (a CAGR of 2.5% in 2012–2018) but revenue will only have a CAGR of 0.5%. Orange is looking to upgrade its data-only CDMA450 network, used mainly for rural broadband, to LTE once 450MHz LTE is standardised.  The take-up of LTE has been slow, because Polkomtel is the only MNO offering 4G services, but we expect LTE to represent 35% of mobile connections by 2018 (excluding M2M). 39 Figure 36: Mobile device connections by type, Poland, 2010–2018 [Source: Analysys Mason, 2013] 1 Handsets and mobile broadband, but excluding M2M. Figure 37: Mobile device connections by technology generation, and mobile penetration rate, Poland, 2010–2018 [Source: Analysys Mason, 2013] 1 Poland: Handset penetration will start to decline after 2014, but smartphone adoption will hit 75% by 2018

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  The decline of residential fixed voice penetration is likely to continue in Poland because of the increasing affordability of mobile services. Strong price competition within the mobile market, not least from challenger Play, has encouraged the trend of increasing mobile and declining fixed-line minutes.  The competition has led to a significantly negative mobile price premium, which was –42% in 2012, a significant increase from –34% in 2010. VoBB has only a minor share of the market. We expect a fixed voice household penetration of 35% at the end of 2018, down from 47% in 2010.  Residential fixed broadband penetration will continue to grow, reaching 57% in 2018, but the market will remain somewhat under-penetrated. This is because of the unusual population distribution in Poland, where only a relatively small percentage of the population live in the largest cities. Mobile broadband has therefore successfully supplanted DSL as the technology with the most subscribers during 2012.  FTTH/B will play a relatively limited role during the forecast period, because the incumbent is concentrating its NGA roll- out on FTTC/VDSL, and cable presence will remain strong. Smaller Ethernet players also hold a significant market share, although they are likely to come under pressure from players able to offer more comprehensive multi-play packages. 40 Figure 38: Fixed voice and fixed broadband residential penetration of households, Poland, 2010–2018 [Source: Analysys Mason, 2013] Figure 39: Fixed broadband connections by technology, Poland, 2010–2018 [Source: Analysys Mason, 2013] Poland: The fixed broadband market will remain competitive as different technologies, including mobile, compete

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  The mobile market in Poland is likely to remain very competitive because the first three MNOs have a roughly equal subscriber size and are competing for the first position. The fourth MNO, Play, which entered the market as a late entrant in 2007, has also been successful in gaining share by stimulating strong price competition in the voice market.  We expect mobile service revenue to decline by 2.7% in 2012–2018 because of further cuts to MTRs, and revenue erosion in both retail voice and messaging services (CAGR of –3.1% and –7.5% respectively), which will suffer high price- competition and substitution to OTT services respectively.  The significant decline of mobile retail revenue will start in 2014 (–0.8%), after a 1% growth both in 2011 and 2012, and stable revenue expected in 2013.  Mobile handset data will present the highest growth (a CAGR of 18% in 2012–2018, driven by a larger mix of smartphones and a low starting base (about 5% of mobile retail revenue in 2012). GDP per capita in Poland is above the CEE average and this will result in higher mobile handset data consumption in the next few years. A recent Analysys Mason survey showed that nearly 10% of Polish respondents who download apps spend at least an additional EUR5 per month (mobile handset ARPU in Poland was EUR9 per month in 2012). 41 Figure 40: Mobile service revenue by type, ARPU and ASPU, Poland, 2010– 2018 [Source: Analysys Mason, 2013] 1 1 ARPU and ASPU are calculated from total revenue divided by the average number of handset and mobile broadband connections (M2M connections are excluded from the denominator). Poland: Mobile retail revenue will decline from 2014 as voice price competition increases and OTT threatens messaging

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  The Polish fixed voice market is in decline as a result of fixed–mobile substitution: only 18% of outgoing voice minutes originated on fixed networks in 2012, and we expect this to decline to 13% in 2018, because mobile prices will become even more attractive than fixed prices. Fixed voice price competition is increasing because cable operators typically offer fixed voice at low prices and in multi-play bundles.  The combined effect of declining fixed voice penetration, fixed–mobile traffic substitution and price competition will cause a 5% decline in fixed voice revenue in 2012–2018.  Fixed broadband revenue will continue to increase, but at a slower rate (a CAGR of 1.5%) because the increase in residential penetration will dilute ARPU, in the context of price competition among different fixed technologies (ADSL-VDSL, cable, Ethernet) and between fixed and mobile.  Business network services will grow at a CAGR of 1.9% between 2012 and 2018, driven by GDP growth, but their contribution to total fixed service revenue will remain low at about 20% in 2018.  Fixed service revenue will show a more resilient performance overall compared with mobile (CAGRs of –1.4% and –2.7% respectively) because mobile voice revenue is predominant in Poland and is at higher risk of contraction. 42 Figure 41: Fixed service revenue by type, Poland, 2010–2018 [Source: Analysys Mason, 2013] Poland: Fixed revenue will continue to decline, but at a slower rate than mobile revenue, where price competition will be stronger

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Service type Revenue (RUB million)CAGR 201220182009–20122012–2018 Mobile voice510 640404 6414.6%–3.8% Mobile messaging61 69137 44513.5%–8.0% Handset data116 437199 94430.9%9.4% Mobile broadband38 95347 65839.3%3.4% M2M201378472.5%25.5% Fixed voice (incl. VoBB)253 229187 852–0.8%–4.9% Fixed broadband (incl. IPTV)99 565119 83019.2%3.1% Fixed BNS/other30 91745 5026.8%6.7% TOTAL 1 113 445 1 050 7197.3%–1.0% Russia: Retail revenue is close to its peak, and will decline from 2014 as price reductions hit the voice market 43 Figure 43: Growth rate of retail revenue by service type, Russia, 2012 and 2018 [Source: Analysys Mason, 2013]  The Russian telecoms market is in many respects saturated, leaving little room for overall revenue growth. Uncertainty around the political attitude to foreign investment may hinder investment in telecoms infrastructure.  Historically strong fixed voice revenue went into decline in 2011, and will be followed by mobile voice in 2013. Growth from other areas will not offset revenue reductions from these services and from mobile messaging. Figure 42: Retail revenue by service type, Russia, 2010–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  General  Under President Medvedev, the Russian economy underwent considerable modernisation and liberalisation, creating a more beneficial environment for telecoms investment. However, his successor, Vladimir Putin, is widely regarded as less of an economic liberal, which may restrict potential foreign investment in the Russian telecoms industry.  Mobile  The Russian mobile market is highly competitive, with many small local and regional operators competing alongside the large national players. This has led to consistent declines in mobile pricing, a trend that we expect to continue. There has been much consolidation in the market, but no operator holds more than 30% of the subscriber base, so the market should remain competitive.  LTE spectrum in the 800MHz and 2.6GHz bands was awarded in June 2012 to four operators (MegaFon, MTS, Rostelecom and VimpelCom), with other bidders, notably Tele2, left disappointed. Another operator, Yota, already operates an LTE network in numerous cities, over frequencies originally used for WiMAX. Despite this early start, Russia will fall behind most of its CEE neighbours in terms of 4G take-up, because of its lower income levels and the lack of handset subsidies in the market.  Fixed  Russia has a favourable climate for NGN roll-out: liberal planning regulations, a predominance of multiple dwelling units, and low labour costs make deployment less expensive than in many other countries. This will help Russia maintain its status as one of the leading fibre markets in the region, with most emphasis being placed on FTTB/LAN.  Fixed voice penetration has held up comparatively well during the last few years, as the mobile penetration has increased substantially. The reorganisation of the incumbent, Rostelecom, as a single nationwide operator is expected to help sustain the fixed market, through better QoS and more competitive pricing. 44 Russia: Summary of forecast drivers

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  Growth in the Russian handset market has slowed markedly in the last two years, and with mobile penetration at 155% as of 2012, we expect negative growth in the handset base.  We expect a reduction in multiple-SIM ownership, particularly in the major cities, because of a reduction in off-net tariffs, a greater emphasis on handset spend, and the introduction of MNP (due by the end of 2013).  Smartphones will account for a smaller share of handsets than in many CEE markets, because of the lack of handset subsidies and low GDP per capita. By 2018, they will account for 72% of handset connections.  Mobile broadband is relatively unimportant in Russia, partly because of the popularity of tethering. Mobile broadband will represent 5% of active SIMs by 2018.  Connected tablets will account for an increasing proportion of SIMS, accounting for 2.9 million SIMs in 2018.  The lack of affordable devices has meant that 3G take-up has been slow, and this will also be the case for 4G. By 2018, 2G will still account for 30% of active SIMs, higher than all other CEE countries except Ukraine.  M2M will remain a niche service, partly because of the low cost of labour (which makes automation uneconomical). 45 Figure 44: Mobile device connections by type, Russia, 2010–2018 [Source: Analysys Mason, 2013] 1 Handsets and mobile broadband, but excluding M2M. Figure 45: Mobile device connections by technology generation, and mobile penetration rate, Russia, 2010–2018 [Source: Analysys Mason, 2013] 1 Russia: The SIM market is saturated and will decline; the move towards more advanced devices and networks will be slow

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  Fixed voice penetration in Russia is higher than the regional average, at 62.5% of households – a slight decline from a peak of 65% in 2008, because of substitution by mobile. We expect a continued slow decline, as continued mobile substitution is mitigated by an increase in fixed voice/broadband bundles.  However, fixed broadband penetration is somewhat below the regional average, at 35%. The market was historically dominated by the incumbent’s DSL services, with a multitude of local operators using a variety of technologies providing the only competition. This tended to keep penetration low.  More recently, rationalisation and consolidation in the market has produced national competitors to Rostelecom that are in a position to compete more effectively. We expect this to continue to stimulate growth in subscribers, to reach a household penetration of 52% by 2018.  FTTB/LAN is now the dominant technology (there is little FTTH). This has been facilitated by lower roll-out costs than in many other European countries.  By 2018 there will be more than17.5 million FTTH/B connections, 61% of total fixed broadband connections. 46 Figure 46: Fixed voice and fixed broadband penetration of households, Russia, 2010–2018 [Source: Analysys Mason, 2013] Figure 47: Fixed broadband connections by technology, Russia, 2010–2018 [Source: Analysys Mason, 2013] Russia: Fixed broadband penetration is catching up with the rest of CEE, driven by low roll-out costs for fibre access

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  Mobile service revenue increased by 9.3% in 2012, the second-highest rate of growth in Europe. Increased voice traffic, and greater use of data services were the main drivers.  Mobile ARPU has been increasing in Russia because of increasing usage per SIM. Users consolidating their expenditure onto a single smartphone is one of the key reasons for this, which drives increased usage of advanced features. We expect ARPU to stabilise at around RUB340 (EUR8.55) per month from 2015.  Total mobile service revenue will peak in 2014 at RUB888 billion (EUR22.3 billion), before declining to RUB812 billion (EUR20.4 billion) in 2018.  Retail voice revenue will enter decline in 2013, because the increase in traffic will be insufficient to counter continued price declines. The increased availability of IP-based alternatives will impact the SMS market, and revenue will start to decline from 2014.  Mobile broadband and handset data services will be the main growth areas, driven by increased availability of 3G and 4G services, and an improving device mix. However, growth in this area will be slower than in many other countries in the region, because of the lower take-up of advanced handsets, low income levels and a highly competitive mobile market. 47 Figure 48: Mobile service revenue by type, ARPU and ASPU, Russia, 2010– 2018 [Source: Analysys Mason, 2013] 1 1 ARPU and ASPU are calculated from total revenue divided by the average number of handset and mobile broadband connections (M2M connections are excluded from the denominator). Russia: Mobile ARPU will increase throughout the forecast period

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 48 Figure 49: Fixed service revenue by type, Russia, 2010–2018 [Source: Analysys Mason, 2013] Russia: The strong economy will boost for business network services, but competition will keep broadband ARPU down  Fixed service revenue in Russia will enter decline in 2013, and shrink at a CAGR of –1.5% during the forecast period.  The price per minute for mobile voice services fell below that of fixed in 2012, having been closing the gap for a number of years. This will cause a further decline in fixed voice services, and restrict operators’ ability to raise prices in response to inflationary pressures.  By 2018, fixed will account for 24% of outgoing voice traffic, compared with 9% in the rest of the region.  Voice revenue will decline to RUB188 billion (EUR4.7 billion) in 2018, down from a peak of RUB270 million (EUR6.7 billion) in 2010.  Competition in the fixed broadband market will depress ARPU and restrict the potential for revenue growth. We forecast a CAGR of 3.1% for 2012  18.  Fixed broadband revenue (including IPTV) will reach RUB120 billion (EUR3.0 billion) in 2018, 30% of total fixed revenue.  Russia’s comparatively good economic outlook will provide a strong impetus for the business network services market, which will have the highest growth in the region.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Service type Revenue (TRY million)CAGR 201220182009–20122012–2018 Mobile voice990610 5194.7%1.0% Mobile messaging143398310.1%–6.1% Handset data1758476139.2%18.1% Mobile broadband56176957.9%5.4% M2M 5021612.4%27.8% Fixed voice (incl. VoBB)53363251–2.6%–7.9% Fixed broadband (incl. IPTV)3195413014.1%4.4% Fixed BNS/other1257177411.0%5.9% TOTAL23 49626 4026.6%2.0% Turkey: Telecoms retail revenue growth will continue through to 2018, but at a decreasing rate 49 Figure 51: Growth rate of retail revenue by service type, Turkey, 2012 and 2018 [Source: Analysys Mason, 2013]  Mobile revenue will continue to grow throughout the forecast period, while fixed revenue will decline from 2013 onwards.  Mobile penetration is the lowest in Europe – at 82% as of 2012 – giving scope for growth in the subscriber base, but at the cost of ARPU dilution.  Mobile data services have proved more popular than fixed, and will grow more strongly than fixed during the forecast period. Figure 50: Retail revenue by service type, Turkey, 2010–2018 [Source: Analysys Mason, 2013]

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  General  Turkey’s economy has one of the highest growth rates in Europe (GDP is forecast to grow at a CAGR of 10.4% in 2012  2018), 1 and its membership of the EU customs area provides a large potential market for its expanding manufacturing sector. Disposable incomes are increasing, giving greater and wider potential for telecoms expenditure.  Mobile  2G population coverage is universal, but 3G lags behind, giving potential for increased usage of advanced data services as roll- outs of 3G/4G continue.  Low penetration gives scope for increased take-up of mobile services, aided by declining prices for basic services, but new users are likely to have lower usage and spend, diluting ARPU and MoU. At the other end of the market, rapid take-up of smartphones will lead to increased spend on advanced mobiles services.  The under-performing fixed broadband sector will continue to provide impetus for mobile Internet services, via mobile broadband USB modems and tablets, as well as on smartphones.  Fixed  The fixed voice sector will enter decline, because of a lack of effective competition, low investment and the increasing availability and affordability of mobile alternatives. Mobile already accounts for more than 90% of voice traffic, and this is set to continue increasing.  Fixed broadband is seen as a utility, and customers generally select packages based on need rather than anything more aspirational. Investment in superfast access networks has been made, but take-up has been unspectacular and without a change in marketing and pricing strategy, this will remain the case. 50 1 European Commission (February 2013), European economic forecasts. Available at http://ec.europa.eu/economy_finance/eu/forecasts/. Turkey: Summary of forecast drivers

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  The number of handsets in Turkey declined in 2008–2010, as reductions in MTRs, the introduction of MNP, and the global economic slowdown contributed to a reduction in multi-SIM ownership and a slower growth of the user base.  Since 2010, growth has returned, and we expect a 43% increase in the number of handset SIMs by 2018, to reach 84.9 million. Of these, almost 72% will be smartphones, up from 19% in 2012.  Take-up of 3G services has been particularly quick in Turkey. Despite being the last country in Europe to launch 3G (in 2009), by the end of 2012 it had the highest level in CEE, with 67% of SIMs on 3G. This reflects the low overall penetration – low-end consumers have no mobile service at all, rather than a cheap 2G service, as in other countries.  Launch of commercial LTE services is not expected until 2015, with no timeline yet in place for the prerequisite spectrum-licensing process.  The USB modem market will be further depressed during the next three years, as light users transfer to smartphones. However, demand in the high-usage substitutive segment will continue to grow, fuelled by the poor fixed offering. Tablets are a new feature of the MBB market, which will drive a return to growth in connections from 2013, but at a lower ARPU. 51 Figure 52: Mobile device connections by type, Turkey, 2010–2018 [Source: Analysys Mason, 2013] 1 Handsets and mobile broadband, but excluding M2M. Figure 53: Mobile device connections by technology generation, and mobile penetration rate, Turkey, 2010–2018 [Source: Analysys Mason, 2013] 1 Turkey: Mobile operators have not addressed low-end consumers; high-end customers have embraced advanced services

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  Fixed voice penetration has declined steadily in recent years, in the face of rising fixed prices and ever-stronger competition from mobile (where prices have been falling). We expect it to continue falling but at a slower rate, the remaining subscriber base being more committed to the fixed service.  Broadband penetration is increasing slowly, and towards the end of the forecast period this will help to maintain the fixed voice market, as more users take up bundled offers.  By 2018, 50% of households will have a fixed broadband connection.  DSL remained the dominant fixed broadband technology at 2012, despite losing market share to cable and fibre, driven by infrastructure investments by Türksat and Turkcell Superonline respectively. These will continue to grow during the forecast period, accounting for 30% of lines in 2018.  Turk Telekom has adopted a plural strategy to fibre roll-out, deploying FTTC, FTTB and FTTH in different locations according to demand. We forecast the number of slower ADSL connections will continue falling initially, as subscribers upgrade to superfast speeds; but from 2016 it will increase again, as rural take-up of basic broadband gathers pace, particularly in the east of the country where availability remains low. 52 Figure 54: Fixed voice and fixed broadband penetration of households, Turkey, 2010–2018 [Source: Analysys Mason, 2013] Figure 55: Fixed broadband connections by technology, Turkey, 2010–2018 [Source: Analysys Mason, 2013] Turkey: Continued slow growth in fixed broadband connections will ultimately sustain fixed voice

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018  The forecast increase in mobile penetration will have the following effects on mobile service revenue.  The incremental users will bring new revenue sources to the market, helping to sustain growth throughout the forecast period. This contrasts with most other countries in the region, which are much nearer saturation point. Turkey and Ukraine are the only countries in the region that will achieve continued growth in mobile revenue right through to 2018.  ARPU will start to decline from 2014. Incremental users have lower incomes and lower interest in mobile services, and will therefore spend less. This will have a diluting effect on the existing subscriber base.  Voice will remain a relatively important revenue stream in Turkey. Incremental users are likely to have only basic handsets with limited functionality and connectivity, so their spend will be focused on traditional services.  Despite this, growth in handset data services will be the strongest of any country in CEE, with a CAGR of 18.1% during the forecast period. 53 Figure 56: Mobile service revenue by type, ARPU and ASPU, Turkey, 2010– 2018 [Source: Analysys Mason, 2013] 1 1 ARPU and ASPU are calculated from total revenue divided by the average number of handset and mobile broadband connections (M2M connections are excluded from the denominator). Turkey: Mobile revenue growth will remain high, driven by new users entering the market, and strong take-up of data services

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 54 Figure 57: Fixed service revenue by type, Turkey, 2010–2018 [Source: Analysys Mason, 2013] Turkey: Legacy voice revenue will continue to be undermined by mobile; broadband growth will remain underwhelming  Fixed revenue was almost flat in 2012, and we expect this to be a lasting trend. The strong mobile sector has out- manoeuvred fixed for all but the highest-spending users, and it is difficult to see what the fixed-line operators can do to counter this.  Fixed voice revenue peaked at more than TRY8 billion (EUR4.8 billion) in 2005, and has declined inexorably ever since. It fell by a third between 2005 and 2012 – and this in nominal terms at a time of high inflation. A 62% drop in fixed traffic in 2005–2012 is the cause of this decline. We forecast continued decline, to TRY3.25 billion (EUR1.4 billion) in 2018.  Despite significant investment in fixed broadband infrastructure, revenue growth has been unspectacular, because users have been reluctant to upgrade to faster packages.  We do not expect a significant change in this situation, because operators are wary of undermining their existing revenue streams by cutting the price of faster services. Growth will therefore remain steady, and revenue will reach TRY4.1 billion (EUR1.8 billion) in 2018.  Strong economic growth will drive growth in business network services second only to Russia in CEE, at a CAGR of 5.9% between 2012 and 2018.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 This report provides forecasts for fixed and mobile telecoms services in 14 individual markets Figure 58: Countries covered in this report [Source: Analysys Mason, 2013] 56  Detailed splits are provided for the following countries:  Bulgaria  Croatia  Czech Republic  Estonia  Hungary  Latvia  Lithuania  In addition, the following are included in the aggregate Central and Eastern Europe dataset:  Albania  Belarus  Bosnia  Macedonia  Poland  Romania  Russia  Slovakia  Slovenia  Turkey  Ukraine.  Moldova  Montenegro  Serbia.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Our forecasts build on Telecoms Market Matrix, a comprehensive source of trusted quarterly market data  In order to accurately size a market, all constituent parts need to be included because:  omissions invalidate total market sizes and skew market averages  smaller players, such as MVNOs, can account for significant customer bases.  Where publicly available data is not available, we use a number of methods to ensure a comprehensive data set:  application of seasonality and quarterly trends  market intelligence  estimates based on historical data, market movements and product launches  benchmarking against peers. Filling in the gaps  Common definitions must be applied in order to make meaningful comparisons within and between markets.  We use quarterly figures for the period in question, not rolling quarterly figures.  We consistently apply a standard definition of active subscribers (for example, to derive metrics such as ARPU).  We ensure that on-net voice traffic data is not double-counted or that roaming-in traffic is not omitted.  Where possible we use reported numbers in their ‘native’ format. Often, we have to reconcile different reporting methodologies with a combination of:  statistical methods  benchmarking and estimation of the elements that account for differences  tracking concurrent metrics and producing blended figures. Applying standard definitions 3 ×   Primary sources of market data are often contradictory.  Where possible, irregularities are removed through the application of standard definitions.  It is important to gain a coherent view of the market.  We reconcile different data sources by:  performing bottom-up and top-down modelling of markets  talking to operators and regulators about their methodologies  making ad hoc judgements based on experience of the market and knowledge of the various sources. Reconciliation of different sources Δ? 57

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Our comprehensive forecast model is supported by a sound knowledge of markets  We have been analysing European telecoms markets for over twenty years and understand the dynamics of the telecoms service market and structural differences between country markets.  All our forecasts are prepared by analysts who understand the numbers and the markets. This is not a number- crunching exercise by statisticians, but a clear statement of the expected development of country markets expressed in numerical form.  The forecasts are intended to predict outcomes, rather than to model market opportunity.  The key assumptions in our forecasts are the product of a considered engagement with likely developments in particular markets. As part of the process, we also solicit opinions on market developments from major players.  We are happy to discuss our key assumptions in more detail with clients. Figure 59: Key factors influencing forecast assumptions [Source: Analysys Mason, 2013] Macro- economics Market insight Inter-country comparison Inter-country comparisons  Knowledge of the structural similarities and differences between markets  Benchmarking with similar markets Macroeconomics  Population, household and workforce trends  GDP forecasts Telecoms market insights  Expected consumer behaviour  Operators’ and vendors’ plans and projections  Expected regulatory developments 58

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Forecast model outline 59 Non-telecoms factors:  GDP  CPI  exchange rates  demographics  labour force  physical sites. Analyst understanding of:  competition  supply-side investment trends  disruptive technologies  device evolution  regulation  pricing trends  end-user behaviour. VoIP PSTN/ISDN Fixed broadband Mobile broadband Mobile voice channels Mobile handset data Handset content/dataMessaging IPTV Voice linesFixed callsBroadbandMobile Total mobile data Basic chargeVAS Volumes, ppm and FMS of total voice market Fixed voice channels The Telecoms Market Matrix analyses raw KPI data and produces a consistent quarterly set of data for volumes and revenue, split out into retail and wholesale and into residential and business. All our country models are based on this same level of detail. Telecoms Market Matrix Core country forecasts (all modelled in local currency) Detailed forecasts More-granular forecasts for specific areas of the telecoms markets are produced as part of our research programmes. These both inform, and are informed by, our core forecasts.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 About the authors [1] 61 Pablo Iacopino (Analyst) focuses on forecasting and analysing telecoms markets in Europe and Latin America. He is co-leader of the Analysys Mason’s Global Telecoms Forecasts programme and a key contributor to the Telecoms Market Matrix. Pablo joined Analysys Mason in 2012, after 8 years in the telecoms industry. He worked for 5 years in Strategy and Investor Relations at Telecom Italia, where he was responsible for European telecoms benchmarking, followed by 3 years in investment banking as a senior equity research analyst covering telecoms stocks. Pablo specialises in industry analysis, benchmarking, modelling, forecasts and valuation. He holds a Master’s degree in business administration and a postgraduate Master’s degree in statistics and economics from Università degli Studi di Roma ‘La Sapienza’. Hilary Bailey (Senior Analyst) has worked for Analysys Mason for more than 20 years. She specialises in quantitative forecast modelling and is a key contributor to Analysys Mason’s Core Forecasts and Country Reports research programmes. Hilary helped to develop and implement our new converged core forecast methodology. She manages and is one of the key contributors to Analysys Mason’s Telecoms Market Matrix, which tracks and compares telecoms metrics and market shares for all the major fixed and mobile operators in Europe. She has previously specialised in telecoms price comparison studies encompassing fixed, mobile and the converged fixed/mobile markets. Hilary has a degree in Economics from the University of Bristol, and an MPhil in Economics from the University of Cambridge. William Hare (Analyst) joined Analysys Mason’s Consulting division in 2007, before transferring to the Research division in 2010. He works primarily on Analysys Mason’s consumer service research, as well as contributing to the modelling behind the Telecoms Market Matrix, wireless traffic forecasting and the Connected Consumer survey. His primary specialisations include business and market modelling and data analysis, for both the mobile and fixed telecoms markets. He read mathematics at the University of Cambridge.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 About the authors [2] Rupert Wood (Principal Analyst) is the lead analyst for Analysys Mason’s Fixed Networks research programme. His primary areas of specialisation include next-generation networks, long-term industry strategy and forecasting the dynamics of convergence and substitution across fixed and mobile platforms. Rupert regularly contributes to the international press on a wide range of telecoms subjects and has been quoted by The Times, The Economist, Business Week, La Tribune and Kommersant. Rupert has a PhD from the University of Cambridge, where he was a Lecturer before joining Analysys Mason. 62

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 About Analysys Mason Knowing what’s going on is one thing. Understanding how to take advantage of events is quite another. Our ability to understand the complex workings of telecoms, media and technology (TMT) industries and draw practical conclusions, based on the specialist knowledge of our people, is what sets Analysys Mason apart. We deliver our key services via two channels: consulting and research. 63 Consulting  Our focus is exclusively on TMT.  We support multi-billion dollar investments, advise clients on regulatory matters, provide spectrum valuation and auction support, and advise on operational performance, business planning and strategy.  We have developed rigorous methodologies that deliver tangible results for clients around the world. For more information, please visit www.analysysmason.com/consulting. Research  We analyse, track and forecast the different services accessed by consumers and enterprises, as well as the software, infrastructure and technology delivering those services.  Research clients benefit from regular and timely intelligence in addition to direct access to our team of expert analysts.  Our dedicated Custom Research team undertakes specialised and bespoke projects for clients. For more information, please visit www.analysysmason.com/research.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Research from Analysys Mason 64 We provide dedicated coverage of developments in the telecoms, media and technology (TMT) sectors, through a range of research programmes that focus on different services and regions of the world. Alongside our standardised suite of research programmes, our Custom Research team undertakes specialised, bespoke research projects for clients. The dedicated team offers tailored investigations and answers complex questions on markets, competitors and services with customised industry intelligence and insights. To find out more, please visit www.analysysmason.com/research.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Consulting from Analysys Mason For more than 25 years, our consultants have been bringing the benefits of applied intelligence to enable clients around the world to make the most of their opportunities. 65 Our clients in the telecoms, media and technology (TMT) sectors operate in dynamic markets where change is constant. We help shape their understanding of the future so they can thrive in these demanding conditions. To do that, we have developed rigorous methodologies that deliver real results for clients around the world. Our focus is exclusively on TMT. We advise clients on regulatory matters, help shape spectrum policy and develop spectrum strategy, support multi-billion dollar investments, advise on operational performance and develop new business strategies. Such projects result in a depth of knowledge and a range of expertise that sets us apart. We help clients solve their most pressing problems, enabling them to go farther, faster and achieve their commercial objectives. To find out more, please visit www.analysysmason.com/consulting.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Published by Analysys Mason Limited Bush House North West Wing Aldwych London WC2B 4PJ UK Tel: +44 (0)845 600 5244 Fax: +44 (0)845 528 0760 Email: research@analysysmason.com www.analysysmason.com/research Registered in England No. 5177472 © Analysys Mason Limited 2013. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior written permission of the publisher. Figures and projections contained in this report are based on publicly available information only and are produced by the Research Division of Analysys Mason Limited independently of any client- specific work within Analysys Mason Limited. The opinions expressed are those of the stated authors only. Analysys Mason Limited recognises that many terms appearing in this report are proprietary; all such trademarks are acknowledged and every effort has been made to indicate them by the normal UK publishing practice of capitalisation. However, the presence of a term, in whatever form, does not affect its legal status as a trademark. Analysys Mason Limited maintains that all reasonable care and skill have been used in the compilation of this publication. However, Analysys Mason Limited shall not be under any liability for loss or damage (including consequential loss) whatsoever or howsoever arising as a result of the use of this publication by the customer, his servants, agents or any third party.

© Analysys Mason Limited 2013 Central and Eastern Europe telecoms market: trends and forecasts 2013–2018 Research Forecast Report Central and Eastern Europe.

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