IP Transformation Beyond the Boxes (2007)

1. IP TRANSFORMATION Beyond the Boxes Marc Jadoul Montreux, 20 November 2007 IP TRANSFORMATION CENTER Partnering for change

2. Read in the Press … 2 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

3. Why Service Providers are Transforming their Business 3 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

4. Why “Doing Nothing” is NO Alternative … ‘Legacy’ dominates revenue mix Low margins on new services Fast erosion of legacy revenues Impact on EBITDA margins = + * Growth Growth ~ 25 % ~ 45 % (~ 2- 4 %) YoY 42 % 35 % ~ 75 % Legacy ~ 55 % Legacy Revenue Mix 2000 2003 2004 2005 2007 EBITDA Mix Legacy revenues Source: service provider reports, Morgan Stanley Low return (RoA, RoI) due to ‘legacy’ & ‘proprietary’ infrastructure. Limited innovation capacity due to network silos & heavy processen/IT. Market Cap /Revenue EV/PPE OPEX/Revenue CAPEX/Revenue Traditionele telecom service providers < 3 < 5 > 62% > 18% New market players (Google, Yahoo, eBay, ...) > 8 > 53 < 47% < 10% RoA= Return on Assets; RoI = Return on Investments EV = Enterprise Value; PPE = Property, Plant, Equipment Source: the Yankee Group, Alcatel-Lucent 4 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

5. The Approach — Business Transformation vs. Network Upgrade “Upgrade” approach • Tactical infrastructure upgrades • Unchecked/uncontrollable TCO • Poor user experience • Technology and operations “silos” “Transformation” approach • Strategic network transformation • Cost control & investment protection • Managed end-to-end QoS/QoE • Global IP transformation project Optimize for “where you have been” Optimize for “where you are going” Costs Costs QoE QoE OpEx OpEx CapEx CapEx Time Time Increased churn - ARPU erosion - margin pressure Customer focus - ARPU expansion - margin protection 5 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

6. The Scope (1) — Cost Optimization along the Entire Value Chain Developing new markets & products Acquiring & managing customers Developing & providing network services Enterprise management 10% 31% 49% 10% OPEX Network Develop- ment Finance & Accoun- ting Mkting and NPD Customer Care Billing & Collections Order Fulfillment Service Assurance Procure- ment Sales HR IT 10% 5% 12% 14% 9% 8% 32% 5% 2% 2% 1% OPEX 4% 1% 1% 2% 3% 2% 83% 1% 1% 1% 1% CAPEX Notes: *Global spending breakouts are an average of Europe, Asia Pacifi c and U.S. wireline carriers, and were derived from U.S. benchmarks using total cost of goods sold (COGS) and Sales, general & administrative (SG&A). ** CAPEX breakouts are based on U.S. benchmark only. Source: Global service provider annual and quarterly reports, FCC ARMIS Database; IBM Institute for Business Value analysis. 6 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

7. The Scope (2) — Convergence in Network AND Services Service Provider’s perspective End-User’s perspective + + + Voice IP VoIP Phone iPod PDA iPhone + + Fixed Mobile FMC Gaming Communication XBox360, Wii, PS3 + + + Internet Telephony Video Triple Play TV Personalization ShareTV + + + Fixed Mobile ISP Nextgen SP Mobility Office Mobile Office 7 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

8. The Benefits — Bottom-line Improvement across Different Domains Cash Benefit (x1000 NZ$) • Outsourcing benefits • Operational cost savings • Sales & support • New business opportunities • “One-off” Benefits • Other 70,000 60,000 50,000 • Vendor reduction benefit • NGN transition benefit 40,000 30,000 • Inventory mngmnt savings • Depreciation savings • Promotions • IP edge margin retention • DSL business penetration • DSL consumer penetration 20,000 10,000 2002 2003 2004 2005 Source: Telecom New Zealand, Gartner 8 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

9. What are Other Service Providers Doing TODAY ? Integration of networks to allow cost synergies Optimization of the network and operations Streamlining processes and IT systems Number of OSS/BSS systems Cost synergies from integration & transformation Cumulative OpEx savings €850M >$5B 1252 >$3B €450M $1.1B €150M ~50 2006 2007 2008 2005 2007 2009 2006 2011 Simplifying the product portfolio and the ‘customer experience’ Transforming the legacy network to support growth assets Focus on investing in growth services Broadband share in CAPEX mix Revenues from new-wave services Products in portfolio ~100 36.5 % 64% ~50 18.3% 27% 2000 2005 2005 2006 2004 2007 Source: service providers reports and analyst presentations 9 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

10. IP is a Means, NOT the Target ... Services Infrastructure • Portfolio rationalization • New customers, higher ARPU • Enhanced ‘user experience’ • ‘All IP’ network • IMS and SDP • Getting rid of silos ! Operations • Time-to-market • Cost reduction • Processes & organization 10 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

11. Case Study* — an European Fixed Incumbent Revenues (M€) EBITDA margin (%) 3.500 € 45% 40% 3.000 € 35% 2.500 € 30% 25% 2.000 € 20% Baseline scenario Baseline scenario 1.500 € Target scenario Target scenario 15% 1.000 € 10% 2004 2005 2006 2007 2008 2009 2010 2011 2004 2005 2006 2007 2008 2009 2010 2011 Environmental impact from: Transformation impact from: Price erosion Take rate Customer churn • Service Delivery (NGN/IMS/SDP) • New services/bundles (VoIP, IPTV, Multimedia) • Network transformation (All-IP) • Process re-engineering and NG OSS/BSS • Competition • Regulation • Internal/external costs evolution (*) business case simulation based on anonymized service provider reports, analyst data and extrapolations of the former 11 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

12. Impact of Transformation on the Business Results Impact on revenues Impact on EBITDA 71% 64% 13% 6% 29% 17% Transformation impact from: Service Delivery (NGN/IMS/SDP) New services/bundles (VoIP, IPTV, Multimedia) Network transformation (All-IP) Process re-engineering and NG OSS/BSS 12 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

13. Some Lessons Learnt from this Case Study • IP Transformation changes everything • Regain economies of scale and allow cost synergies • User-centricity is the new paradigm • QoS is more than ‘bits per second’ • “Less is More” and “Simpler is Better” … • … but don’t under-estimate end-to-end complexity • No service innovation without network capabilities • OSS/BSS modernization goes hand in hand with BPR • Need for a “holistic” vision and roadmap • Migration will not happen overnight • Internal alignment & external communication • Each transformation project is unique … QoE 13 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

14. Why Telco-Supplier Relationships are Changing “ As more IP transformation projects launch, their inherent complexity will steer carriers towards closer ties with fewer vendors. It is happening already.” “ As time passes, carriers will invariably be drawn into closer relationships with fewer vendors — and those vendors will play a more active role in planning and building networks.” Andrew Chetham, Gartner 14 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

15. Approaches to Carrier-Vendor Partnering Leverage partner’s experience for an aggressive roll-out • Streamlined decision, 3rdparty procurement, implementation and management process Strategic Partner Retain in-house control of multiple projects • Selected suppliers directly managed by the Service Provider Multiple Vendors “ With Telstra following the example of SBC and with other operators such as TNZ also adopting this approach… [Alcatel-Lucent]’s turnkey proposition does seem to be resonating well with a growing number of major global operators.” JP Morgan, November 2005 15 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

16. Benefits of a Strategic Partnering Model Tech. strategy & CapEx allocation Technology selection & planninjg Tender spec preparation Evaluate & select vendor Delivery / post-sales support Business driver need Negotiate & place order Traditional Decision Process Strategic Partnering Model Strategic Partnering Model Multiple Vendor Model Benefits Short process (3-4 months); vendor assists in technology evaluation, rapid pilot and rollout Long process (12-18 months) of technology spec, tender selection, pilot & rollout Time to Market Integrated network with lower total cost of ownership, low vendor management costs Complex network, high total cost of ownership; high vendor management costs Network & Cost Telco has access to Strategic Partner’s global expertise, R&D, products, solutions Global expertise generally not provided unless at a cost or little incentive Global Expertise Pricing outcomes vary dependent on state of market, number of competitive vendors, incumbency Benchmarking and risk-reward model ensures that vendors provide attractive price Pricing Risk-reward model allows vendors to get more upside Incentives No incentives for vendors Vendor can work in alignment with telco to prepare business cases and help make good investment decisions Good investment decisions Widespread deskilling in Telcos can potentially lead to slow and poor decisions Enables telco to focus on core competencies by outsourcing/outtasking non-core activities to vendor Limited opportunity for Telco except when functions are outsourced under contractual relationship Focus on competencies 16 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

17. Alcatel-Lucent’s Partnering Approach to IP Transformation Cross-domain Multi-vendor End-to-End Business Transformation Network Transform. Service Transform. Consult 1 Stakeholder Engagement Maintain & Operate 5 Design 2 Deploy 4 Integrate 3 Full-lifecycle Professional Services Prime Integrator 17 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

18. Alcatel-Lucent IP Transformation Centers Regional competence centers •Business/Technology Consulting •Network/System/Solution Design •Network/System Integration & Validation •Technology/Services/Subscriber Migration •Project/Program/3rdParty Management End-to-end hosted integration facilities •Multi-technology, multi-vendor •Network, CPE, IT and applications Alcatel-Lucent IPTCs launched in Europe, North America and Asia Pacific IPTC’s mission: “Assist Service Providers in defining, executing and managing their transformation journey.” 18 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

19. Alcatel-Lucent IPTC in Antwerp, Belgium First center of such scale in Europe •1500 m2lab and integration floor •50+ cutting-edge technologies (network, IT, ops, apps., test, …) •80+ multi-domain experts (consultants, designers, engineers, …) •End-to-end: from satellite antenna to 500 xDSL modems bank •Can handle up to 10 large projects Flexible integration of reliable solutions •More than 150 km UTP cable and fiber •More than 15000 patch ports, AC/DC everywhere •Unique concept, no sub-floor cabling •One ‘virtual’ lab across ALU Antwerp campus •Secure interconnection with other ALU, 3rd party & customer premises/network Serving customers in Europe, Middle-East, CIS, Africa and Central/Latin America •300 IPTC visits since opening in September ‘06 •About 30% of customer audience is CxO level 19 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

20. The Conclusion (1) — Making IP Transformation “Predictable” Containing costs and De-risking investments • Shareholder-proof business case • Scalable all-IP architecture • Market-proof service roadmap • The right skills and experience • End-to-end integration • Streamlined business processes • Cost-effective OSS/BSS Hidden costs and risks ! • Overall project management 20 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

21. The Conclusion (2) — IP Transformation “Beyond the Boxes” Infrastructure: reduce costs • Strengthen IP footprint and BB coverage • Simplified architecture, getting rid of network and service“stovepipes” Services: fuel growth • Right portfolio mix • Streamlined and redesigned end-to-end delivery process Operations: free up cash • Leverage cost saving programs • Automated processes with optimized systems & tools • Alternative partnership models Transform predictably. Transform comprehensively. Transform profitably. 21 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007

22. www.alcatel-lucent.com www.alcatel-lucent-iptc.com www.alcatel-lucent.com marc.jadoul@alcatel-lucent.be 22 | NGN Europe - Montreux | 20 November 2007 All Rights Reserved ©Alcatel-Lucent 2007