20-F 1 dp22177_20f.htm FORM 20-F Unassociated Document
As filed with the Securities and Exchange Commission on April 29, 2011


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 20-F

(Mark One)
   
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
OR
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
 
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
 
 
OR
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 

Commission file number: 001-09531
 
TELEFÓNICA, S.A.
(Exact name of Registrant as specified in its charter)
 
KINGDOM OF SPAIN
(Jurisdiction of incorporation or organization)
 
Distrito C, Ronda de la Comunicación, s/n
28050 Madrid, Spain
(Address of principal executive offices)
 
Lucila Rodriguez Jorge, Securities Legal Department
Distrito C, Ronda de la Comunicación, s/n, 28050 Madrid, Spain
Tel.  +34 91 482 3734, Fax.  +34 91 482 3768, e-mail: amv@telefonica.es

María García-Legaz Ponce, Head of Investor Relations,
Distrito C, Ronda de la Comunicación, s/n, 28050 Madrid, Spain
Tel.  +34 91 482 8700, Fax.  +34 91 482 8600, e-mail: ir@telefonica.es
(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
 
Name of each exchange on which registered
Ordinary Shares, nominal value €1.00 per share*
American Depositary Shares, each representing one
Ordinary Share
 
New York Stock Exchange
New York Stock Exchange
     
Guarantees** by Telefónica, S.A. of the $1,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2011; $750,000,000 Fixed Rate Guaranteed Senior Notes Due 2013; $850,000,000 Floating Rate Guaranteed Senior Notes Due 2013; $1,200,000,000 Fixed Rate Guaranteed Senior Notes Due 2013; $1,250,000,000 Fixed Rate Notes Due 2015; $900,000,000 Fixed Rate Guaranteed Senior Notes Due 2015; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $700,000,000 Fixed Rate Guaranteed Senior Notes Due 2017; $1,000,000,000 Fixed Rate Notes Due
 
New York Stock Exchange
 
 
 
 

 
 
 
2019; $1,400,000,000 Fixed Rate Guaranteed Senior Notes Due 2020; $1,500,000,000 Fixed Rate Guaranteed Senior Notes Due 2021; $2,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2036; each of Telefónica Emisiones, S.A.U.    
 
*
Not for trading, but only in connection with the listing of American Depositary Shares, pursuant to the requirements of the New York Stock Exchange.
 
**
Not for trading, but only in connection with the listing of the $1,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2011; $750,000,000 Fixed Rate Guaranteed Senior Notes Due 2013; $850,000,000 Floating Rate Guaranteed Senior Notes Due 2013; $1,200,000,000 Fixed Rate Guaranteed Senior Notes Due 2013; $1,250,000,000 Fixed Rate Notes Due 2015; $900,000,000 Fixed Rate Guaranteed Senior Notes Due 2015; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $700,000,000 Fixed Rate Guaranteed Senior Notes Due 2017; $1,000,000,000 Fixed Rate Notes Due 2019; ; $1,400,000,000 Fixed Rate Guaranteed Senior Notes Due 2020; $1,500,000,000 Fixed Rate Guaranteed Senior Notes Due 2021; $2,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2036;each of Telefónica Emisiones, S.A.U.  (a wholly-owned subsidiary of Telefónica, S.A.)

 Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 The number of outstanding shares of each class of capital stock of Telefónica, S.A. at December 31, 2010 was:
 
Ordinary Shares, nominal value €1.00 per share: 4,563,996,485
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes x      Noo
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes o      Nox
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x      Noo
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes o      Noo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x         Accelerated filero          Non-accelerated filero
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP o    International Financial Reporting Standards as Issued by the international Accounting Standards Boardx    Other o
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17 o      Item 18o
 
If this is an annual report indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o      Nox
 



 
 
 
 


 
Page
 
1
3
6
7
Identity of Directors, Senior Management and Advisors
7
Directors and Senior Management
7
Advisers
7
Auditors
7
Offer Statistics and Expected Timetable
7
Key Information
7
Selected Financial Data
7
Capitalization and Indebtedness
9
Reasons for the Offer and Use of Proceeds
10
Risk Factors
10
Information on the Company
16
History and Development of the Company
16
Business Overview
22
Organizational Structure
75
Property, Plant and Equipment
75
Unresolved Staff Comments
77
Operating and Financial Review and Prospects
77
Operating Results
77
Liquidity and Capital Resources
115
Research and Development, Patents and Licenses, etc.
119
Trend Information
121
Off-Balance Sheet Arrangements
122
Tabular Disclosure of Contractual Obligations
122
Directors, Senior Management and Employees
123
Directors and Senior Management
123
Compensation
131
Board Practices
136
Employees
137
Share Ownership
137
Major Shareholders and Related Party Transactions
138
Major Shareholders
138
Related Party Transactions
139
Interests of Experts and Counsel
140
Financial Information
140
The Offering and Listing
144
Offer and Listing Details
144
Plan of Distribution
148
Markets
148
Selling Shareholders
148
Dilution
148
Expenses of the Issue
148
Additional Information
149
Share Capital
149
Memorandum and Articles of Association
149
Material Contracts
152
Exchange Controls
155
 
 
 
 
Taxation
156
Dividends and Paying Agents
161
Statements by Experts
161
Documents on Display
161
Subsidiary Information
161
Quantitative and Qualitative Disclosures About Market Risk
161
Description of Securities Other Than Equity Securities
162
American Depositary Shares
162
165
Defaults, Dividend Arrearages and Delinquencies
165
Material Modifications to the Rights of Security Holders and Use of Proceeds
165
Controls and Procedures
165
[Reserved]
165
Audit Committee Financial Expert
165
Code of Ethics
165
Principal Accountant Fees and Services
166
Exemptions from the Listing Standards for Audit Committees
167
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
167
Change in Registrant’s Certifying Accountant
167
Corporate Governance
168
 
169
Financial Statements
169
Financial Statements
170
Exhibits
171
 

 
 
This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  The forward-looking statements in this Annual Report can be identified, in some instances, by the use of words such as “will,” “expect,” “aim,” “hope,” “anticipate,” “intend,” “believe” and similar language or the negative thereof or by the forward-looking nature of discussions of strategy, plans or intentions.  These statements appear in a number of places in this Annual Report including, without limitation, certain statements made in “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” and include statements regarding our intent, belief or current expectations with respect to, among other things:
 
 
·
the effect on our results of operations of competition in telecommunications markets;
 
 
·
trends affecting our financial condition or results of operations;
 
 
·
acquisitions or investments which we may make in the future;
 
 
·
our capital expenditures plan;
 
 
·
our estimated availability of funds;
 
 
·
our ability to repay debt with estimated future cash flows;
 
 
·
our shareholder remuneration policies;
 
 
·
supervision and regulation of the telecommunications sectors where we have significant operations;
 
 
·
our strategic partnerships; and
 
 
·
the potential for growth and competition in current and anticipated areas of our business.
 
Such forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties, and actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors.  The risks and uncertainties involved in our business that could affect the matters referred to in such forward-looking statements include but are not limited to:
 
 
·
changes in general economic, business or political conditions in the domestic or international markets (particularly in Latin America) in which we operate or have material investments that may affect demand for our services;
 
 
·
changes in currency exchange rates, interest rates or in credit risk in our treasury investments or in some of our financial transactions;
 
 
·
general economic conditions in the countries in which we operate;
 
 
·
existing or worsening conditions in the international financial markets;
 
 
·
the actions of existing and potential competitors in each of our markets;
 
 
·
the impact of current, pending or future legislation and regulation in countries where we operate;
 
 
·
failure to renew or obtain the necessary licenses, authorizations and concessions to carry out our operations;
 
 
·
the potential effects of technological changes;
 
 
 
 
 
·
the impact of limitations in spectrum capacity;
 
 
·
failure of suppliers to provide necessary equipment and services on a timely basis;
 
 
·
the impact of unanticipated network interruptions;
 
 
·
the effect of reports suggesting that radio frequency emissions cause health problems;
 
 
·
the impact of impairment charges on our goodwill and assets as a result of changes in the regulatory, business or political environment; and
 
 
·
the outcome of pending litigation.
 
Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date of this Annual Report.  We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date of this Annual Report including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.
 
 
 
 
 
Our ordinary shares, nominal value €1.00 per share, are currently listed on each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges and are quoted through the Automated Quotation System under the symbol “TEF.”  They are also listed on various foreign stock exchanges such as the London, Buenos Aires and Tokyo stock exchanges.  American Depositary Shares (“ADSs”), each representing the right to receive one ordinary share, are listed on the New York Stock Exchange and on the Lima Stock Exchange.  ADSs are evidenced by American Depositary Receipts (“ADRs”) issued under a Deposit Agreement with Citibank, N.A., as Depositary.  Brazilian Depositary Receipts (“BDRs”), each representing the right to receive one ordinary share, are listed on the São Paulo Stock Exchange and are issued under a deposit agreement with Banco Bradesco, S.A., as Depositary.  On March 30, 2011, we initiated a plan to cancel the BDR Program and delist our securities from the São Paulo Stock Exchange. We expect that the BDR Program cancellation and delisting process will be completed in the second half of 2011.
 
As used herein, “Telefónica,” “Telefónica Group,” “Group” and terms such as “we,” “us” and “our” mean Telefónica, S.A. and its consolidated subsidiaries, unless the context requires otherwise.
 
As used herein, “Atento” means Atento Holding, Inversiones y Teleservicios, S.A. and its consolidated subsidiaries, unless the context requires otherwise.
 
Below are definitions of certain technical terms used in this Annual Report:
 
·
“Access” refers to a connection to any of the telecommunications services offered by us.  We present our customer base using this model because the integration of telecommunications services in bundled service packages has changed the way residential and corporate customers contract for our services.  Because a single customer may contract for multiple services, we believe it is more accurate to count the number of accesses, or services a customer has contracted for, as opposed to only counting the number of our customers.  For example, a customer that has fixed line telephony service and broadband service represents two accesses rather than a single customer.  In addition, we fully count the accesses of all companies over which we exercise control or joint control.  The following are the main categories of accesses:
 
 
·
Fixed telephony accesses: includes public switched telephone network, or PSTN, lines (including public use telephony), and integrated services digital network, or ISDN, lines and circuits.  For purposes of calculating our number of fixed line accesses, we multiply our lines in service as follows: PSTN (x1); basic ISDN (x1); primary ISDN (x30, x20 or x10); 2/6 digital accesses (x30).
 
 
·
Internet and data accesses: includes broadband accesses (retail asymmetrical digital subscriber line “ADSL,” satellite, fiber optic and circuits over 2 Mbps), narrowband accesses (Internet service through the PSTN lines) and other accesses, including the remaining non-broadband final client circuits.  “Naked ADSL” allows customers to subscribe for a broadband connection without a monthly fixed line fee.
 
 
·
Pay TV: includes cable TV, direct to home satellite TV, or DTH, and Internet Protocol TV, or IPTV.
 
 
·
Mobile accesses: includes accesses to mobile network for voice and/or data services (including connectivity). Mobile broadband includes internet access from devices used to make voice calls and smartphones (mobile internet), and internet access from devices that complement fixed broadband, such as  PCCards/dongles, and enable large amounts of data to be downloaded on the move (mobile connectivity).  In 2009 in order to align the criteria for the key performance indicators of our mobile operations, the definition of mobile accesses (and, therefore, of total accesses) was revised to include machine-to-machine accesses.  Mobile accesses are categorized into contract and prepay accesses.  In addition, we revised the accounting criteria for pre-pay mobile accesses at Telefónica O2 Czech Republic and Telefónica O2 Slovakia to conform to the accounting criteria for pre-pay mobile accesses throughout the Group.  In order to count a pre-pay mobile access, such access must have been active in the most recent three months prior to counting, through a revenue-generating event for our Group from whatsoever source.  As a result of both revisions, we restated 2008 mobile accesses.
 
 
 
 
 
·
Unbundled local loop, or ULL: includes accesses to both ends of the copper local loop leased to other operators to provide voice and DSL services (fully unbundled loop, fully UL) or only DSL service (shared unbundled loop, “shared UL”).
 
 
·
Wholesale ADSL: means wholesale asymmetrical digital subscriber line.
 
 
·
Other: includes other circuits for other operators.
 
Certain technical terms used with respect to our business are as follows:
 
 
·
“ARPU” is the average revenue per user per month.  ARPU is calculated by dividing total service revenue (excluding inbound roaming revenue) from sales to customers for the preceding 12 months by the weighted average number of accesses for the same period, and then divided by 12 months.  ARPU is calculated using gross service revenue before deduction of wholesale discounts.
 
 
·
“CDMA” means Code Division Multiple Access, which is a type of radio communication technology.
 
 
·
“Commercial activity” includes the addition of new lines, replacement of handsets, migrations and changes in types of contracts.
 
 
·
“Customer revenue” means service revenue less interconnection revenue.
 
 
·
“Duo bundle” means broadband plus voice and/or TV service.  We measure “duo bundles” in terms of units, where each bundle of broadband and voice service counts as one unit.
 
 
·
“Digital Dividend” refers to the amount of spectrum that will be freed up in the switchover from analogue to digital terrestrial TV.
 
 
·
“FTTx” is a generic term for any broadband network architecture that uses optical fiber to replace all or part of the metal local loop typically used for the last mile of telecommunications wiring.
 
 
·
“Final client accesses” means accesses provided to residential and corporate clients.
 
 
·
“Gross adds” means the gross increase in the customer base measured in terms of accesses in a period.
 
 
·
“HSDPA” means High Speed Downlink Packet Accesses, which is a 3G mobile telephony communications protocol in the High-Speed Packet Access (HSPA) family, which allows networks based on UMTS to have higher data transfers speeds and capacity.
 
 
·
“Interconnection revenue” means revenues received from other operators which use our networks to connect to our customers.
 
 
·
“ISP” means Internet service provider.
 
 
·
“IT”, or information technology, is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications.
 
 
·
“LMDS” means local multipoint distribution service.
 
 
·
“LTE” means Long Term Evolution, a wireless access technology.
 
 
·
“Local loop” means the physical circuit connecting the network termination point at the subscriber’s premises to the main distribution frame or equivalent facility in the fixed public telephone network.
 
 
·
“M2M”, or machine to machine, refers to technologies that allow both wireless and wired systems to communicate with other devices of the same ability.
 
 
·
“MOU,” or minutes of use, is calculated by dividing the total number of voice minutes for the preceding 12 months by the weighted average number of mobile accesses for the same period, and then divided by 12 months.  Over the past several years, we have experienced strong growth in mobile accesses related
 
 
 
primarily to data services (such as accesses related to machine-to-machine and mobile broadband devices).  Such growth in mobile accesses related to data services limits the use of MOU as an indicator of usage as it increases the total number of mobile accesses in the relevant period without any corresponding increase in the number of voice minutes related to such accesses for the relevant period.  As a result, we no longer publish MOU for years after 2008 and instead publish traffic evolution in absolute minutes of use.
 
 
·
“MVNO” means mobile virtual network operator, which is a mobile operator that is not entitled to use spectrum for the provision of mobile services.  Consequently, an MVNO must subscribe to an access agreement with a mobile network operator in order to provide mobile access to their customers.  An MVNO pays such mobile network operator for using the infrastructure to facilitate coverage to their customers.
 
 
·
“Net adds” means the difference between the customer base measured in terms of accesses at the end of the period and the beginning of a period.
 
 
·
“Revenues” means net sales and revenues from rendering of services.
 
 
·
“Service revenues” means revenues less revenues from handset sales.
 
 
·
“Traffic” means voice minutes used by our customers over a given period, both outbound and inbound.  On-net traffic is only included once (outbound), and promotional traffic (free minutes included in commercial promotions) is included.  Traffic not associated with our mobile customers (roaming-in; MVNOs; interconnection of third parties and other business lines) is excluded.  To arrive at the aggregate traffic for a given period, the individual components of traffic are not rounded.
 
 
·
“Trio bundle” means broadband plus voice service plus TV.  We measure “trio bundles” in terms of units, where each bundle of broadband, voice service and TV counts as one unit.
 
 
·
“UMTS” means Universal Mobile Telecommunications System.
 
 
·
“VoIP” means voice over Internet protocol.
 
 
·
“Wholesale accesses” means accesses we provide to our competitors, who then sell services over such accesses to their residential and corporate clients.
 
In this Annual Report we make certain comparisons in local currency or on a “constant euro basis” or “excluding foreign exchange rate effects” in order to present an analysis of the development of our results of operations from year-to-year without the effects of currency fluctuations.  To make comparisons on a local currency basis, we compare financial items in the relevant local currency for the periods indicated as recorded in the relevant local currency for such periods.  To make comparisons on a “constant euro basis” or “excluding foreign exchange rate effects,” we convert the relevant financial item into euros using the prior year’s average euro to relevant local currency exchange rate.  In addition, we present certain financial information excluding the effects of Venezuela being considered a hyperinflationary economy in 2010 and 2009 by eliminating all adjustments made as a result of such consideration.
 
 
 
In this Annual Report, references to “US dollars,” “dollars” or “$,” are to United States dollars, references to “pounds sterling,” “sterling” or “£” are to British pounds sterling, references to “reais” refer to Brazilian reais and references to “euro” or “€” are to the single currency of the participating member states in the Third Stage of the European Economic and Monetary Union pursuant to the treaty establishing the European Community, as amended from time to time.
 
Our consolidated financial statements as of December 31, 2009 and 2010, and for the years ended December 31, 2008, 2009 and 2010 included elsewhere in this Annual Report including the notes thereto (the “Consolidated Financial Statements”), are prepared in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
 



 
 
 
 
Not applicable.
 
 
Not applicable.
 
 
Not applicable.
 
 
Not applicable.
 
 
 
The following table presents certain selected consolidated financial data.  It is to be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the Consolidated Financial Statements.  The consolidated income statement and cash flow data for the years ended December 31, 2008, 2009 and 2010 and the consolidated statement of financial position data as of December 31, 2009 and 2010 set forth below are derived from, and are qualified in their entirety by reference to the Consolidated Financial Statements.  The consolidated income statement and cash flow data for the years ended December 31, 2006 and 2007 and the consolidated statement of financial position data as of December 31, 2006, 2007 and 2008 set forth below are derived from Telefónica, S.A.’s consolidated financial statements for such years, which are not included herein.
 
Our Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB.
 
 
 
The basis of presentation and principles of consolidation are described in detail in Notes 2 and 3.q., respectively, to our Consolidated Financial Statements.
 
   
As of or for the year ended December 31,
 
   
2006(1)
   
2007
   
2008
   
2009
   
2010
 
   
(in millions of euros, except share data)
 
Revenues
    52,901       56,441       57,946       56,731       60,737  
Other income
    1,571       4,264       1,865       1,645       5,869  
Supplies
    (16,629 )     (17,907 )     (17,818 )     (16,717 )     (17,606 )
Personnel expenses
    (7,622 )     (7,893 )     (6,762 )     (6,775 )     (8,409 )
Other expenses
    (11,095 )     (12,081 )     (12,312 )     (12,281 )     (14,814 )
Depreciation and amortization
    (9,704 )     (9,436 )     (9,046 )     (8,956 )     (9,303 )
Operating income
    9,422       13,388       13,873       13,647       16,474  
Share of profit (loss) of associates
    76       140       (161 )     47       76  
Net financial expense
    (2,795 )     (2,851 )     (2,821 )     (2,767 )     (2,537 )
Net exchange differences
    61       7       24       (540 )     (112 )
Net financial income (expense)
    (2,734 )     (2,844 )     (2,797 )     (3,307 )     (2,649 )
Profit before taxes from continuing operations
    6,764       10,684       10,915       10,387       13,901  
Corporate income tax
    (1,781 )     (1,565 )     (3,089 )     (2,450 )     (3,829 )
Profit for the year from continuing operations
    4,983       9,119       7,826       7,937       10,072  
Profit from discontinued operations after taxes
    1,596                          
Profit for the year
    6,579       9,119       7,826       7,937       10,072  
Non-controlling interests
    (346 )     (213 )     (234 )     (161 )     95  
Profit for the year attributable to equity holders of the parent
    6,233       8,906       7,592       7,776       10,167  
Weighted average number of shares (thousands)
    4,778,999       4,758,707       4,645,852       4,552,656       4,522,228  
Basic and diluted earnings per share from continuing operations attributable to equity holders (euros)(2)
    0.97       1.87       1.63       1.71       2.25  
Basic and diluted earnings per share attributable to equity holders of the parent (euros)(2)
    1.30       1.87       1.63       1.71       2.25  
Earnings per ADS (euros)(2)(3)
    1.30       1.87       1.63       1.71       2.25  
Weighted average number of ADS (thousands) (3)
    4,778,999       4,758,707       4,645,852       4,552,656       4,522,228  
Cash dividends per ordinary share (euros)
    0.55       0.65       0.90       1.00       1.30  
Consolidated Statement of Financial Position Data
                                       
Cash and cash equivalents
    3,792       5,065       4,277       9,113       4,220  
Property, plant and equipment
    33,887       32,460       30,545       31,999       35,797  
Total assets
    108,982       105,873       99,896       108,141       129,775  
Non-current liabilities
    62,645       58,044       55,202       56,931       64,599  
Equity (net)
    20,001       22,855       19,562       24,274       31,684  
Capital stock
    4,921       4,773       4,705       4,564       4,564  
Consolidated Cash Flow Data
                                       
Net cash from operating activities
    15,414       15,551       16,366       16,148       16,672  
Net cash used in investing activities
    (28,052 )     (4,592 )     (9,101 )     (9,300 )     (15,861 )
Net cash (used in) from financing activities
    14,572       (9,425 )     (7,765 )     (2,281 )     (5,248 )
 

(1)
Telefónica Publicidad e Información, S.A. (TPI) was sold in 2006 and its results of operations for 2006 and the gain we recorded on its sale are included under “Profit from discontinued operations after taxes” for 2006.
 
(2)
The per share and per ADS computations for all periods presented have been presented using the weighted average number of shares and ADSs, respectively, outstanding for each period, and have been adjusted to reflect the stock dividends which occurred during the periods presented, as if these had occurred at the beginning of the earliest period presented.
 
(3)
Until January 20, 2011, each ADS represented the right to receive three ordinary shares.  Since January 21, 2011, each ADS represents the right to receive one ordinary share. The above figures have been restated accordingly.  Figures do not include any charges of the Depositary.
 

 
Exchange Rate Information
 
As used in this Annual Report, the term “Noon Buying Rate” refers to the rate of exchange for euros, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes.  The Noon Buying Rate certified by the New York Federal Reserve Bank for the euro on April 22, 2011 was $1.4545 =€1.00.  The following tables describe, for the periods and dates indicated, information concerning the Noon Buying Rate for the euro.  Amounts are expressed in U.S. dollars per €1.00.
   
Noon Buying Rate
 
Year ended December 31,
 
Period end
   
Average(1)
   
High
   
Low
 
2006
    1.3197       1.2661       1.3327       1.1860  
2007
    1.4603       1.3797       1.4862       1.2904  
2008
    1.3919       1.4698       1.6010       1.2446  
2009
    1.4332       1.3955       1.5100       1.2547  
2010
    1.3269       1.3261       1.4536       1.1959  
2011 (through April 22, 2011)
    1.4545       1.3840       1.4585       1.2944  
 

Source: Federal Reserve Bank of New York.
 
(1)
The average of the Noon Buying Rates for the euro on the last day reported of each month during the relevant period.
 
   
Noon Buying Rate
 
Month ended
 
High
   
Low
 
October 31, 2010
    1.4066       1.3688  
November 30, 2010
    1.4224       1.3036  
December 31, 2010
    1.3395       1.3089  
January 31, 2011
    1.3715       1.2944  
February 28, 2011
    1.3794       1.3474  
March 31, 2011
    1.4212       1.3813  
April 30, 2011 (through April 22, 2011)
    1.4585       1.4211  
 

Source: Federal Reserve Bank of New York.
 
Monetary policy within the member states of the euro zone is set by the European Central Bank.  The European Central Bank has set the objective of containing inflation and will adjust interest rates in line with this policy without taking account of other economic variables such as the rate of unemployment.  It has further declared that it will not set an exchange rate target for the euro.
 
Our ordinary shares are quoted on the Spanish stock exchanges in euro. Currency fluctuations may affect the dollar equivalent of the euro price of our shares listed on the Spanish stock exchanges and, as a result, the market price of our ADSs, which are listed on the New York Stock Exchange.  Currency fluctuations may also affect the dollar amounts received by holders of ADSs on conversion by the depositary of any cash dividends paid in euro on the underlying shares.
 
Our consolidated results are affected by fluctuations between the euro and the currencies in which the revenues and expenses of some of our consolidated subsidiaries are denominated (principally the Brazilian real, the Venezuelan Bolivar fuerte (see “Item 5. Operating and Financial Review and Prospects—A.  Operating Results—Significant Factors Affecting the Comparability of our Results of Operations in the Periods Under Review—Classification of Venezuela as a hyperinflationary economy” and “Item 5.  Operating Results—Significant Factors Affecting the Comparability of our Results of Operations in the Periods Under Review—Devaluation of the Venezuelan bolivar”), the pound sterling, the Czech koruna (crown), the Argentine peso, the Chilean peso, the Peruvian nuevo sol, the Mexican peso and the Colombian peso).
 
 
Not applicable.
 
 
 
 
 
Not applicable.
 
 
In addition to the other information contained in this Annual Report, prospective investors should carefully consider the risks described below before making any investment decision.  The risks described below are not the only ones that we face.  Additional risks not currently known to us or that we currently deem immaterial may also impair our business and results of operations.  Our business, financial condition, results of operations and cash flow could be materially adversely affected by any of these risks, and investors could lose all or part of their investment.
 
Risks Relating to Our Business
 
A material portion of our operations and investments are located in Latin America, and we are therefore exposed to risks inherent in operating and investing in Latin America.
 
At December 31, 2010, approximately 50.6% of our assets were located in our Latin America segment.  In addition, approximately 42.9% of our revenues for 2010 were derived from our Latin American segment operations.  At December 31, 2010, 56.4% of Latin America assets and 42.7% of Latin America revenues were derived from our operations in Brazil.  Our business is thus particularly sensitive to any of the risks relating to Latin America discussed in this section to the extent they arise or manifest themselves in Brazil.  Our operations and investments in Latin America (including the revenues generated by these operations, their market value and the dividends and management fees expected to be received therefrom) are subject to various risks linked to the economic, political and social conditions of these countries, including risks related to the following:
 
 
·
government regulation or administrative polices may change unexpectedly and negatively affect our interests in such countries;
 
 
·
currencies may be devalued or may depreciate or currency restrictions and other restraints on transfer of funds may be imposed;
 
 
·
the effects of inflation or currency depreciation may result in certain of our subsidiaries having negative equity, which would require them to undertake a mandatory recapitalization or commence dissolution proceedings;
 
 
·
governments may expropriate or nationalize assets or increase their participation in the economy and companies;
 
 
·
governments may impose burdensome taxes or tariffs;
 
 
·
political changes may lead to changes in the economic conditions and business environment in which we operate; and
 
 
·
economic downturns, political instability and civil disturbances may negatively affect our operations.
 
In addition, our operations are dependent, in many cases, on concessions and other agreements with existing governments in the countries in which we operate.  These concessions and agreements, including their renewal, could be directly affected by economic and political instability, altering the terms and conditions under which we operate.
 
Our financial condition and results of operations may be adversely affected if we do not effectively manage our exposure to foreign currency exchange rate, interest rate or financial investment risks.
 
We are exposed to various types of market risk in the normal course of our business, including the impact of changes in foreign currency exchange rates and the impact of changes in interest rates, as well as the impact of changes of credit risk in our treasury investments  (in cash and cash equivalents) or in some of our financial
 
 
 
 
transactions.  We employ risk management strategies to manage this exposure, in part through the use of financial derivatives such as foreign currency forwards, currency swap agreements and interest rate swap agreements.  If the financial derivatives market is not sufficiently liquid for our risk management purposes, or if we cannot enter into arrangements of the type and for the amounts necessary to limit our exposure to currency exchange rate fluctuations and interest rate fluctuations or if our counterparties fail to deliver on their commitments due to lack of solvency or otherwise, such failure could adversely affect our financial condition, results of operations and cash flow.  Also, our other risk management strategies may not be successful, which could adversely affect our financial condition, results of operations and cash flow.  Finally, if the rating of our counterparties in treasury investments or in our structured financial transactions deteriorates significantly or if any of such counterparties were to fail in its obligations to us, we may suffer a loss of value in our investments, incur unexpected losses and assume additional financial obligations under these transactions, and such failure could adversely affect our business, financial condition, results of operations and cash flow.
 
For a more detailed description of our financial derivatives transactions, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk” and Note 16 to our Consolidated Financial Statements.
 
Adverse economic conditions could reduce purchases of our products and services.
 
Our business is impacted by general economic conditions and other similar factors in each of the countries in which we operate.  The current uncertainty about an economic recovery may negatively affect the level of demand of existing and prospective customers, as our services may not be deemed critical for these customers.  Additional factors that could influence customer demand include access to credit, unemployment rates, consumer confidence and other general macroeconomic factors.  Specifically, in this respect the continuation of the economic situation in Spain, according to the forecasts contained in the Spanish economic ministry’s Stability Program for 2009-2013, could have an adverse affect on the Telefónica Group’s results in Spain. In addition, other related effects of the financial crisis could impact our business, including insolvency of key suppliers or customers.  A loss of customers or a reduction in purchases by our current customers could have a material adverse effect on our business, financial condition, results of operations and cash flow and may therefore negatively affect our ability to meet our growth targets.
 
Existing or worsening conditions in the international financial markets may limit our ability to carry out our business plan.
 
The development and distribution of our services as well as the operation, expansion and upgrading of our networks, require substantial financing.  Moreover, our liquidity and capital resource requirements may increase if we participate in other fixed line or mobile license award processes or make acquisitions.  We also have major capital resource requirements relating to, among other things, the development of distribution channels in new countries of operations and the development and implementation of new technologies.
 
If our ability to generate cash flow were to decrease, whether due to an economic crisis or otherwise, we may need to incur additional debt or raise other forms of capital to support our liquidity and capital resource requirements for the ongoing development and expansion of our business.
 
The state of international financial markets in terms of liquidity, cost of credit, access and volatility continues to be affected by current uncertainties surrounding the pace of economic recovery, the health of the international banking system and increasing concerns regarding burgeoning public deficits in certain countries, among other factors.  Worsening conditions in the international credit markets due to any of these factors may make it more difficult and more expensive to refinance our financial debt or to incur additional debt.
 
In addition, our capacity to raise capital in the international capital markets would be impaired if our credit ratings were downgraded, whether due to decreases in our cash flow or otherwise.  Further, current market conditions may make it more difficult to renew our unused bilateral credit facilities, 35% of which as of December 31, 2010 are scheduled to mature prior to December 31, 2011.  The current financial situation may also make it more difficult and costly for us to launch a rights issue to our current shareholders or to raise additional equity capital if further funds were needed for pursuing our business plans.
 
 
 
 
Risks Relating to Our Industry
 
We face intense competition in most of our markets, which could result in decreases in current and potential customers, revenues and profitability.
 
We face significant competition in all of the markets in which we operate, and we are therefore subject to the effects of actions by our competitors in these markets.  Our competitors could:
 
 
·
offer lower prices, more attractive discount plans or better services and features;
 
 
·
develop and deploy more rapidly new or improved technologies, services and products;
 
 
·
launch bundle offerings of one type of service with others;
 
 
·
in the case of the mobile industry, subsidize handset procurement; or
 
 
·
expand and enhance their networks more rapidly.
 
Furthermore, some of our competitors in certain markets have, and some potential competitors may enjoy, in certain markets, competitive advantages, including the following:
 
 
·
greater brand name recognition;
 
 
·
greater financial, technical, marketing and other resources;
 
 
·
dominant position or significant market power;
 
 
·
better strategic alliances;
 
 
·
larger customer bases; and
 
 
·
well-established relationships with current and potential customers.
 
To compete effectively with our competitors, we need to successfully market our products and services and to anticipate and respond to various competitive factors affecting the relevant markets, such as the introduction of new products and services by our competitors, pricing strategies adopted by our competitors and changes in consumer preferences and in general economic, political and social conditions.  If we are unable to effectively compete, it could result in price reductions, lower revenues, under-utilization of our services, reduced operating margins and loss of market share, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flow.
 
We operate in a highly regulated industry, which could adversely affect our businesses.
 
As a multinational telecommunications company that operates in regulated markets, we are subject to different laws and regulations in each of the jurisdictions in which we provide services.  Such laws and regulations are promulgated and enforced to varying degrees by supranational regulators such as the European Union and national, state, regional and local authorities.  Regulation may be especially strict in the markets of those countries in which we hold a significant market position.  In this respect, regulatory authorities regularly intervene in the retail and wholesale offering and pricing of our products and services.  Furthermore, such authorities may also adopt further regulations or take additional actions that could adversely affect us, including revocation of or failure to renew any of our licenses, authorizations or concessions, implementation of changes to the spectrum allocated to us or the granting or new licenses, authorizations or concessions to our competitors to offer services in the relevant markets.  Furthermore, regulations could require us to reduce roaming prices and termination rates in mobile and/or fixed line networks, require us to offer access to our network to other operators, and result in the imposition of fines if we fail to fulfill our service commitments.  Such regulations and regulatory actions could place significant competitive and pricing pressure on our operations, and could have a material adverse effect on our business, financial condition, results of operations and cash flow.
 
 
 
 
In addition, since we hold a leading market share in many of the counties where we operate, we could face regulatory actions by antitrust or competition authorities designed to enhance competition in the relevant markets.  These authorities could prohibit us from taking further actions such as making further acquisitions or continuing to engage in particular practices or impose fines or other penalties on us, which, if significant, could result in loss of market share and harm to our financial performance and future growth.
 
We expect that the regulatory landscape in the European Union will change as a consequence of the recent passage of a common regulatory framework that is to be implemented by Member States before May 2011.  We believe, based on the principles set forth in such regulatory framework, that the regulations adopted by Member States could result in an increased focus on the development and maintenance of competitive markets.  This regulatory framework proposes the adoption of certain measures, in specific circumstances, by national authorities to establish functional separation between the retail and wholesale operations of vertically integrated operators with significant market power, by requiring such operators to offer equal wholesale conditions to related and third party operators that buy wholesale products.  The adoption of such regulatory framework in Spain and other European Union Member States where we operate could result in requirements that force us to modify our internal organization in the relevant markets, which could result in additional costs to us. Additionally, our industry may face new regulatory initiatives regarding lowering mobile termination rates and the provision of data and audiovisual services.
 
Furthermore, we may face pressure from regulatory initiatives in some European countries that seek to reallocate spectrum rights and modify spectrum allocation policies that may result, among other things, in new tender processes for spectrum allocation in the European Union.
 
Finally, the European Commission’s recommendation concerning the implementation of European regulation of next-generation broadband networks may reduce incentives for operators to invest in broadband networks over the short and medium term because operators that invest in broadband networks could be required to provide third parties access to such networks.  This could affect competition, business performance and future growth in such services.  The European Commission is also considering further recommendations concerning cost accounting and non-discrimination that could increase regulatory pressure on fixed operators.
 
For further information regarding the matters discussed above and other aspects of the regulatory environments in which our businesses operate, see “Item 4. Information on the Company—Business Overview—Regulation.”
 
We operate under licenses, authorizations and concessions granted by government authorities.
 
Most of our operating companies require licenses, authorizations or concessions from the governmental authorities of the countries in which they operate.  These licenses, authorizations and concessions specify the types of services permitted to be offered by the operating company holding such license, authorization or concession.  The continued existence and terms of our licenses, authorizations and concessions are subject to review by regulatory authorities in each country and to interpretation, modification or termination by these authorities.  Moreover, authorizations, licenses and concessions as well as their renewal terms and conditions may be affected by political and regulatory factors.
 
The terms of these licenses, authorizations and concessions granted to our operating companies and conditions of the renewals of such licenses, authorizations and concessions vary from country to country.  Although license, authorization and concession renewal is not usually guaranteed, most licenses, authorizations and concessions do address the renewal process and terms, which is usually related to the fulfillment of the commitments that were assumed by the grantee.  As licenses, authorizations and concessions approach the end of their terms, we intend to pursue their renewal to the extent provided by the relevant licenses, authorizations or concessions and, under certain circumstances, we will operate under technically expired licenses, authorizations or concessions under preexisting terms during the renewal process.  Failure to complete the renewal process successfully could adversely affect our business, financial condition, results of operations and cash flow.
 
Many of our licenses, authorizations and concessions are revocable for public interest reasons.  The rules of some of the regulatory authorities with jurisdiction over our operating companies require us to meet specified network build-out requirements and schedules.  In particular, our existing licenses, authorizations and concessions
 
 
 
 
typically require us to satisfy certain obligations, including, amongst others, minimum specified quality standards, service and coverage conditions and capital investment.  Failure to comply with these obligations could result in the imposition of fines or revocation or forfeiture of the license, authorization or concession for the relevant area.  In addition, the need to meet scheduled deadlines may require our companies to expend more resources than otherwise budgeted for a particular network build-out.
 
For further information regarding the licenses and concessions of our operating companies, see “Item 4. Information on the Company—Business Overview—Regulation.”
 
The industry in which we operate is subject to rapid technological changes, which requires us to continuously adapt to such changes and to upgrade our existing networks.  If we are unable to adapt to such changes, our ability to provide competitive services could be materially adversely affected.
 
Our future success depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes.  We expect that new products and technologies will emerge on a continuous basis and that existing products and technologies will further develop.  These new products and technologies may reduce the prices for our existing services or may be superior to, and render obsolete, the products and services we offer and the technologies we use and may consequently reduce the revenues generated by our products and services and require investment in new technology.  In addition, we may be subject to competition in the future from other companies that are not subject to regulation as a result of the convergence of telecommunications technologies.  As a result, it may be very expensive for us to upgrade our products and technology in order to continue to compete effectively with new or existing competitors.  Such increased costs could adversely affect our business, financial condition, results of operations and cash flow.
 
In particular, we must continue to upgrade our existing mobile and fixed line telephony networks in a timely and satisfactory manner in order to retain and expand our customer base in each of our markets, to enhance our financial performance and to satisfy regulatory requirements.  Among other things, we could be required to upgrade the functionality of our networks to accommodate increased customization of services, to increase coverage in some of our markets, or to expand and maintain customer service, network management and administrative systems.
 
Many of these tasks are not entirely under our control and may be affected by applicable regulations.  If we fail to execute these tasks successfully, our services and products may be less attractive to new customers and we may lose existing customers to our competitors, which would adversely affect our business, financial condition, results of operations and cash flow.
 
Spectrum capacity may become a limiting and costly factor.
 
Our mobile operations in a number of countries may rely on spectrum availability.  Failure to obtain sufficient or adequate spectrum coverage and the costs related to obtaining this capacity could have a material adverse impact on the quality of our services, on our ability to provide new services and on our cash flow, adversely affecting our business, financial condition and results of operations.
 
Our business could be adversely affected if our suppliers fail to provide necessary equipment and services on a timely basis.
 
We depend upon a small number of major suppliers for essential products and services, mainly network infrastructure and mobile handsets.  These suppliers may, among other things, extend delivery times, raise prices and limit supply due to their own shortages and business requirements.  If these suppliers fail to deliver products and services on a timely basis, our business and results of operations could be adversely affected.  Similarly, interruptions in the supply of telecommunications equipment for our networks could impede network development and expansion, which in some cases could adversely affect our ability to satisfy our license terms and requirements.
 
We may be adversely affected by unanticipated network interruptions.
 
Unanticipated network interruptions as a result of system failures whether accidental or otherwise, including due to network, hardware or software failures, which affect the quality of or cause an interruption in our service, could result in customer dissatisfaction, reduced revenues and traffic and costly repairs, penalties or other measures
 
 
 
 
imposed by regulatory authorities, and could harm our reputation.  We attempt to mitigate these risks through a number of measures, including backup systems and protective systems such as firewalls, virus scanners and building security.  However, these measures are not effective under all circumstances and cannot avert every action or event that could damage or disrupt our technical infrastructure.  Although we carry business interruption insurance, our insurance policy may not provide coverage in amounts sufficient to compensate us for any losses we may incur.
 
The mobile industry may be harmed by concerns stemming from actual or perceived health risks associated with radio frequency emissions.
 
Over the last few years, the debate about the alleged potential effects of radio frequency emissions on human health has increased significantly.  In many cases, this has hindered the deployment of the infrastructures necessary to ensure quality of service.
 
Institutions and organizations, such as the World Health Organization (WHO), have stated that exposure to radio frequency emissions generated by mobile telephony, within the limits established, has no adverse effects on health.  In fact, a number of European countries, including Spain among others, have drawn up complete regulations reflecting the Recommendation of the Council of the European Union dated July 12, 1999.  These add planning criteria for new networks, thus ensuring compliance with the limits on exposure to radio frequency emissions.
 
New research is underway. Specifically, the WHO has announced that in 2011 it will issue new recommendations in connection with the release of its Radio Frequency Environment Health Criteria. Regardless of any conclusions drawn from such research, popular concerns about radio frequency emissions may discourage the use of mobile communication devices and may result in significant restrictions on both the location and operation of cell sites, either or both of which could have a detrimental impact on our mobile companies and consequently on our financial condition, results of operations and cash flow. While we are not currently aware of any evidence confirming a link between radio frequency emissions and health problems and we continue to comply with good practices codes and relevant regulations, there can be no assurance of what future medical research may suggest.
 
Developments in the telecommunications sector have resulted, and may in the future result, in substantial write-downs of the carrying value of certain of our assets.
 
We review on an annual basis or more frequently where the circumstances require, the value of each of our assets and cash generating units to assess whether their carrying values can be supported by the future cash flows expected to be derived from such assets and cash generating units, including in some cases synergies included in their acquisition costs.  Changes in the regulatory, business, economic or political environment may result in the necessity of recognizing impairment charges on our goodwill, intangible assets or fixed assets.
 
Although the recognition of impairments of tangible, intangible and financial assets result in a non-cash charge on the income statement, such charge would adversely affect our results of operations and consequently, our ability to achieve our growth targets.
 
Other Risks
 
We are involved in disputes and litigation with regulators, competitors and third parties.
 
We are party to lawsuits and other legal, regulatory and antitrust proceedings in the ordinary course of our business, the final outcome of which is generally uncertain.  Litigation and regulatory proceedings are inherently unpredictable.  An adverse outcome in, or any settlement of, these or other proceedings (including any that may be asserted in the future) may have a material adverse effect on our business, financial condition, results of operations and cash flow.
 
For a more detailed description of current legal proceedings, see “Item 8. Financial Information—Legal Proceedings.”
 
 
 
 
 
 
Overview
 
Telefónica, S.A., is a corporation duly organized and existing under the laws of the Kingdom of Spain, incorporated on April 19, 1924.  We are:
 
 
·
a diversified telecommunications group which provides a comprehensive range of services through one of the world’s largest and most modern telecommunications networks;
 
 
·
mainly focused on providing fixed and mobile telephony services; and
 
 
·
present principally in Spain, Europe and Latin America.
 
The following significant events occurred in 2010:
 
 
·
On February 16, 2010, we completed, through our subsidiary Telefónica Deutschland GmbH, the acquisition of the German telecommunications operator HanseNet Telekommunikation GmbH (“HanseNet”).
 
 
·
On May 20, 2010, Telefónica O2 Germany GmbH & Co OHG (“Telefónica O2 Germany”) secured two blocks in the 800 MHz spectrum at the German frequency auction. Telefónica O2 Germany also secured one block of the 2.0 GHz and four blocks of the 2.6 GHz spectrums. The total investment in new frequencies by Telefónica O2 Germany was approximately €1,379 million.
 
 
·
On July 28, 2010, we signed an agreement with Portugal Telecom, SGPS, S.A. (“Portugal Telecom”) for the acquisition by Telefónica of the 50% of the capital stock of Brasilcel, N.V. (“Brasilcel”) owned by Portugal Telecom.  Brasilcel owned approximately 60% of Vivo Participaçoes, S.A. (“Vivo Participaçoes”).  The acquisition price of the aforementioned capital stock of Brasilcel was €7,500 million, €4,500 million of which was paid at the closing of the transaction on September 27, 2010 and €1,000 million of which was paid on December 30, 2010, with the remaining €2,000 million due on October 31, 2011 (though Portugal Telecom may request for this final payment to be made on July 29, 2011, in which case such final payment, and correspondingly, the price of the aquisition would be reduced by €25 million). Coincident with the closing of the transaction, the agreements signed in 2002 between Telefónica and Portugal Telecom, relating to their joint venture in Brazil (Subscription Agreement and Shareholders Agreement), were terminated.
 
 
·
On July 28, 2010, we executed a syndicated facility agreement with several domestic and international financial entities in an aggregate amount up to €8,000 million. This facility agreement is divided into two tranches: the first is a three-year term loan facility, in an aggregate amount up to €5,000 million and the second is a five-year revolving credit facility, in an aggregate amount up to €3,000 million.
 
 
·
On October 26, 2010, following the completion of the acquisition of Portugal Telecom’s 50% stake in Brasilcel, we announced a tender offer for all the outstanding voting shares of Vivo Participaçoes not held by Brasilcel, which represented approximately 3.8% of Vivo’s equity. This offer was approved by the Brazilian market regulator (C.V.M.) on February 11, 2011, and was completed on March 18, 2011.
 
 
·
On December 28, 2010, Telefónica, S.A., through its subsidiary, Telefónica de Contenidos, S.A.U., completed the acquisition of 22% of the capital stock of Distribuidora de Televisión Digital S.A. (“DTS”) for approximately €488 million, €228 million of which was settled by cancelling the subordinated loan between Telefónica de Contenidos, S.A.U. (as creditor) and Sogecable, S.A. (currently Prisa Televisión, S.A.U., as debtor).
 
 
 
 
Business areas
 
We have implemented a regional, integrated management model based on three business areas, with each area in charge of the fixed and mobile telephone and other businesses within its borders:
 
 
·
Telefónica Spain: oversees the fixed and mobile telephony services in Spain.
 
 
·
Telefónica Europe: oversees the fixed and mobile telephony services in the United Kingdom, Germany, Ireland, the Czech Republic and Slovakia.
 
 
·
Telefónica Latin America: oversees the fixed and mobile telephony services in Latin America. In addition, Telefónica Latin America’s other members include: Telefónica Empresas, Telefónica International Wholesale Services (TIWS), the business unit responsible for other telecommunications operators and for managing our international services and the network which supports these services, and Terra Networks Latin América.
 
We are also involved in the media and contact center segments through Telefónica de Contenidos and Atento, respectively.
 
 
 
 
The following chart shows the organizational structure of the principal subsidiaries of the Telefónica Group at December 31, 2010, including their jurisdictions of incorporation and our ownership interest.  For further detail, see Exhibit 8.1 to this Annual Report.
 
 
(1)   Ownership in Telefónica Móviles España, S.A.U. is held directly by Telefónica, S.A.
(2)
85.57% representing voting interest.
(3)
Ownership in Telefónica International Wholesale Services, S.L.  (Spain) is held 92.51% by Telefónica, S.A. (Spain) and 7.49% by Telefónica Datacorp, S.A.U.  (Spain).
(4)
Ownership in O2 (Europe) Ltd. is held directly by Telefónica, S.A.
(5)
Companies held indirectly by Telefónica, S.A.
(6)
Ownership in Telefónica International Wholesale Services II is held directly by Telefónica, S.A.
 
 
 
 
Telefónica, S.A., the parent company of the Telefónica Group, also operates as a holding company with the following objectives:
 
 
·
coordinate the Group’s activities;
 
 
·
allocate resources efficiently among the Group;
 
 
·
provide managerial guidelines for the Group;
 
 
·
manage the Group’s portfolio of businesses;
 
 
·
foster cohesion within the Group; and
 
 
·
foster synergies among the Group’s subsidiaries.
 
Our principal executive offices are located at Distrito C, Ronda de la Comunicación, s/n, 28050 Madrid, Spain, and our registered offices are located at Gran Vía, 28, 28013 Madrid, Spain.  Our telephone number is +34 900 111 004.
 
Capital Expenditures and Divestitures
 
Our principal capital expenditures during the three years ended December 31, 2010 consisted of additions to property, plant and equipment and additions to intangible assets, including spectrum.  In 2010, 2009 and 2008, we made capital expenditures of €10,844 million, €7,257 million and €8,401 million, respectively.
 
Year ended December 31, 2010
 
Our capital expenditures increased 49.4% to €10,844 million in 2010 compared to €7,257 million in 2009, mainly as a result of the acquisition of spectrum in Germany (€1,379 million) and Mexico (€1,237 million) and the full consolidation in the fourth quarter of 2010 of Vivo.  Excluding such spectrum acquisitions, capital expenditures growth would have been 13.4%.  Our investments in Spain were directed toward further developing the fixed broadband business with a selective roll-out of fiber optics, Imagenio and data services for large corporate customers and expanding mobile third generation, or 3G, offerings.  In Latin America, capital expenditures were directed toward the transformation of the fixed telephony business and continuing to expand coverage and capacity of 3G and GSM networks in our mobile telephony business.  In Europe, capital expenditures were directed toward improving the capacity and coverage of our mobile networks and greater investments in the ADSL business.
 
Year ended December 31, 2009
 
Our capital expenditures decreased 13.6% to €7,257 million in 2009 compared to €8,401 million in 2008, mainly as a result of investment containment in our three regions of activity. Our investments in Spain were directed toward further developing the broadband business and expanding 3G.  In Latin America capital expenditures were directed toward satisfying increased customer demand in broadband and pay TV and increasing coverage and capacity of our second generation, or GSM, and mobile 3G networks.  In Europe capital expenditures were directed toward expanding the mobile 3G network coverage, developing the broadband business and undertaking IT projects.
 
Year ended December 31, 2008
 
Our capital expenditures increased 4.7% to €8,401 million in 2008 compared to €8,027 million in 2007, mainly as a result of investments made to support the growth in Telefónica Latin Americas broadband and pay TV businesses and to further develop ADSL and adapt existing loops to FTTx (fiber optic) technology in order to enhance coverage for new services in Spain and expand the coverage and capacity of our mobile networks in all regions.
 

 
 
Financial Investments and Divestitures
 
Our principal financial investments in 2010 relate to the acquisition of 50% of Brasilcel (approximately €7,500 million), the acquisition of HanseNet (approximately €275 million) and the acquisition of a 22% stake in DTS (approximately €488 million).  Our principal divesture in 2010 was the reduction of our stake in Portugal Telecom by 7.98%, resulting in cash inflow of €631 million, though we retained a certain amount of economic exposure to fluctuations in the value of Portugal Telecom’s shares through the use of derivative instruments.
 
Our principal financial investment in 2009 was the acquisition of an additional stake in China Unicom (Hong Kong) Limited (“China Unicom”) (approximately $1,000 million as a consequence of a mutual share exchange).  Our principal divestiture in 2009 was the sale of Medi Telecom (€400 million) as described above.
 
Our principal financial investments in 2008 were made by Inversiones Telefónica Internacional Holding, Ltda., which invested €640 million for the acquisition of the additional 51.85% of Telefónica Chile, S.A., or Telefónica Chile, and Vivo, which invested Brazilian reais 1,163 million (equivalent to approximately €429 million at the transaction date) for the acquisition of 53.90% of the voting stock and 4.27% of the preferred stock of Telemig Celular Participaçoes, S.A.
 
Public Takeover Offers
 
The principal public takeover offers which occurred in 2010 and in 2011 through the date of this Annual Report were the following:
 
 
·
On July 28, 2010, Telefónica and Portugal Telecom signed an agreement for the acquisition by Telefónica of 50% of the capital stock of Brasilcel (a company then jointly owned by Telefónica and Portugal Telecom, which owned shares representing approximately 60% of the capital stock of Vivo (the “Brasilcel Acquisition Agreement”). The acquisition price for the aforementioned capital stock of Brasilcel was €7,500 million, of which €4,500 million was paid at the closing of the transaction on September 27, 2010, €1,000 million on December 30, 2010, with the remaining €2,000 million due October 31, 2011 (though Portugal Telecom may request for this last payment to be made on July 29, 2011, in which case the price of the acquisition and the final payment would be reduced by €25 million).
 
 
·
On December 21, 2010, the merger between Telefónica and Brasilcel was registered in the Madrid Mercantile Register, with the company becoming a direct shareholder of the Brazilian consolidated group Vivo, by virtue of its ownership of approximately 60% of Vivo Participaçoes’s capital stock.
 
Pursuant to Brazilian legislation, on October 26, 2010, Telefónica announced a tender offer for the acquisition of all outstanding voting shares of Vivo not already owned or controlled by Telefónica, representing approximately 3.8% of Vivo Participaçoes’s capital stock, for an amount equivalent to 80% of the price per share to be paid to Portugal Telecom pursuant to the Brasilcel Acquisition Agreement, subject to regulatory approval. This offer was approved by the Brazilian market regulator (C.V.M.) on February 11, 2011 and completed on March 18, 2011.
 
Recent Developments
 
The principal events that have occurred since December 31, 2010 are set forth below:
 
 
·
On January 23, 2011, Telefónica and China Unicom signed an extension to their strategic alliance agreement, pursuant to which both companies agreed to strengthen and deepen their strategic cooperation in certain business areas, and committed to investing the equivalent of $500 million in ordinary shares of the other party toward the alliance. Telefónica will acquire, through its subsidiary Telefónica Internacional, S.A.U, a number of China Unicom shares amounting to $500 million from third parties, within nine months of the date of the agreement.
 
Following the completion of the transaction, Telefónica will hold, through its subsidiary Telefónica Internacional, S.A.U., approximately 9.7% of China Unicom’s voting share capital. Telefonica is in the process of making the required investment in China Unicom and its final ownership percentage of
 
 
 
 
China Unicom's voting capital after such investment may vary from the foregoing as it will depend upon the prevailing share prices at which the investment is made. In recognition of China Unicom’s stake in Telefónica, Telefónica has committed to proposing the appointment of a board member to be selected by China Unicom at our next General Shareholders’ Meeting, in accordance with applicable legislation and our bylaws.
 
China Unicom completed its acquisition of Telefónica shares on January 28, 2011, resulting in its ownership of 1.37% of our capital. For information related to this acquisition, see “Item 5. Operating and Financial Review and Prospects —Business Overview—Strategic Partnership”, “Item 5. Operating and Financial Review and Prospects – Significant Factors Affecting the Comparability of our Results of Operations in the Periods Under Review.” and Note 24 to our consolidated financial statements.
 
 
·
On February 11, 2011, the Brazilian market regulator (C.V.M.) approved the tender offer made by Telefónica, S.A. to holders of all outstanding voting shares of Vivo Participaçoes not already held or controlled by Telefónica.  For information related to this tender offer, see “Item 5. Operating and Financial Review and Prospects – Significant Factors Affecting the Comparability of our Results of Operations in the Periods Under Review.”
 
 
·
On February 24, 2011, we announced that we are considering a possible divestiture of our subsidiary, Atento Inversiones y Teleservicios, S.A.U., contemplating, among other alternatives, a potential public offering of shares of that company.
 
 
·
On March 25, 2011, the Board of Directors of each of our controlled subsidiaries, Vivo Participações and Telecomunicações de São Paulo, S.A.—Telesp (“Telesp”), respectively, approved the terms and conditions of a restructuring whereby all shares of Vivo Participações that Telesp does not own will merge into Telesp in exchange for Telesp shares, converting Vivo Participações into a wholly-owned subsidiary of Telesp (the “Restructuring”). The Restructuring was approved by shareholders of Vivo Participações at an Extraordinary General Shareholders’ Meeting held on April 27, 2011 and by shareholders of Telesp at an Extraordinary General Shareholders’ Meeting held on that same date.
 
 
·
On March 30, 2011, we announced that the Brazilian market regulator (C.V.M) authorized the termination of Telefónica’s BDRs Program in Brazil and the subsequent delisting of Telefónica shares from the São Paulo stock exchange. The termination and delisting process started on March 30, 2011 and it is expected to conclude in the second half of 2011.
 
 
·
On April 12, 2011, our Board of Directors resolved to call Telefónica’s 2011 General Shareholders’ Meeting to be held on May 17, on first call, or on May 18, 2011 on second call.  The main items included in the agenda of this meeting are the following:
 
 
-
Examination and approval, if applicable, of the Individual Annual Accounts, the Consolidated Annual Accounts and the Management Report of  Telefónica, and of its consolidated group of companies, as well as of the proposed allocation of the profits/losses of Telefónica, S.A. and the management of its Board of Directors, all with respect to Fiscal Year 2010.

 
-
Compensation of shareholders: Distribution of dividends to be charged to Unrestricted Reserves.

 
-
Amendment of the By-Laws principally for adjustments related to the latest legislative developments.

 
-
Amendment of the Regulations for the General Shareholders' Meeting principally for adjustments related to the latest legislative developments.

 
-
Re-election, appointment and ratification, as applicable, of the following Directors: Mr. Isidro Fainé Casas, Mr. Vitalino Manuel Nafría Aznar, Mr. Julio Linares López,  Mr. David Arculus,  Mr. Carlos Colomer Casellas, Mr. Peter Erskine, Mr. Alfonso Ferrari Herrero, Mr. Antonio Massanell Lavilla, and  Mr. Chang Xiaobing. (Determination of the number of Directors)
 
 
 

 
 
-
Authorization to increase the share capital pursuant to the terms and conditions of Section 297.1.b) of the Companies Act, over a maximum period of five years, delegating the power to exclude pre-emptive rights pursuant to Section 506 of the Companies Act.

 
-
Long-term share incentive plans including: (i) approval of a long-term incentive plan aimed at members of the executive team of the Telefónica Group (including executive Directors); (ii) restricted share plan aimed at employees and executive personnel; (iii) global incentive share purchase plan for the employees of the Telefónica Group.

 
For information related to our significant financing transactions completed in 2010 and through the date of this Annual Report, see “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Anticipated Sources of Liquidity.”
 
 
We increased our customer base, measured in terms of total accesses, by 8.7% to 287.6 million accesses at December 31, 2010 from 264.6 million accesses at December 31, 2009, which was a 2.1% increase from the 259.1 million accesses we had at December 31, 2008.  This growth from December 31, 2009 to December 31, 2010 was primarily driven by an 8.9% increase in mobile accesses, a 27.0% increase in broadband accesses and a 12.0% increase in pay TV accesses.  Growth in our total number of accesses from December 31, 2008 to December 31, 2009 was primarily driven by growth in mobile accesses, broadband accesses and pay TV accesses.
 
The following table shows our total accesses at the dates indicated.  The classifications and explanatory notes below also apply, to the extent applicable, to the tables detailing our accesses by business area and country elsewhere in this section.
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Fixed telephony accesses(1)
    42,930.8       40,606.0       41,355.7  
Internet and data accesses
    14,654.3       15,082.5       18,611.4  
Narrowband accesses
    1,997.2       1,427.5       1,314.1  
Broadband accesses(2)
    12,472.1       13,492.6       17,129.6  
Other accesses(3)
    185.0       162.4       167.8  
Mobile accesses(4)(5)
    195,818.6       202,332.5       220,240.5  
Pay TV accesses
    2,267.5       2,489.2       2,787.4  
Final clients accesses
    255,671.1       260,510.2       282,994.9  
Unbundled local loop accesses
    1,748.1       2,206.0       2,529.2  
Shared UL accesses
    602.3       447.7       264.0  
Full UL accesses
    1,145.8       1,758.3       2,265.3  
Wholesale ADSL accesses(6)
    534.7       463.4       687.4  
Other accesses(7)
    1,150.1       1,426.0       1,420.7  
Wholesale accesses
    3,433.0       4,095.3       4,637.4  
Total accesses
    259,104.1       264,605.5       287,632.3  
 

(1)
PSTN (including public use telephony) x1; ISDN basic access x1; ISDN primary access; 2/6 access x30. Includes our accesses for internal use. It also includes VoIP and naked ADSL accesses.
 
(2)
Includes ADSL, satellite, fiber optic, cable modem and broadband circuits and naked ADSL accesses.
 
(3)
Includes remaining non-broadband final client circuits.
 
(4)
Includes accesses of Telemig.  Medi Telecom accesses are excluded at December 31, 2009.
 
(5)
In 2009 in order to align the criteria for the key performance indicators of our mobile operations, the definition of mobile accesses (and, therefore, of total accesses) was revised to include machine-to-machine accesses.  In addition, we revised the accounting criteria for pre-pay mobile accesses at Telefónica O2 Czech Republic and Telefónica O2 Slovakia to conform to the accounting criteria for pre-pay mobile
 
 
 
 
accesses throughout the Group.  In order to count a pre-pay mobile access, such access must have been active in the most recent three months prior to counting.  As a result of both revisions, we restated 2008 mobile accesses, adding 0.2 million accesses in the aggregate.
 
(6)
Includes unbundled lines by Telefónica O2 Germany.
 
(7)
Includes circuits for other operators.
 
Our Services and Products
 
Fixed business
 
The principal services we offer in our fixed businesses in Spain, Europe and Latin America are:
 
 
·
Traditional fixed telecommunication services.  Our principal traditional fixed telecommunication services include PSTN lines; ISDN accesses; public telephone services; local, domestic and international long distance and fixed-to-mobile communications services; corporate communications services; supplementary value-added services (including call waiting, call forwarding, voice and text messaging, advanced voicemail services and conference-call facilities); video telephony; business-oriented value-added services; intelligent network services; leasing and sale of handset equipment; and telephony information services.
 
 
·
Internet and broadband multimedia services.  Our principal Internet and broadband multimedia services include Internet service provider service; portal and network services; retail and wholesale broadband access through ADSL; naked ADSL ( broadband connection without the monthly fixed line fee); narrowband switched access to Internet for universal service, and other technologies; residential-oriented value-added services (including instant messaging, concerts and video clips by streaming video, e-learning, parental control, firewall protection, anti-virus protection, content delivery and personal computer sales); television services such as Imagenio, our IPTV business, cable television and satellite television; companies-oriented value-added services, like puesto integral o puesto informático, which includes ADSL, computer and maintenance for a fixed price and VoIP services.  Also, in some regions, (Spain and Brazil) we are providing services based on Fiber to the Home (FTTH), including a new range of products and services. This line of products includes high speed Internet access (currently up to 30 Mb), which allows Telefónica Spain to provide its customers with advanced IPTV services, such as high definition channels (HDTV), and in Spain, Multiroom (allowing clients to watch different TV channels in different rooms) and Digital Video Recording (DVR).
 
 
·
Data and business-solutions services.  Our data and business-solutions services principally include leased lines; virtual private network, or VPN, services; fiber optics services; the provision of hosting and application, or ASP, service, including web hosting, managed hosting, content delivery and application, and security services; outsourcing and consultancy services, including network management, or CGP; and desktop services and system integration and professional services.
 
 
·
Wholesale services for telecommunication operators.  Our wholesale services for telecommunication operators principally include domestic interconnection services; international wholesale services; leased lines for other operators’ network deployment; and local loop leasing under the unbundled local loop regulation framework.  It also includes bit stream services, bit stream naked, wholesale line rental accesses and leased ducts for other operators’ fiber deployment.
 
Mobile business
 
We offer a wide variety of mobile and related services and products to personal and business customers.  Although the services and products available vary from country to country, the following are our principal services and products:
 
 
·
Mobile voice services.  Our principal service in all of our markets is mobile voice telephony.
 
 
·
Value added services.  Customers in most of our markets have access to a range of enhanced mobile calling features, including voice mail, call hold, call waiting, call forwarding and three-way calling.
 
 
 
 
 
·
Mobile data and Internet services.  Current data services offered include Short Messaging Services, or SMS, and Multimedia Messaging Services, or MMS, which allow customers to send messages with images, photographs and sounds.  Customers may also receive selected information, such as news, sports scores and stock quotes.  We also provide mobile broadband connectivity and Internet access.  Through mobile broadband and Internet access, our customers are able to send and receive e-mail, browse the Internet, download contents (like games), purchase goods and services in m-commerce transactions and use our other data services.
 
 
·
Wholesale services.  We have signed network usage agreements with several MVNOs in different countries.
 
 
·
Corporate services.  We provide business solutions, including mobile infrastructure in offices, private networking and portals for corporate customers that provide flexible on line billing.
 
 
·
Roaming.  We have roaming agreements that allow our customers to use their mobile handsets when they are outside of our service territories, including on an international basis.
 
 
·
Fixed wireless.  We provide fixed voice telephony services through mobile networks in Venezuela, Argentina, Peru, Mexico, Ecuador, El Salvador, Guatemala and Nicaragua.
 
 
·
Trunking and paging.  In Spain and Guatemala, we provide digital mobile services for closed user groups of clients and paging services.
 
The following sections provide a description of the main markets in which we operate. Customer information on the markets in which we operate, including our market share based on accesses, are estimates that we have made based on annual reports and press releases made public by our competitors or information from local regulators in the respective markets.
 
Telefónica Spain Operations
 
Telefónica Spain provides fixed and mobile telephony services in Spain.
 
Telefónica Spain’s total accesses increased by 1.7% to 47.6 million accesses at December 31, 2010 from 46.8 million accesses at December 31, 2009.  Total accesses at December 31, 2010 included 24.3 million mobile accesses, 13.3 million fixed telephony accesses, 5.9 million Internet and data accesses and 0.8 million pay TV accesses.  Additionally, it included 2.5 million unbundled local loop accesses and 0.6 million of wholesale ADSL accesses.
 
The following table presents, at the dates indicated, selected statistical data relating to our operations in Spain.
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Fixed telephony accesses
    15,326.3       14,200.1       13,279.7  
Internet and data accesses
    5,670.0       5,722.5       5,879.8  
    Narrowband accesses
    388.0       219.5       136.1  
Broadband accesses
    5,246.4       5,476.8       5,722.3  
Other accesses
    35.6       26.2       21.4  
Mobile accesses
    23,604.8       23,538.6       24,309.6  
Pre-pay accesses
    9,037.0       8,204.5       7,919.8  
Pay TV accesses
    612.5       703.0       788.2  
Final clients accesses
    45,213.6       44,164.2       44,257.4  
Wholesale accesses
    2,136.1       2,614.0       3,333.8  
Total accesses
    47,349.7       46,778.2       47,591.2  
 
 
 
 
Telefónica Spain - Fixed business
 
Telefónica Spain provides fixed telephony services in Spain.
 
Operations
 
The following table presents, at the dates indicated, selected statistical data relating to the operations of Telefónica Spain’s fixed business:
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Fixed telephony accesses
    15,326.3       14,200.1       13,279.7  
Internet and data accesses
    5,670.0       5,722.5       5,879.8  
    Narrowband accesses
    388.0       219.5       136.1  
Broadband accesses
    5,246.4       5,476.8       5,722.3  
Other accesses
    35.6       26.2       21.4  
Pay TV accesses
    612.5       703.0       788.2  
Final clients accesses
    21,608.8       20,625.6       19,947.8  
Wholesale line rental accesses
    9.5       97.4       294.5  
Unbundled local loop accesses
    1,698.0       2,153.8       2,477.1  
Shared UL accesses
    602.3       447.7       264.0  
Full UL accesses
    1,095.7       1,706.1       2,213.1  
Wholesale ADSL accesses
    423.8       359.0       561.3  
Other accesses
    4.7       3.7       0.9  
Wholesale accesses
    2,136.1       2,614.0       3,333.8  
Total accesses
    23,744.8       23,239.6       23,281.6  

Telefónica Spain’s fixed telephony accesses decreased by 6.5% to 13.3 million accesses at December 31, 2010, from 14.2 million accesses at December 31, 2009.  Telefónica Spain had net fixed telephony accesses losses of 0.9 million in 2010, lower than the 1.1 million net fixed telephony accesses losses recorded in 2009.
 
Telefónica Spain’s broadband accesses increased 4.5% to 5.7 million at December 31, 2010 from 5.5 million accesses at December 31, 2009.
 
Unbundled local loops at December 31, 2010 amounted to 2.5 million accesses, of which nearly 10.7% were shared access loops, while the remainder were full unbundled loops (including 602 thousand naked shared loops). Decreasing growth rates in 2010 contributed to fewer net additions for the full year (323 thousand loops), 29.1% below net additions in 2009. Shared loops decreased by 184 thousand accesses in 2010, while full unbundled loops increased by 507 thousand.
 
Telefónica Spain’s total wholesale ADSL accesses were 0.6 million accesses at December 31, 2010, an increase of 56.4% compared to the accesses at December 31, 2009, mainly due to new modalities and price reductions.
 
In 2010, Telefónica Spain continued to increase its presence in the pay TV market, achieving a customer base of 0.8 million accesses at December 31, 2010, up from 0.7 million accesses at December 31, 2009, an increase of 12.1%.
 
Since 2005 Telefónica Spain has bundled its ADSL services with other products in Duo bundles, which include voice services, and Trio bundles, which include voice and IPTV services.  At December 31, 2010, approximately 89% of Telefónica Spain’s broadband accesses were included in Duo or Trio bundles compared to 88% at December 31, 2009.
 
 
 
 
Sales and marketing
 
One of our main priorities has been to satisfy customer needs and increase customer loyalty by improving the quality of our customer service and offering a wide range of integrated telecommunications services.  We have reinforced our strategy of customer segmentation in order to tailor our services to best meet the specific needs of each customer segment.
 
In 2010, we rebranded in connection with our customer-focused strategy. In May 2010, Movistar was launched as the sole trademark for all residential and business customers, in order to foster emotional connections with customers.
 
In order to boost the value of its services, in June 2010 Telefónica Spain added to its broadband bundles the option for free fixed-to-mobile calls for customers on weekends.
 
In addition, on October 1, 2010 a new type of broadband access called “hasta 6Mb” was launched. This allows each customer to enjoy increased network speed.
 
In addition to these measures aimed at improving the products and services offered to broadband customers, ADSL speeds are being increased without concurrent price increases.
 
We also implemented a local strategy involving different offers adapted to local conditions in each area. Pursuant to this strategy, we focus on areas where competition is particularly high, creating comprehensive plans and outstanding commercial processes such as the establishment of a Convergent Customer Service Centre.
 
The value of fixed lines was also enhanced by redesigning our fixed line catalogue and launching new types of contracts for fixed line customers that offer more favorably priced packages for access plus calls, which addresses basic domestic communication needs (“Contrato Básico Hogar”, “Planazo Hogar a Fijos y Móviles”).
 
In the business segment, we continued to promote our Puesto de Trabajo services, which is a package of services designed to meet the voice (fixed and/or mobile), data and IT needs of self-employed, and small- and medium-sized businesses. During 2010 we advanced this initiative with the roll out of Aplicateca services, focusing mainly on management, localization, security and office automation software.
 
The customer service model employed by Telefónica Spain, which is focused on achieving the highest degree of efficiency in customer service, has the following features:
 
 
·
a 24-hour personal customer service line for purchasing any type of product and service and handling customer queries;
 
 
·
Telefónica stores (Tiendas Telefónica), where customers can test and buy the products we market, the highlight of which is our flagship store at the historic Telefónica headquarters building on the Gran Vía (Madrid), which is the largest telecommunications store in Spain. We also continue to work to improve our stores, equipping them with the resources to meet the needs of residential and business customers. Special attention has been given to the Telyco stores to improve the customer experience;
 
 
·
the Telefónica On Line Store, accessible by Internet (www.telefonica.es), which offers customers clear and accessible information regarding the services and products we offer and the ability to purchase these services and products online, as well as manage their accounts and access their bills, easily and securely;
 
 
·
a dedicated customer service system for corporate and residential customers, to ensure each customer’s particular needs are met. The technical service centers also help customers resolve possible service problems, and offer enhanced service to customers via specialized and highly-skilled staff.
 
Competition
 
Telefónica Spain’s principal competitors in the fixed telephony market fall within three main categories:
 
 
·
cable operators, such as Spanish nationwide cable operator ONO, which offers bundles of voice, broadband and pay TV services triple play, and regional cable operators (Euskaltel, Telecable and Grupo R);
 
 
 
 
 
·
ULL operators, such as Orange, Jazztel and Vodafone; and
 
 
·
large-business oriented operators, such as British Telecom and Colt, which offer voice and data virtual private networks (VPNs).
 
Telefónica Spain’s estimated market share at December 31, 2010 was as follows:
 
 
·
fixed telephony accesses market share amounted to approximately 69% of retail accesses;
 
 
·
broadband market share amounted to approximately 53% of retail accesses; and
 
 
·
pay TV market share amounted to approximately 19% of the market in terms of accesses.
 
In November 2008, the CMT approved “Wholesale Access for Telephone Lines,” or AMLT, a new product that allows operators to resell telephone lines to their final customers. After more than two years on the market, this service has been consolidated and continues to grow and function correctly, both at systems and operational level.
 
Network and technology
 
Telefónica Spain continued to further develop the fixed broadband business with a selective roll-out of fiber optics, Imagenio and data services for large corporate customers, as well as improvements in capacity and security of its aggregation, transport and data network.
 
Telefónica Spain - Mobile business (Spain)
 
Telefónica Spain provides mobile services in Spain.
 
Operations
 
The estimated penetration of the Spanish mobile market reached 125% at December 2010.  The Spanish mobile market showed growth primarily as a result of the growth of data services.
 
The following table presents, at the dates or for the periods indicated, selected statistical data relating to Telefónica Spain’s mobile business.
 
   
At or for the year ended December 31,
 
   
2008
   
2009
   
2010
 
Total mobile accesses (in thousands)
    23,604.8       23,538.6       24,309.6  
Pre-pay accesses (in thousands)
    9,037.0       8,204.5       7,919.8  
MOU (minutes)
    156    
n.a.
   
n.a.
 
Traffic (millions of minutes)
    43,568       42,039       41,700  
ARPU (in euros)
    30.4       27.5       25.4  

Our mobile customer base in Spain, measured in terms of accesses, stood at 24.3 million accesses at December 31, 2010, an increase of 3.3% from 23.5 million at December 31, 2009.  This evolution was primarily driven by a 6.9% increase in accesses in the contract segment, which offset the decrease of 3.5% in the prepaid segment. In May 2010 we disconnected 113 thousand prepaid accesses from our customer base, without a significant impact on our economic results.
 
In the context of an increasingly competitive market, with strong competition in number portability and pressure on pricing, Telefónica Móviles España continues to maintain its leadership in difference between revenue and access share, due to its strong focus on high value customers.  Telefónica Spain’s mobile business achieved net adds of  771 thousand accesses in 2010, compared to negative net adds of 66 thousand accesses in 2009, with a noteworthy number of net accesses gains in the contract segment: 1.1 million accesses in 2010, up from 0.8 million in 2009.
 
At December 31, 2010, approximately 67.4% of our mobile accesses in Spain were contract, which represents an increase of 2.3 percentage points from December 31, 2009.
 
 
 
 
ARPU for Telefónica Spain’s mobile business decreased 7.3% to €25.4 in 2010 from €27.5 in 2009, primarily due to by mobile termination rate cuts (-19.2% year-on-year following the cuts implemented in October and April 2010), lower usage by customers in the current environment and increased price-oriented competition, offsetting higher contribution from connectivity revenue.
 
Traffic for 2010 decreased 0.8% to 41,700 million minutes compared to 42,039 million minutes in 2009 mainly due to lower voice usage.
 
Sales and marketing
 
Telefónica Spain is focused on key initiatives to preserve its position as a leading mobile operator in the market, leading it to increase commercial efforts with measures including:
 
 
·
in-depth market segmentation, with a focus on customer value;
 
 
·
programs to promote customer loyalty;
 
 
·
pricing policies to stimulate usage, including launching segmented packages and innovative tariff options; and
 
 
·
a focus on the latest market trends involving mobile Internet access, either from devices used to make voice calls or from devices that complement fixed broadband and enable large amounts of data to be downloaded on the move.
 
Since Telefónica Spain began providing mobile services in Spain, its sales and marketing strategy has focused on generating increased brand awareness and customer satisfaction to achieve customer growth. Telefónica Spain utilizes several types of marketing channels, including television, radio, exterior billboards, telemarketing, direct mail and Internet advertising. Telefónica Spain also sponsors several cultural and sporting events in order to increase its brand recognition.
 
During 2010 Telefónica Spain’s main marketing campaigns focused on boosting demand for mobile broadband, with the launch of data flat rates for browsing the web using a smartphone or mobile internet to access (content, music, television, etc) as well as browsing the web using a laptop or mobile conectivity device, developing new concepts such as “try and buy”. In addition, Telefónica Spain offers access to mobile broadband services with HSPA technology. These favorable data rates and mobile broadband capable devices have been bundled by Telefónica Spain in order to promote an increase in the number of accesses and level of use of mobile broadband services in Spain.  In order to help achieve this goal:
 
 
·
In 2010, Telefónica Spain launched complementary mobile and fixed broadband services at very competitive prices.
 
 
·
In 2010, Telefónica Spain advanced its portfolio of data tariffs for the residential segment, launching tariffs that address technology needs such as multi-device flat-rate data plans enabling users to browse with tablets and smartphones at no extra cost, and new tranches to existing plans that better meet customer needs. The main innovations in our mobile voice portfolio for corporate customers have focused on increasing voice time allotments. We have also initiated plans to bundle mobile voice and data, which offers single-contract advantages.
 
Competition
 
Telefónica Spain’s main competitors in the Spanish market for mobile communications service are: Vodafone España, a subsidiary of Vodafone plc, Orange, which is the trade name of France Telecom España S.A., Yoigo, whose principal shareholder is TeliaSonera, and other MVNO operators.
 
Telefónica Spain’s estimated market share in Spain in terms of mobile accesses was approximately 41.4% at December 31, 2010.
 
 
 
 
Network and technology
 
Telefónica Spain’s digital network in Spain is based upon the GSM/UMTS standard.  The prevalence of the GSM standard, together with Telefónica Spain’s international roaming agreements, enable its mobile customers to make and receive calls in more than 200 countries worldwide.  Telefónica Spain’s GSM/UMTS based network provides its customers with access to many of the most advanced mobile handsets and a full range of services and products.
 
In 2010, Telefónica Spain invested in and expanding mobile third generation, or 3G, in Spain and developing its technological platforms and information systems.
 
Telefónica Europe
 
Telefónica Europe’s principal activities are the provision of fixed and mobile telephony services, Internet and data services in the United Kingdom, Germany and the Czech Republic, Internet, data and mobile telecommunications services in Ireland, mobile telecommunications services in Slovakia and pay TV services in Czech Republic and Germany.
 
The following table presents, at the dates indicated, selected statistical data relating to our operations in Europe.
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Fixed telephony accesses
    1,952.7       1,827.5       3,672.4  
Internet and data accesses
    1,354.5       1,754.7       4,496.4  
Narrowband accesses
    163.4       137.3       503.2  
Broadband accesses
    1,158.7       1,589.1       3,964.9  
Other accesses
    32.4       28.3       28.3  
Mobile accesses
    41,401.8       44,095.0       46,675.5  
Pay TV accesses
    114.5       137.6       206.4  
Final clients accesses
    44,823.5       47,814.9       55,050.6  
Wholesale accesses
    1,237.9       1,425.2       1,247.7  
Total accesses
    46,061.4       49,240.1       56,298.3  

Telefónica Europe’s total accesses increased 14.3% to 56.3 million accesses at December 31, 2010 from 49.2 million accesses at December 31, 2009.  This increase was mainly driven by the inclusion of accesses from HanseNet into Telefónica Europe’s accesses during 2010. Total accesses at December 31, 2010 included 46.7 million mobile accesses, 3.7 million fixed telephony accesses, 4.5 million Internet and data accesses and 0.2 million pay TV accesses.  Additionally, it included 1.2 million ADSL wholesale accesses.
 
United Kingdom – Telefónica O2 UK
 
Operations
 
The following tables present, at the dates or for the periods indicated, selected statistical data relating to our operations in the United Kingdom.
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Internet and data accesses
    340.9       591.5       671.6  
Broadband accesses
    340.9       591.5       671.6  
Mobile accesses
    20,274.7       21,299.3       22,211.5  
Pre-pay accesses
    11,862.5       11,740.3       11,712.3  
Final clients accesses
    20,615.6       21,890.8       22,883.1  
Total accesses
    20,615.6       21,890.8       22,883.1  
 
 
 

 
   
Year ended December 31,
 
   
2008
   
2009
   
2010
 
MOU (minutes)
    207    
n.a.
   
n.a
 
Traffic (millions of minutes)
    46,585       53,856       58,143  
ARPU (in euros)
    29.0       24.7       25.1  

The estimated mobile penetration rate in the United Kingdom was approximately 133% at December 31, 2010, compared to approximately 126% at December 31, 2009.
 
Total accesses for Telefónica O2 UK, Telefónica Europe’s operating company in the United Kingdom, increased 4.5% to 22.9 million accesses at December 31, 2010 compared to 21.9 million accesses at December 31, 2009 (excluding the Tesco mobile customer base, which is the result of a joint venture in which Telefónica O2 UK holds a 50% stake and whose customers use the Telefónica O2 UK network).  Telefónica O2 UK, had net adds of 0.9 million accesses in 2010, 11% less than its net additions in 2009.
 
Telefónica O2 UK added 0.9 million mobile contract accesses in 2010, bringing the total at December 31, 2010 to 10.5 million mobile contract accesses, an increase of 9.8% from December 31, 2009. Pre-pay mobile accesses decreased from 11.74 million accesses at December 31, 2009 to 11.71 million accesses at December 31, 2010. At December 31, 2010 mobile contract accesses made up 47.3% of Telefónica O2 UK’s mobile customer base, compared to 44.9% at December 31, 2009.  At December 31, 2010 Telefónica O2 UK had 0.7 million broadband accesses compared to 0.6 million broadband accesses at December 31, 2009.
 
ARPU was €25.1 in 2010 up from €24.7 in 2009 (a decrease of 2.1% in local currency).  The decrease in local currency ARPU was caused by the impact of lower mobile termination rates, or MTRs, which was partially offset by the increased demand for data from smartphone users. Traffic in 2010 increased 8% to 58,143 million minutes compared to 53,856 million minutes in 2009.
 
Sales and marketing
 
In the United Kingdom, we use a broad range of marketing channels, including television, radio, billboards, telemarketing, direct mail, internet advertising and sponsorship to market Telefónica O2 UK’s products and services.
 
In 2010, Telefónica O2 UK continued its focus on high-value customers across various segments and offered a wide range of smartphones such as the iPhone 4 and a range of android devices, in addition to mobile broadband, representing one of the key drivers of revenue growth in 2010.
 
Competition
 
Telefónica O2 UK’s estimated market share was approximately 26.6% at December 31, 2010 compared with approximately 26.2% at December 31, 2009, based on the number of mobile accesses.
 
In addition to Telefónica O2 UK, other significant network operators in the UK mobile telecommunications market are: Vodafone UK, a subsidiary of Vodafone plc, Everything Everywhere, a joint venture between Deutsche Telecom AG and France Telecom, and 3, owned by Hutchison Whampoa.  MVNOs operating in the UK market include Virgin Mobile and Talk-Talk, owned by Virgin Media and The Carphone Warehouse Group respectively, which respectively use the T-Mobile UK and Vodafone network, and Tesco Mobile, a joint venture in which Telefónica O2 UK holds a 50% stake, and which uses the Telefónica O2 UK network.
 
Since December 31, 2009, Telefónica O2 UK also provides the network infrastructure for LycaMobile, a mobile virtual network operator (MVNO) who competes with us and pays Telefónica O2 UK to use its network.
 
Network and technology
 
Telefónica O2 UK’s digital network in the United Kingdom is based upon the GSM/UMTS standard.  The prevalence of the GSM standard, together with Telefónica O2 UK’s international roaming agreements, enables Telefónica O2 UK’s customers to make and receive calls in more than 200 countries worldwide.
 
 
 
 
Germany – Telefónica O2 Germany
 
Operations
 
The following tables present, at the dates or for the periods indicated, selected statistical data relating to our operations in Germany (2010 data includes HanseNet figures).
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Fixed telephony accesses
                1,916.4  
Internet and data accesses
    214.8       285.1       2,914.7  
Narrowband accesses
                385.7  
Broadband accesses
    214.8       285.1       2,529.1  
Mobile accesses
    14,198.5       15,507.4       17,049.2  
Pre-pay accesses
    7,231.5       7,807.0       8,795.2  
Pay TV accesses
                77.2  
Final clients accesses
    14,413.3       15,792.5       21,957.5  
Wholesale accesses
    1,128.4       1,316.8       1,116.5  
Total accesses
    15,541.7       17,109.3       23,074.0  

   
Year ended December 31,
 
   
2008
   
2009
   
2010
 
MOU (minutes)
    138    
n.a.
      n.a.  
Traffic (millions of minutes)
    22,313       23,257       25,543  
ARPU (in euros)
    17.4       15.6       14.8  

The estimated mobile penetration rate in Germany was approximately 131% at December 31, 2010, compared to approximately 132% at December 31, 2009.
 
The total customer base of Telefónica O2 Germany, Telefónica Europe’s operating company in Germany, increased by 6.0 million accesses from December 31, 2009 to 23.1 million accesses at December 31, 2010, due primarily to our acquisition of HanseNet.
 
Telefónica O2 Germany had net adds of 0.6 million mobile contract accesses and 1.0 million mobile pre-pay accesses in 2010, bringing the contract and pre-pay customer base at December 31, 2010 to 8.3 million accesses and 8.8 million accesses respectively.
 
At December 31, 2010, Telefónica O2 Germany had a customer base of 2.5 million broadband accesses.  Telefónica O2 Germany reported 1.1 million ULL lines at December 31, 2010, a decrease of 15.2% from 1.3 million ULL lines at December 31, 2009. The decrease in ULL lines was due to the absorption of former HanseNet lines.
 
During March 2010 and following the acquisition of HanseNet, Telefónica O2 Germany added 2.1 million broadband accesses, 1.8 million fixed telephony accesses, 0.4 million narrowband accesses and 0.1 million pay TV accesses to its portfolio.
 
Mobile ARPU continued to decline in 2010, decreasing 5.5% to €14.8 in 2010 from €15.6 in 2009, mainly as a result of an approximately 62% regulated cut in MTRs in the last two years, through December 2010.  Traffic in 2010 increased 9.8% to 25,543 million minutes compared to 23,257 million minutes in 2009.
 
Sales and marketing
 
During 2010, Telefónica O2 Germany bolstered its commercial model with the introduction of the iPhone to its portfolio.  In addition, Telefónica O2 Germany unveiled its O2 Blue tariff, specifically targeted at Smartphone users and providing simple and affordable tariffs for this growing segment of the market.
 
 
 
 
Competition
 
Telefónica O2 Germany’s estimated market share in Germany was approximately 15.7% at December 31, 2010 compared to approximately 14.6% at December 31, 2009, based on number of mobile accesses.
 
Telefónica O2 Germany competes primarily with three other companies in the German market for communication services.  These are Vodafone Germany, which is owned by Vodafone plc. , T-Mobile, a subsidiary of Deutsche Telecom AG, and E-Plus, which is owned by KPN. Telefónica O2 Germany also competes with several MVNOs, Cable and DSL operators.
 
Telefónica O2 Germany purchased spectrum licenses in 2010 for approximately €1,379 million in connection with its efforts to provide next-generation mobile services.
 
Network and technology
 
Telefónica O2 Germany’s digital network in Germany is based upon the GSM/UMTS standard.  The prevalence of the GSM standard, together with Telefónica O2 Germany’s international roaming agreements, enables Telefónica O2 Germany customers to make and receive calls in more than 200 countries worldwide.
 
Czech Republic and Slovakia – Telefónica O2 Czech Republic and Telefónica O2 Slovakia
 
Telefónica Europe provides fixed line, Internet and data accesses, pay TV, and mobile services in the Czech Republic and mobile services in Slovakia, where it launched operations during the first quarter of 2007.
 
Operations
 
The following tables present, at the dates or for the periods indicated, selected statistical data relating to our operations in the Czech Republic (data excludes Slovakia).
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Fixed telephony accesses
    1,893.4       1,770.6       1,669.2  
Internet and data accesses
    779.5       848.7       898.8  
Narrowband accesses
    163.4       137.6       117.5  
Broadband accesses
    583.7       683.1       753.0  
Other accesses
    32.4       28.3       28.3  
Mobile accesses
    4,802.1       4,944.6       4,838.6  
Pre-pay accesses
    2,282.8       2,130.2       1,975.0  
Pay TV accesses
    114.5       137.6       129.2  
Final clients accesses
    7,589.5       7,701.5       7,535.8  
Wholesale accesses
    109.5       108.4       131.2  
Total accesses
    7,698.9       7,810.0       7,667.0  

   
Year ended December 31,
 
   
2008
   
2009
   
2010
 
MOU (minutes)
    121    
n.a.
   
n.a.
 
Traffic (millions of minutes)
    7,420       8,232       8,790  
ARPU (in euros)
    22.8       19.3       18.5  

The estimated mobile penetration rate in the Czech Republic based on registered customers was approximately 135% at December 31, 2010, compared to approximately 134% at December 31, 2009.
 
Fixed telephony accesses for Telefónica O2 Czech Republic, Telefónica Europe’s operating company in the Czech Republic, decreased by 5.7% to 1.7 million accesses at December 31, 2010 from 1.8 million accesses at December 31, 2009, mainly due to the challenging environment.
 
 
 
 
Telefónica O2 Czech Republic’s broadband accesses increased 10.2% compared to December 31, 2009 to 0.8 million accesses at December 31, 2010. These increases are primarily as a result of increased demand for accesses in the Czech Republic. Meanwhile, the pay TV customer base decreased 6.1% to 0.1 million accesses at December 31, 2010.
 
Telefónica O2 Czech Republic’s mobile accesses decreased 2.1% to 4.8 million accesses at December 31, 2010, from 4.9 million accesses at December 31, 2009.  Contract mobile accesses accounted for 59.2% of these accesses at December 31, 2010, up from 56.9% at December 31, 2009.  The number of pre-pay mobile accesses decreased 7.3%, to 2.0 million accesses at December 31, 2010, from 2.1 million accesses at December 31, 2009.
 
ARPU decreased to €18.5 in 2010 from €19.3 in 2009 (a reduction of 8.1% in local currency), primarily due to MTR cuts and reduced roaming rates.  Traffic in 2010 increased 6.8% to 8,790 million minutes compared to 8,232 million minutes in 2009.
 
Sales and marketing
 
Continued uptake of “O2 Neon” tariffs, a postpaid tariff with attractive prices, an increased retail fixed broadband customer base as well as a stabilization of fixed line losses contributed to solid commercial momentum in 2010, despite the challenging economic environment.
 
Competition
 
Telefónica O2 Czech Republic had an estimated mobile market share of approximately 38.5% at December 31, 2010, compared to approximately 39.2% at December 31, 2009, based on number of mobile accesses.
 
There are currently two other primary competitors in the Czech Republic mobile telecommunications market, Vodafone Czech Republic, which is owned by Vodafone plc., and T-Mobile, which is part of Deutsche Telecom AG.
 
The fixed telephony market in the Czech Republic consists of six large operators and a number of other smaller providers.  In voice the major competitors are U:fon, UPC and other cable operators which also provide integrated voice, Internet and pay TV offers.  Internet service is offered by all major mobile operators as well as a large volume of WiFi providers.  Pay TV is dominated by a number of cable and satellite companies, the biggest being UPC.
 
Network and technology
 
Telefónica O2 Czech Republic’s digital network in the Czech Republic is based upon the GSM/UMTS standard.  The prevalence of the GSM standard, together with Telefónica O2 Czech Republic’s international roaming agreements, enables its customers to make and receive calls in more than 200 countries worldwide.
 
Slovakia
 
At December 31, 2010, Telefónica O2 Slovakia’s total number of mobile accesses amounted to 0.9 million accesses, an increase of 59.2% compared to December 31, 2009.  Contract mobile accesses accounted for 38.0% of these accesses at December 31, 2010 compared to 35.4% at December 31, 2009.  Throughout 2010, Telefónica O2 Slovakia continued with “O2 Fér” plan, a simple tariff which unifies pre-pay and contract mobile rates and offers SIM-only products without a handset subsidy.
 
Ireland – Telefónica O2 Ireland
 
Operations
 
The following tables present, at the dates or for the periods indicated, selected statistical data relating to our operations in Ireland:
 
 
 
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Total mobile accesses
    1,727.7       1,714.3       1,695.8  
Pre-pay accesses
    1,084.6       1,022.5       966.5  

   
Year ended December 31,
 
   
2008
   
2009
   
2010
 
MOU (minutes)
    245    
n.a.
   
n.a.
 
Traffic (millions of minutes)
    4,867       4,672       4,732  
ARPU (in euros)
    43.2       39.6       37.0  

The estimated mobile penetration rate in Ireland was approximately 118% at December 31, 2010, compared to 120% at December 31, 2009.
 
Telefónica O2 Ireland had net losses of 18 thousand mobile accesses in 2010.  Telefónica O2 Ireland’s customer base, in terms of mobile accesses, decreased 1.1% from December 31, 2009 to 1.7 million mobile accesses at December 31, 2010.
 
Telefónica O2 Ireland had net adds of 38 thousand contract mobile accesses in its mobile business in 2010, a decrease of 22.7% on December 31, 2009.
 
ARPU decreased by 6.6% in 2010 to €37.0 from €39.6 in 2009 as a result of MTR cuts and continued mobile usage optimization by customers, including reduced roaming activity.  Traffic in 2010 increased 1.3% to 4,732 million minutes compared to 4,672 million minutes in 2009.
 
Sales and marketing
 
During 2010, despite Telefónica O2 Ireland’s performance being impacted by difficult economic conditions, intense competition and MTR cuts, Telefónica O2 Ireland posted growth in mobile postpay.
 
Competition
 
There are currently three other primary competitors in the Irish mobile telecommunications market: Vodafone Ireland, which is part of Vodafone plc, Meteor, which is part of Eircom, and 3 Ireland, which is part of Hutchison Whampoa Ltd.
 
Telefónica O2 Ireland’s estimated market share was approximately 32.0% at December 31, 2010 compared to approximately 32.3% at December 31, 2009 based on number of mobile accesses.
 
Network and technology
 
Telefónica O2 Ireland’s digital network in Ireland is based upon the GSM/UMTS standard.  The prevalence of the GSM standard, together with Telefónica O2 Ireland’s international roaming agreements, enables Telefónica O2 Ireland customers to make and receive calls in more than 200 countries worldwide.
 
Telefónica Latin America
 
Telefónica Latin America provides fixed and mobile telephony services through the operators described in the following sections in the main Latin American markets.  In addition, Telefónica Latin America’s other members include: Telefónica Empresas, TIWS, the business unit responsible for other telecommunications operators and for managing our international services and the network which supports these services, and Terra Networks Latin América.
 
The following table presents statistical data relating to our operations in Latin America:
 
 
 
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Fixed telephony accesses                                                                                             
    25,644.5       24,578.3       24,403.6  
Internet and data accesses                                                                                             
    7,629.8       7,605.2       8,235.1  
Narrowband accesses                                                                                         
    1,445.8       1,070.6       674.8  
Broadband accesses                                                                                         
    6,067.0       6,426.8       7,442.3  
Other accesses                                                                                         
    117.0       107.8       118.0  
Mobile accesses                                                                                             
    123,385.2       134,698.9       149,255.4  
Pay TV accesses                                                                                             
    1,540.5       1,648.6       1,792.7  
Final clients accesses                                                                                             
    158,200.1       168,531.1       183,686.9  
Wholesale accesses                                                                                             
    59.0       56.1       55.9  
Total accesses                                                                                             
    158,259.0       168,587.2       183,742.8  

 
Telefónica Latin America’s total accesses increased 9.0% to 183.7 million accesses at December 31, 2010 from 168.6 million accesses at December 31, 2009.  Total accesses at December 31, 2010 include 149.3 million mobile accesses, 24.4 million fixed telephony accesses, 8.2 million Internet and data accesses and 1.8 million pay TV accesses. Additionally, it includes 56 thousand wholesale accesses.
 
The following table sets forth certain information at December 31, 2010 regarding the principal Latin American operating companies of Telefónica Latin America.
 
Country
 
Company
 
Population
   
Interest
 
       
(in millions)
   
(%)
 
Brazil
 
Telecomunicações de São Paulo, S.A.—Telesp
    41.3 (*)     87.95  
   
Vivo Participaçoes S.A.
    194.0       59.42  
Mexico
 
Telefónica Móviles México, S.A. de C.V.
    110.6       100.00  
Panama
 
Telefónica Móviles Panamá, S.A.
    3.5       100.00  
Nicaragua
 
Telefónica Móviles Nicaragua, S.A.
    5.6       100.00  
Guatemala
 
Telefónica Móviles Guatemala, S.A.
    13.9       99.98  
El Salvador
 
Telefónica Móviles El Salvador, S.A. de C.V.
    6.0       99.08  
Venezuela
 
Telcel, S.A.
    28.8       100.00  
Colombia
 
Colombia Telecomunicaciones, S.A. ESP.
    45.5       52.03  
   
Telefónica Móviles Colombia, S.A.
            100.00  
Peru
 
Telefónica del Perú, S.A.A.
    29.6       98.34  
   
Telefónica Móviles Perú, S.A.C.
            99.99  
Ecuador
 
Otecel, S.A.
    14.3       100.00  
Argentina
 
Telefónica de Argentina, S.A.
    40.4       100.00  
   
Telefónica Móviles Argentina S.A.
            100.00  
Chile
 
Telefónica Chile, S.A.
    16.9       97.89  
   
Telefónica Móviles Chile, S.A.
            100.00  
Uruguay
 
Telefónica Móviles Uruguay, S.A.
    3.4       100.00  
 

(*)
Concession area only.

 
Brazil
 
The following table presents, at the dates indicated, selected statistical data relating to our operations in Brazil.
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Fixed telephony accesses
    11,661.9       11,253.8       11,292.6  
Internet and data accesses
    3,625.8       3,440.2       3,848.2  
Narrowband accesses
    996.4       723.1       446.2  
Broadband accesses
    2,557.8       2,638.4       3,319.2  
Other accesses
    71.6       78.7       82.8  
Mobile accesses
    44,945.0       51,744.4       60,292.5  
Pre-pay accesses
    36,384.0       41,960.7       47,658.6  
Pay TV accesses
    472.2       487.2       486.3  
Final clients accesses
    60,704.9       66,925.7       75,919.6  
Wholesale accesses
    34.1       34.2       33.9  
Total accesses
    60,739.1       66,959.8       75,953.5  

 
 
 
Telefónica Latin America’s accesses in Brazil increased 13.4% to 76.0 million accesses at December 31, 2010 from 67.0 million accesses at December 31, 2009. This growth reflects a 16.5% year-on-year increase in Vivo’s  customer base and, to a lesser extent, the expansion of Telesp’s (Telefónica Latin America’s Brazilian fixed line business) fixed telephony accesses and broadband business, while pay TV accesses were largely unchanged.
 
Brazil Fixed Business – Telecomunicações de São Paulo, S.A. – Telesp
 
Operations
 
Telesp provides fixed telephony and other telecommunications services in the Brazilian state of São Paulo under concessions and licenses from Brazil’s federal government.
 
Telesp achieved significant operating and commercial improvements in 2010, a year during which the company reoriented its management focus and repositioned its commercial efforts, attaining improvements in quality and customer loyalty levels. As a result of this, Telesp’s fixed telephony, Internet and data and pay TV accesses increased 2.9% to 15.7 million accesses at December 31, 2010 from 15.2 million accesses at December 31, 2009 primarily due to sharp increases in broadband accesses. Telesp’s fixed telephony accesses increased 0.3% to 11.29 million accesses at December 31, 2010 from 11.25 million accesses at December 31, 2009. Of these, 29.9% were pre-pay accesses or accesses with consumption limits.
 
The Brazilian broadband market continued to grow in 2010. Telesp increased its broadband customer base by 25.8% to 3.3 million accesses at December 31, 2010 compared to 2.6 million accesses at December 31, 2009, recovering market share in this business. Telesp offers pay TV mainly through a DTH solution and, since the fourth quarter of 2007 after the acquisition of Navy Tree, also offers MMDS technology, reaching 0.5 million accesses at December 31, 2010.
 
Sales and marketing
 
In Brazil, we employ a differentiated approach to marketing whereby we use a mix of human and technological resources (a specialized team and business intelligence tools, respectively), in addition to specific studies that allow us to target various market segments according to the relevant needs of the customers in each segment. We continuously monitor market trends in an effort to develop new products and services that may address the future needs of our customers.
 
Telefónica Latin America employs direct sales, telesale and indirect channels to deliver fixed telephony and other telecommunications solutions to residential, small and medium enterprises, or SMEs, and corporate customers in Brazil.
 
We offer bundled products, which include both local and long-distance traffic and minutes bundled with broadband.  We believe that the trend towards bundled offers in Brazil will continue to grow, and that further developing such offers will be important to maintaining our competitiveness in the market.  Also, since 2009 Telesp launched its “X-treme” products, based on FTTx technology.
 
Competition
 
Our fixed telephony business in Brazil currently faces strong competition in the corporate and premium residential segments in respect of several types of services. In the corporate segment, there is strong competition in both voice services (local and long distance) and data transmission, resulting in greater retention costs to maintain client relationships. We also face fierce competition in IT services from multinational companies with considerable experience in this business.
 
 
 
 
Our main competitors in the corporate fixed telephony line segment are Oi, Intelig and Embratel, a subsidiary of Telmex Internacional. In the high-income residential service segment, we compete for long-distance customers with Embratel and for broadband customers with cable TV providers, mainly NET Serviços de Comunicação S.A. The niche operator owned by Vivendi, GVT, started operating in the state of São Paulo in 2010. For the local voice and high-income segments, we also face increasing competition from mobile operators. To defend ourselves from increasing competition, we focus on improving our broadband products, offering bundled services that include voice, broadband and pay TV, and we are increasing the access speed offered to our clients. In addition, we are improving our market segmentation and developing more competitive products intended to defend our client base from our competitors’ product offerings and to defend our market share.
 
In the low-income fixed local telephony segment, we face less direct competition due to the low profitability of this market. The most significant competition is from pre-pay mobile telecommunications providers.
 
Telesp had an estimated market share in the fixed telephony market in the State of São Paulo of approximately 72.7% at December 31, 2010 based on the number of fixed telephony accesses, down from approximately 74.4% at December 31, 2009.
 
Brazil mobile business –Vivo
 
Operations
 
With approximately 203.1 million mobile accesses, Brazil ranked first in Latin America in terms of number of mobile accesses at December 31, 2010. At December 31, 2010, Brazil had an estimated mobile market penetration rate of approximately 104.7% compared to approximately 90.5% at December 31, 2009.
 
Since September 2010, Telefónica has control of Vivo, after acquiring Portugal Telecom’s stake in Brasilcel. The license of Vivo considers the Brazilian market on a nationwide basis with an aggregate population of approximately 194 million people. Vivo is the leading operator in Brazil, with an approximate 29.7% market share in terms of mobile accesses.
 
Vivo’s customer base, in terms of number of accesses, increased 16.5% to 60.3 million accesses at December 31, 2010 from 51.7 million accesses at December 31, 2009. Of these, 12.6 million were mobile contract accesses. The primary factors contributing to this growth include new mobile broadband accesses, the wider range of handsets available, Vivo’s leadership in terms of brand and distribution chain, ongoing marketing campaigns for pre-pay mobile traffic and an improved capacity to attract contract accesses with the Vivo Voçe plans launched at the end of 2009.
 
   
Year ended December 31,
 
   
2008
   
2009
   
2010
 
Traffic (millions of minutes)
    40,547       52,134       77,463  
ARPU (in euros)
    11.2       9.9       11.0  
 
Traffic in 2010 increased 48.6% to 77,463 million minutes compared to 52,134 million minutes in 2009 due to the characteristics of the promotions that Vivo offered in 2010, focusing on pre-pay and control segments, which require minimum consumption and a prepaid recharge when such consumption is complete.
 
ARPU was €11.0 in 2010 compared to €9.9 in 2009 (a decrease of 6.0% in local currency), reflecting the increased proportion of “SIM only” accesses and a strong growth in the customer base.
 
Sales and marketing
 
Vivo actively manages its distribution channels, which consisted of approximately 11,834 points of sale at December 31, 2010. Also, pre-pay mobile customers have access to a wide range of top up points. Credit top ups can also be made by electronic transfers through an automatic teller machine.  At December 31, 2010, approximately 21.0% of Vivo’s customer base were contract mobile accesses and the remaining 79.0% were pre-pay accesses. Contract mobile accesses growth was driven by customer acquisition and retention campaigns focused on high-value customers, with an emphasis on the Vivo Voçe plans and mobile internet offers.
 
 
 
 
Vivo voçe plans are customized plans that allow customers to choose among various service mixes and include free voice minutes, messaging, and/ or mobile Internet access.  Vivo Voçe also aims to increase customer loyalty by encouraging increased usage and advertising competitive prices.  These plans are divided into different categories depending on the number of minutes included, and feature additional upgrades, such as extra SMS, extra long distance minutes and extra MMS as well as a 3G Internet upgrade option.
 
Competition
 
Vivo was the leading mobile operator in Brazil in terms of number of accesses at December 31, 2010. The growth of the Brazilian market was considerable during the past years while being accompanied by an increase in competition due to the introduction of new competitors in the regions in which Vivo operates. Vivo’s major competitors are subsidiaries of TIM Brasil (a subsidiary of Telecom Italia), Claro (a subsidiary of America Móvil) and Oi.
 
Vivo’s estimated market share in terms of mobile accesses in the Brazilian mobile markets in which it operates was approximately 29.7% at December 31, 2010, largely unchanged from December 31, 2009.
 
Network and technology
 
The licenses granted to the companies integrated under the Vivo brand allow operations over the WCDMA, GSM, CDMA, CDMA 1XRTT, CDMA EVDO and TDMA systems. Vivo offers both analog and digital services in the bands of 800 MHz, 1900 MHz and 2100 MHz. In 2010 migration from the CDMA to the GSM network continued, increasing Vivo’s GSM customer base at December 31, 2010 to 49.6 million accesses, 82.3% of its total customer base.
 
Venezuela
 
Venezuela mobile business – Telcel, S.A. – Telcel
 
Operations
 
The following table presents, at the dates indicated, selected statistical data relating to our operations in Venezuela.
 
   
At December 31,
 
   
2008
   
2009
   
2010
 
   
(in thousands)
 
Total mobile accesses
    10,584.0       10,531.4       9,514.7  
Pre-pay accesses
    9,970.7       9,891.1       8,740.3  
Fixed wireless accesses
    1,312.8