MANAGEMENT’S DISCUSSION AND ANALYSIS Network revenue was higher this year compared to last year. This was the net effect of: Excluding the decline in US and international roaming revenue this year, network revenue would have increased 1 % . Data revenue was 17 % higher this year mainly because of the continued penetration and growing use of smartphones, tablet devices and wireless laptops, which increased the use of e-mail, wireless, Internet access, text messaging and other wireless data services. Data revenue represented approximately 47 % of total network revenue this year, compared to approximately 41 % last year. Postpaid churn was 1.24 % this year, compared to 1.29 % in 2012. The lower churn rate is partly attributable to the new simplified plans and the roaming plans we introduced. Gross postpaid subscriber additions were 1.4 million this year, or 3 % lower than last year, which reduced net postpaid subscriber additions to 228,000, despite a lower postpaid churn. We believe the industry transition from three year to two year plans resulting from the recent adoption of the Canadian Radio-television and Telecommunications Commission (CRTC) Wireless Code may have slowed our overall wireless subscriber growth from the second half of the year. See “Regulation in Our Industry” for more information on the Wireless Code. We activated and upgraded approximately 2.7 million smartphones this year, compared to approximately 2.9 million in 2012. Approximately 34 % of these were for new subscribers. The decrease was mainly because there was a 10 % reduction in hardware upgrades by existing subscribers during the year, which we also believe is at least partly due to the move from three to two year contracts and the associated pricing changes. The percentage of subscribers with smartphones increased to 75 % of our overall postpaid subscriber base, compared to 69 % at the end of 2012. Smartphone subscribers typically generate significantly higher ARPU and are less likely to churn. The decrease in prepaid subscriber net additions was mainly because of increasing competition at the lower end of the wireless market where prepaid products are mainly sold. Blended ARPU was down slightly this year compared to last year because the voice component declined at a faster rate than the data component increased. Equipment sales (net of subsidies) include revenue from sales to: Revenue from equipment sales was lower this year, mainly because fewer existing subscribers upgraded their devices and there were fewer gross activations. We assess operating expenses in two categories: Other operating expenses (excluding retention spending), were down slightly from 2012, due to a continued focus on cost productivity initiatives we are implementing across various functions. Adjusted operating profit was 3 % higher this year compared to last year because of continued growth of wireless data, our improvements in cost management and efficiency and lower volumes of hardware sales and upgrades. Adjusted operating profit margin as a percentage of network revenue increased this year to 46.8 % from 45.6 % in 2012. Higher Adjusted Operating Profit Lower Operating Expenses Lower Equipment Sales 40 ROGERS COMMUNICATIONS INC. 2013 ANNUAL REPORT GLYPH<129> higher data revenue related to an increase in subscriber levels and higher usage of wireless data services GLYPH<129> partially offset by our introduction of new lower priced US and international roaming plans and rates which offer consumers more value, and GLYPH<129> the continued adoption of customer friendly simplified plans, which often bundle in certain features like voicemail, caller ID and long distance that we have charged for separately in the past. GLYPH<129> the cost of wireless handsets and equipment GLYPH<129> all other expenses involved in day-to-day operations, to service existing subscriber relationships and attract new subscribers. GLYPH<129> independent dealers, agents and retailers GLYPH<129> directly to subscribers through fulfillment by Wireless’ customer service groups, websites, telesales and corporate stores. (IN MILLIONS OF DOLLARS) WIRELESS DATA REVENUE 2013 2012 2011 $3,175 $2,722 $2,325 (%) DATA REVENUE PERCENT OF BLENDED ARPU 2013 2012 2011 47% 41% 35% (IN MILLIONS OF DOLLARS) WIRELESS ADJUSTED OPERATING PROFIT 2013 2012 2011 $3,157 $3,063 $3,036 (%) SMARTPHONES AS A PERCENTAGE OF POSTPAID SUBSCRIBERS 2013 2012 2011 75% 69% 56% The cost of equipment was $50 million lower than last year, or 3 % , mainly because fewer existing subscribers upgraded hardware and fewer new customers were added during the year as discussed above. We activated and upgraded fewer devices compared to 2012. Total customer retention spending (including subsidies on handset upgrades) was $939 million, 0.3 % lower than last year. The reduction was mainly because fewer existing subscribers upgraded their hardware as discussed above, which we partially attribute to the recent shift to two year contracts.