Business Radar | KPN B.V. | Annual Report of 2012

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KPN Annual Report 2012

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Contents Introduction 1 Financial Statements 85 Corporate Financial Statements 149 Introduction by the CEO Consolidated Financial Statements 86 Corporate Income Statement 149 – Trust in the future 2 Consolidated Statement of Income 86 Corporate Balance Sheet 150 Review of the year 2012 4 Consolidated Statement General notes to the Corporate Trends in telecom and ICT 6 of Comprehensive Income 87 Financial Statements 151 Who we are and what we do 8 Consolidated Statement Notes to the Corporate of Financial Position 88 Balance Sheet 152 Our main achievements 12 Consolidated Statement of Our strategy 14 Cash Flows 90 Other Information 155 Strategy at a glance 16 Consolidated Statement of Independent Auditor’s Report 155 strategies, financing plans, competitive position, Strategy in action 18 Changes in Group Equity 91 Proposed appropriation of result 156 Our role in society 20 General notes to the Consolidated Financial Statements 92 Subsequent events 156 Notes to the Consolidated Legal structure 157 Report by the Board of Management 22 Statement of Income 101 Information about the KPN share 24 Glossary of terms 158 Notes to the Consolidated are not historical facts and can be identified by the use of Group performance and outlook 26 Statement of Financial Position 111 Our activities and performance 30 Notes to the Consolidated Statement of Cash Flows 133 Governance 48 Other Notes to the Consolidated Risk management and compliance 56 Financial Statements 134 Regulatory developments 63 Report by the Supervisory Board 66 Remuneration and Organizational Development Report 72 All market share information in this financial report is accredited manufacturer and is certified as an FSC mixed sources product. It is produced with 50% recycled fibre 50% FSC certified fibre sourced from sustainable forests. 22

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KPN is a leading supplier of telecommunications and ICT services. We offer consumers total solutions for fixed and mobile telephony, internet and TV. For business customers – from multinationals to SMEs and home offices – we provide fixed and mobile telephony and data services. In addition, we provide a broad range of ICT products and services, such as workspace management, data centers, consulting and cloud services. In the Belgian and German mobile markets, we are a strong challenger. We aim to be the best service provider in the Netherlands. Thanks to us, our customers can be online wherever and whenever: at home, at work and on the move. Our products and services make this as easy as possible for them. Thanks to our cables, transmission masts and data centers and the thousands of KPN people, Schiphol Airport, the port of Rotterdam, the railways, internet banking, pin payments and many other things can all function. Day in, day out. We want to bring the society further, with each other and for each other, in a sustainable way. That’s where our strength lies. 87 68 KPN | Annual Report 2012 1

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Introduction TRUST IN THE FUTURE 2012 was a turbulent and challenging year for the KPN Group. It was accelerated our commercial and infrastructure investments to stabilize and improve customer service, thus taking the necessary steps to These ambitions go hand in hand with our social policy. However, and dividend policy changes impacted our shareholders’ returns. 24/7 T he effects of the measures needed to become the best service provider were clearly visible in 2012. Our customers were able to see improvements in our services and products. We boosted the quality free helpdesk launched of our services, but at a slower pace than expected at the beginning of 2012. Investments in our services and products enabled us to achieve our market share targets in both the >1M business and the consumer market. However, the improved operating performance was not reflected in improved financial results. Quality of services IPTV customers The Net Promoter Score, which was in the Netherlands considerably higher among consumers than in 2011, proves that we are making the right investments in the quality of our services. Among the reasons for the higher score were the launch of our free 24/7 helpdesk, an improvement in the call center service and the opening of XL shops. The main driver 2 KPN | Anual Report 2012 a year where we market positions realize our ambitions. share price development for the increase in broadband customers for the first time in years was our growth in fiber activations and good performance of the Telfort brand. Our new, transparent mobile propositions triggered positive reactions from consumers and business customers. Nevertheless, revenues in the mobile market continued to decrease, partly as a result of a change in customer behavior: people are communicating more and more via apps. Another factor in the drop in our revenues was increasing competition. In the business segment we maintained our market position but the adverse economic conditions had an impact on our customers in 2012. They remained circumspect regarding their ICT investments or postponed them, putting further pressure on prices. The sentiment in the Corporate Market was also characterized by reticence and uncertainty. That confirmed the need to integrate the Business Market segment and parts of Corporate Market.

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We were once again successful in 2012 with Corporate Social Responsibility (CSR) Secondly, the change in our shareholding our subsidiaries in our neighboring countries. We recorded good results in 2012 in the whereby América Móvil acquired just over The number of customers rose substantially domain of CSR. We have been increasingly 27% of KPN’s shares in June 2012 received a in Germany. Primarily as a result of increased successful in integrating our social policies and lot of attention. As announced on February 20, price competition, revenue growth slowed in thereby making it a self-evident part of our 2013 the support of our largest shareholder in the fourth quarter. Belgium continued to show business operations. Through our social our intention to raise EUR 4 billion of equity strong revenue growth, driven by B2B, themes we explicitly show that, as a telecom equivalent capital is a major step towards wholesale and data. and ICT service provider, we can do a lot for successful execution of our capital raise. This the community. “Best ICT infrastructure” is one will consist of a EUR 3 billion rights issue and, To further improve the quality of our of our themes for good reason, as it allows us in addition, issuance of hybrid capital services we ramped up customer-driven to stress that a modern society cannot do instruments. I am pleased that important investments. We went ahead with upgrading without ICT. Moreover, we are convinced that progress has been made towards aligning our our copper network, enabling us to offer our KPN makes an essential contribution. And the financial position with our strategy and that customers even higher upload and download more important ICT becomes, the greater the our relationship agreement will enable us to speeds. We also improved our existing mobile demands people make on secure and reliable have the benefit of a strong relationship with network and we laid the foundations for the internet traffic. To safeguard this, we give top a global leader in the telecom sector going mobile network of the future by acquiring an priority to the theme “Security and privacy”. forward, among other things, by the intended attractive frequency package, including 4G In terms of procuring green power and saving appointment of two individuals, designated LTE. We have made an energetic start to the energy we are now among the world’s by América Móvil, to KPN’s Supervisory Board rollout of our 4G network, so we expect to “greenest” telecom and ICT companies. during the Annual General Meeting (“AGM”) have 50% coverage in the summer of 2013. Our listing in the Carbon Disclosure Project in April 2013. We also expanded our fiber network in 2012 and the Newsweek Green Rankings prove that and we strengthened our “fiber position” we are able to distinguish ourselves through To conclude thanks to the takeover of several fiber service our sustainability framework. We make The A year ago in this report I wrote, “KPN is a providers. Uncertain economic prospects, the New Way of Living and Working possible for healthy company with stretching customer- need to strengthen our financial position and a growing number of companies, thereby oriented and social ambitions”. Those words the flexibility to finance strategic investments underlining the positive effects on the apply just as much today. We have made underlay our decision to stop our share buy environment and society as a whole. Also in good progress and I am pleased with the back program at the start of 2012 and to the healthcare sector we are able to highlight operational performance as a team. This offers reduce our 2012 dividend. Unfortunately, the value of ICT. good prospects of success on our strategic these circumstances contributed to a decline path. KPN is a strong and resilient company, in our share price during the year. We demonstrate the fine potential of ICT with thanks to the efforts, knowledge and qualities KlasseContact, the most important project of of thousands of KPN employees. Organization the KPN Mooiste Contact Fonds. In 2012 we To align our organization with our strategic enabled 200 chronically ill children to continue goals and to be able to respond adequately taking lessons via a special communication Eelco Blok to the changing market, we revamped our top set. We will give this project additional Chairman of the Board of Management structure at the beginning of 2012. We formed support in 2013, so that even more children and CEO the Executive Committee and appointed Joost can stay in contact with their class and their Farwerck as Managing Director Netherlands. classmates. In the fall we added a cultural There was one change in the composition dimension to our social policies by entering of the Board of Management in 2012: in into a partnership with the new Rijksmuseum September Eric Hageman was officially in Amsterdam. appointed as Chief Financial Officer, the job he had already partially performed on an Special topics interim basis in the previous months, along I would especially like to mention two topics with Steven van Schilfgaarde. that received a lot of attention within the company and in the outside world. In January We are continuing our personnel reduction we were confronted with a computer hack. program in the Netherlands. Consequently, We took the incident very seriously, we learned at the end of 2013 the workforce will show our lessons and used this to focus even more a decrease of 4,000 to 5,000 employees in on security and privacy, both internally and comparison with the start of 2011. We realize externally. It goes without saying that we are the significance of the impact on employees conscious of how important it is for customers concerned, but a smaller, simpler and more to have confidence in our ability to keep their efficient organization is essential if we are data secure. We have taken necessary to operate at lower cost. A social plan is in measures, including setting up the Security place for colleagues who have had to leave Operations Center, which reduces the risk the company; this is geared to helping of security incidents in the future. those employees find a new job as quickly as possible. KPN | Annual Report 2012 3

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Introduction REVIEW OF THE YEAR 2012 From the strategy update in January to the acquisition of frequencies in December. The last twelve months at KPN summarized on two pages. JANUARY MARCH MAY To have more direct and efficient control over Young people’s bran Hi, introduces a new KPN closes the sale of Getronics International. its operational activities, KPN introduces a series of subscriptions centered around The transaction is part of KPN’s proven new top structure including an Executive mobile internet, with options for voice strategy of strengthening its global delivery Committee, under the final responsibility calls and text messages. capabilities for major international clients of the Board of Management. through partnerships. KPN sets up a Security Operations Center. KPN presents it’s strategic update, with This measure is just one of the ways First in Belgium to offer mobile services a focus on stabilizing domestic market in which KPN aims to prevent security without a minimum contract duration positions and did not announce a share incidents such as that in January. buy back program. The Mexican company América Móvil makes a partial bid for just over 27% of KPN’s A hacker obtains access to servers on the KPN ordinary shares. network. KPN immediately takes steps and informs all relevant authorities. JUNE In Amsterdam IJburg and Nunspeet KPN In the Rijksmuseum in Amsterdam, newspaper introduces high-speed internet via fiber Het Financieele Dagblad and KPN organize broadband with speeds of up to 500 Mb the debate “Het Nieuwe Holland”, with per second. The New Way of Living and Working as a central theme. At the National Privacy Debate KPN announces its Privacy Mission. The mission is part of the measures to safeguard customers’ privacy APRIL and security. The NMa approves the acquisition of fiber In midsummer the KPN Mooiste Contact Fonds service provider Lijbrandt and Reggefiber continues a fine tradition: the XL days. In five Wholesale. This results in more efficiency Dutch cities 500 KPN employees give 550 and a clearer division of roles: KPN provides elderly people a day to remember. the fiber services, whereas Reggefiber can completely focus on the fiber network roll-out. Following América Móvil’s partial bid, KPN investigates various options for creating E-Plus introduced a value for money data more value, including selling E-Plus. Due to FEBRUARY proposition under the new brand name Yourfone. Following its multi-brand strategy, the tough conditions on the capital markets, no agreement can be reached with similar propositions are introduced for Simyo prospective buyers. Using the headline “Two million apologies”, and Blau in the months thereafter. KPN publishes an advertisement in the daily papers to apologize for inconvenience caused by the hack in January. KPN asks all e-mail customers to change their passwords as a precautionary measure. 4 KPN | Anual Report 2012

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JULY The Carbon Disclosure Project acclaims KPN NOVEMBER as the world’s number one telecom company KPN introduces new commercial propositions in terms of its climate policy. KPN is the only The number of customers taking services via for consumers, becoming the first mobile Dutch company that is listed on both the the fiber network exceeds 350,000, more provider in the Netherlands to offer unlimited performance index and the disclosure index. than three times as many as a year ago. calls and text messages with corresponding data bundles – for a flat fee. KPN sells part of its German mobile towers. Among other things, the cash proceeds KPN reduces its 2012 dividend to EUR 0.35 will be used to support the investments per share to maintain a prudent financial in the accelerated roll-out of its German framework. In order to make the necessary mobile network. investments in frequency licenses possible, KPN further adjusts the dividend in December KPN and the labor unions reach a provisional to EUR 0.03 per share for 2013. agreement on a new collective labor agreement running from April 1, 2012 to June 1, 2013. To further strengthen its fixed network strategy in the Netherlands, KPN acquires an additional 10% of the shares in Reggefiber, After an absence of a year, KPN Group is once increasing its share to 51%. again listed on the Dow Jones Sustainability World Index. This means that KPN is one of E-Plus is ranked 3rd in network quality by the top five most sustainable telecom Germany’s biggest computer magazine companies in the world. “Computerbild”, who performed an extensive network test amongst consumers. KPN Group Belgium introduces BASE ALL Unlimited: unlimited calls, text messages and data for a flat fee. DECEMBER AUGUST OCTOBER Thanks to the upgrade of the copper network KPN now offers two thirds KPN starts renewing the mobile networks of Dutch households a download speed KPN sells part of its Dutch mobile in the Netherlands, making mobile telephony of at least 40 Mbps. towers to a large operator of wireless and internet even more stable and reliable telecommunication masts. than before. Modernizing and improving The huge popularity of IPTV enables KPN the networks is one of KPN’s ways of to reach the milestone of one million IPTV In three months’ time the number of new further improving its market position customers, taking its market share from 17% mobile subscriptions in Germany grows in the mobile market. to 23% in the space of one year. by a staggering 500 thousand. Due to fierce competition, this growth does not translate To put the focus more strongly on its SEPTEMBER to increased turnover. domestic markets and core activities, KPN sells the mobile subdivisions KPN KPN starts a free telephone helpdesk that For the first time in years, the number of Spain and Ortel Mobile Switzerland. is available 24/7 to KPN consumer and broadband customers grows; reasons include business customers. more fiber connections and Telfort’s good During the spectrum auction a very attractive performance. This stabilizes KPN’s broadband combination of frequency licenses is Eric Hageman is appointed CFO. Mr. Hageman market share. allocated to KPN for the Dutch mobile market already worked partially as interim CFO since for EUR 1,352 million. the beginning of 2012. KPN reaches ninth place in the environmental rankings of the American weekly magazine Newsweek, making it the best performing Dutch company. The rankings chart the ecological footprint of the five hundred largest publicly quoted companies. The Dutch competition authority (NMa) announced the approval of the acquisition of the fiber service providers Edutel, XMS, KickXL and Concepts ICT from Reggeborgh. KPN | Annual Report 2012 5

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Introduction TRENDS IN TELECOM AND ICT The importance of telecom and ICT is increasing: businesses and consumers want to be accessible anytime, anywhere, and vital functions in society cannot work without ICT infrastructure. Traditional forms of communication are making way for new ones. The world of telecom and ICT is changing radically and rapidly. I Mobile network CT has become our economy’s central and unemployed people is rising. Bankruptcies nervous system. Internet and fixed and lead to a contraction of the business telecom 10X mobile telephony have become a basic market; companies disappear or delay their requirement of modern life, and for millions investments. Growing unemployment and of people social media such as Facebook and a decrease in purchasing power and consumer Twitter are now a perfectly normal and confidence influence expenditure. For instance, accepted means of communication. Consumers more and more consumers are opting for a faster than current mobile are becoming increasingly demanding: they single fixed connection (with a cable or Internet connections with want products and services of the best quality telecom company). Competition and declining 4G LTE for the best price. They expect personal service revenues are encouraging telecom and other and a reliable, secure and fault-free network. companies to operate more efficiently. Specific activities are being outsourced to specialist 249% The challenges are considerable, particularly companies domestically or abroad that can in economically tough times, that are also do the work more cheaply without any loss affecting the telecom and ICT sector. The of quality. economies of the Netherlands, Germany and Belgium, the countries in which KPN Market dynamics are changing as mobile increase in data traffic at KPN operates, are relatively strong. But even here providers enter the fixed consumer market customers compared to 2007 the number of bankruptcies, redundancies and they and cable service providers increase their focus on the business market. 6 KPN | Anual Report 2012

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From 3G to 4G CSR The unrelenting growth of smartphone The New Way of Living and Working, which and tablet use and associated new forms facilitates working irrespective of time and of communication, both free and paid, are place, has gained a firm foothold in society. pushing mobile data traffic to new heights. Now that the facilities are becoming more That places high demands on the quality widely available and quality continues to and security of the mobile infrastructure. improve, the next challenge is to solve The transition from a 3G to a 4G LTE network intangible issues such as striking an will change the mobile market radically: 4G appropriate work-life balance. LTE will level the playing field between mobile and fixed internet in terms of speed. The impact A relative scarcity of raw materials such as of this modernization is hard to estimate, but iron and copper and social concerns about will offer big opportunities for all parties “conflict minerals”, such as tin and coltan, are involved. Among other things, it could simplify encouraging the telecom sector to conduct a and accelerate the implementation of The New more environmentally aware procurement and Way of Living and Working and innovations processing policy. Lease propositions, recycling in the healthcare sector. In the field of fixed of obsolete peripherals and other equipment, telephony, optimal utilization of the copper and the quest for alternative materials are network and the rollout of fiber are on-going. therefore becoming more important. Dutch and European legislation affect the While the growth in data traffic is pushing up developments in the telecom and ICT market, energy consumption, our aim is nevertheless especially with regard to pricing policies. to reduce our total energy consumption and Telecom companies are being forced to lower CO2 emissions. For several years, the rise in their mobile termination rates (MTR) and energy prices has made the trend towards roaming tariffs. In addition, an increasing more sustainable energy consumption number of strict rules are meant to create apparent. But growing environmental a level playing field for new entrants and awareness is a contributory factor as well: incumbents alike. Similar rules for cable more and more consumers are generating service providers are virtually non-existent. their own renewable energy. The sustainability This situation has changed the balance of trend among businesses and consumers is power in favor of the latter. expected to grow in the years ahead. KPN | Annual Report 2012 7

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Introduction WHO WE ARE AND WHAT WE DO In the radically and rapidly changing world of telecom and ICT, KPN is the network that has been bringing people together for the last 125 years. Through our services, products and network we ensure that people and businesses are online wherever and whenever they want, with whatever device they choose. That’s where our strength lies. As the challenger on the German and Belgian mobile markets we are playing a significant role in shaping the market place. KPN Group in 2012 The Netherlands Consumer Residential Consumer Mobile Business Market Corporate Market NetCo We offer a diverse and With our multiple brands We offer our small and KPN offers multinationals The beating heart of KPN broad range of products KPN, Hi, Telfort and Simyo medium-sized business and other enterprises a where infrastructure and and services (KPN, Telfort we offer various customer customers a wide range broad range of services ICT coincide. This division, and XS4ALL) in and around segments customized of services, from fixed and products: consulting, which is responsible for the house, such as (IP) TV, mobile services and and mobile telephony workspace management, the fixed and mobile internet and fixed products, ensuring that and internet to a variety cloud services, data networks, makes it telephony. The copper people can be contacted of data network services, center capacity and technically possible for and fiber networks are the anytime, anywhere. optionally in the cloud. other network-related KPN to ‘run’ its services technical foundation on Among the brands we ICT solutions. and products. which all communications operate are KPN, XS4ALL, are based. Telfort Zakelijk, Yes Telecom and Talk & Vision. International iBasis Germany Belgium iBasis E-Plus is the successful challenger in KPN Group Belgium is the successful Thanks to the global activities of iBasis, KPN the German mobile market with its challenger in Belgium. Its flagship is is a leading player in the international wholesale brands BASE, Simyo, Ortel Mobile, BASE, the third largest mobile provider market for telephony services. yourfone, Blau and Ay Yildiz, as well in Belgium. We also operate there with as via wholesale customers. Simyo and Ortel Mobile. 8 KPN | Anual Report 2012

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W e have a mission: to be the best and mobile services. We also offer ICT service provider and to give our applications to the government and the customers the best and most healthcare and education sectors. Corporate integrated network. At home, Market supplies large organizations with, at work and on the move. We achieve this with among other things, workspace services, high-quality customized services and products network solutions and data center services. under a number of brands, enabling us to cater We have 37 million mobile customers, of which even better to the needs and wishes of the 10 million are in the Netherlands, 23 million various customer groups. For example, we in Germany and 3 million in Belgium. make a distinction between products, services and price, so customers can choose the brand Many of our customers call our network that best suits their needs and wishes. the best in the Netherlands. The thousands of transmission masts and the countless The network that cares for society kilometers of copper cable and fiber ensure As the biggest ICT service provider in the that our mobile and fixed services can operate. Netherlands we are conscious of our (social) Other parties use our network too. A stable responsibilities. This is why over the last few and reliable network requires maintenance years we have invested heavily in the quality and modernization. Furthermore, we have of the service we give to our customers, to anticipate a strong growth in data traffic, in technology and in our fixed and mobile especially as a result of mobile internet usage. networks, as well as in simplifying our That is why in 2012 alone we invested EUR processes and our organization. For instance, 2.209 billion, of which EUR 1.509 billion in we increased the upload and download speed our fixed and mobile infrastructure services for broadband, we raised the quality of our in the Netherlands, Germany and Belgium. IPTV product to an even higher level and In December 2012 we acquired an attractive we launched new transparent mobile combination of frequency licenses for the propositions. We opened new shops, Dutch mobile market for EUR 1.352 billion. improved our call-out service and introduced Among other things, this cleared the path for the free 24/7 helpdesk. With these initiatives the roll-out of the 4G LTE network, which we we are putting the three core values of our have since started. More and more customers strategy into practice: “Strengthen”, “Simplify” are taking advantage of the latest fiber and “Grow”. technology, which makes speeds of 500 Mb per second possible. At the end of 2012 For millions of customers, the copper network the number of customers taking services via serves as the basis for our three fixed services: the fiber network had tripled in comparison IPTV, internet and fixed telephony. Around with 2011. Besides providing fiber access we 979 thousand of our customers take these continued the upgrade of our copper network, three services in a single package (triple play). enabling us to continue offering adequate In the business market, we help small and large bandwidth and upload and download speeds organizations with total ICT solutions. We offer in the Netherlands. them total integration of voice, data, fixed Revenues EBITDA evenues €12,409m (2011: €13,022m) ITDA €4,528m (2011: €5,138m) Germany 25% Germany 28% Belgium 6% Belgium 6% Rest of World 1% Rest of World 0% Consumer Mobile 13% Consumer Mobile 10% Consumer Residential 14% Consumer Residential 8% Business 19% Business 16% Netco 6% Netco 31% Corporate Market (Getronics) 9% Corporate Market (Getronics) 1% iBasis 7% iBasis 0% KPN | Annual Report 2012 9

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Introduction Who we are and what we do continued Customers determine success downloading possible, throughout the The management Improving our service is the central theme in Netherlands within the next 18 months. KPN is a public limited company incorporated our strategy. We realize that it is the customer The more our society becomes dependent under Dutch law, led by the Board of who decides whether we fulfill our ambition on ICT, the more it becomes vulnerable. Management. The Board of Management, of becoming the best service provider. KPN An increasing volume of sensitive and under the leadership of Chief Executive employees who are in direct contact with our confidential information passes over the Officer (CEO) Eelco Blok, controls strategic, customers play a crucial role in this. To enable internet. Recognizing that we have to give financial and organizational matters and these employees to offer good service to our our customers secure and reliable connections, appoints senior management. The Board of customers we invested in new shop concepts we give top priority to security and privacy. Management is also responsible for overseeing and improved the management and We place the highest priority on the security the work of the Group Executive Committee scheduling of our engineers. Furthermore, of both our network and our internal privacy (ExCo), which controls the segments. The we increased the number of call center staff policy. For many years KPN has been pre- Supervisory Board is charged with supervising and gave them more freedom to solve eminent in the Netherlands in The New Way and advising the Board of Management. customers’ problems. And as more and more of Living and Working. Thanks in part to that people are discovering social media as a experience, we make it possible for a growing At the start of 2012 we introduced the new service we also invested in KPN Webcare, number of customers to work irrespective of segment structure, in which the NL ExCo our online customer service. time and place. More and more companies controls the operating activities in the are experiencing and recognizing the positive Netherlands and the International ExCo Social responsibility effects of this concept on, for example, is responsible for the operational activities We invest not only in our customers, services employee involvement and the environment. abroad. We carried out the organizational and technology but also in society, because In terms of energy saving we are now among changes so as to be able to run the various the role of ICT in our society is essential. the world’s “greenest” telecom and ICT business units more directly and efficiently We aim to strengthen our company and companies, because our energy consumption and to respond even better to new ICT use ICT in a sustainable manner, because is decreasing despite the exponential increase developments and the rapidly changing we regard sustainability as a self-evident in data traffic. The theme “Energy efficient” customer wishes. The ExCo falls under the part of our business operations. Consequently, enables us to show that we give top priority direct responsibility of the Board of the five themes on which our social policy to energy saving. In addition, we help our Management. ExCo Group is represented is based are under the direct responsibility customers to save energy themselves. by ExCo NL, ExCo Mobile International of the Executive Committee. We are able to highlight the value of ICT in and corporate departments on HR, Legal the healthcare sector too and we are gradually and Strategy. ExCo NL consists of Consumer We want to help the Netherlands and our improving the efficiency and effectiveness Residential, Consumer Mobile, Business customers make progress and to offer them of the healthcare sector. We reinforce our Market, NetCo, Corporate Market, the best ICT infrastructure. One of the ways ambitions in terms of healthcare with the while Germany and Belgium are part we are doing this is with 4G LTE, the new theme “Healthcare of the future”. of ExCo Mobile International. generation of mobile internet. By rolling it out quickly we aim to provide this new technology, which makes superfast uploading and Board of Management: From left to right T. Dirks, E. Blok and W.T.J. Hageman 10 KPN | Anual Report 2012

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More information about the composition training. We invest in keeping all our staff of the Board of Management and the changes members fit. Physical and mental fitness during 2012 can be found on page 52 of the tests are available to all KPN employees, Annual Report. and the results can be used to make health improvements, if necessary. The interactive The strength of KPN staff coaching program I-Change helps employees As an employer, we expect commitment, to change their lifestyle. expertise and professionalism from our employees. We offer good employment People connected conditions and fringe benefits. As a modern Thanks to the KPN Mooiste Contact Fonds we company we promote The New Way of Living ensured that in 2012 alone over 200 seriously and Working, which on the one hand offers ill children could continue taking their school more freedom and on the other hand involves lessons and stay in touch with their classmates. more personal responsibility. Currently, 9,000 Our lead sponsorship of skating is another KPN employees are taking advantage of this social initiative that allows KPN to become modern style of working. even better connected with the Netherlands and the Dutch population. We sponsor skating We are convinced that teamwork is the key in all its forms: from the professionals to the to success. Its importance is expressed on young beginners, from the enthusiastic TEAMKPN Online, the internal communication recreational skater to the loyal fans of the platform which connects all employees with Dutch stars watching competitions on TV. one another. KPN employees inform and help With our lead sponsorship of the Rijksmuseum one another and share knowledge via news in Amsterdam we have now also established reports, videos, blogs and other media. a cultural connection with the Netherlands. TEAMKPN Magazine is another valuable Through this partnership we are going to communication medium that provides ensure that the Rijksmuseum has the most employees with a wealth of background modern ICT and telecom services, so it is and information. connected with the entire world and can make its art collections accessible to all. We believe it important for employees to continue to develop themselves and to keep their knowledge and skills up-to-date. We therefore offer them the possibility of adding to or enlarging their skill set within a specific area of competence. We run a talent program in order to find and hold on to graduates and those with higher professional KPN’s strategy 2011-2015 targets three principles: SIMPLIFY We will create a nimble organization STRENGTHEN by simplifying the organizational structure GROW and by offering a clearer set of products We will strengthen our market and services in both the business and We aim to increase our customer base for positions in the Netherlands by an consumer markets in the Netherlands. fixed and mobile telephony and we see enhanced focus on product and service particularly good opportunities for the quality, a more efficient organization fiber network. We will continue our and a tighter policy on costs. Mobile International Challenger strategy in the coming years. KPN | Annual Report 2012 11

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Introduction OUR MAIN ACHIEVEMENTS KPN has set several specific objectives, expressed in financial and non-financial key performance indicators (KPIs). Performance indicators Customer satisfaction A number of KPIs forms the basis for the We use the Net Promoter Score (NPS) to variable remuneration of the members measure customer satisfaction. We regularly of the Board of Management and the ExCo survey a representative customer group in and of the other top managers. In 2011, we the Netherlands to calculate this score. The key introduced customer satisfaction, reputation question asked is whether customers would and electricity consumption as non-financial recommend KPN to friends or family. KPIs. These three KPIs give an indication A negative score means that customers as to whether we are on schedule with our who recommend KPN are in the minority. strategic targets. 12 KPN | Anual Report 2012

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EBITDA (in billions of EUR) Capital expenditure Free cash flow EBITDA margin (in billions of EUR) (in billions of EUR) 5.5 2.2 2.6 5.1 5.2 5.1 2.0 2.4 2.4 2.4 4.5 1.9 1.8 1.8 40.9% 39.0% 1.7 38.4% 34.6% 35.6% 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Net debt / EBITDA Earnings per share Number of FTEs (EUR) as of 31 December 2.7 1.33 36,702 1.15 33,148 2.2 2.2 2.3 1.06 30,599 30,941 2.1 26,156 0.77 0.49 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Customer satisfaction Reputation Energy consumption (NPS) (Ranking in the Netherlands) (in petajoule) e N/A 12 5.7 5.8 5.6 5.5 5.4 16e 16e -6 17e 18e -13 -13 -14 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Reputation Electricity consumption Financial KPIs We use RepTrak to monitor our reputation. KPN is a large-scale user of electricity, Healthy financial management of the business RepTrak, run by the Reputation Institute, accounting for 0.8% of total Dutch energy is critical to success. Indicators such as market publishes an annual ranking based on a consumption. Consequently, we do everything shares, capital expenditures, EBITDA, profit survey carried out among the population possible to reduce our energy consumption per share and free cash flow give a clear of the Netherlands. Along with other large and to use green energy. The sharply rise in picture of our financial performance. Dutch companies KPN takes part in this survey. data consumption makes this even more In 2012 we set a new long-term objective for necessary. Moreover, we put our customers Significant market shares 2012 2011 reputation. As from 2013 our objective is to and suppliers in a position to reduce their own Broadband Netherlands1 41% 40% improve our RepTrak score, in stead of the energy consumption through the use of ICT. TV Netherlands1 23% 17% objective to improve our position compared Mobile Netherlands2 45% 46% to other Dutch companies. Mobile Germany2 15.8% 15.8% Mobile Belgium2 ~20% ~19% 1) Based on subscriber numbers at year-end 2) Based on service revenues KPN | Annual Report 2012 13

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Introduction OUR STRATEGY “Strengthen”, “Simplify” and “Grow” are the three principles on which we base our strategy: Our aim is to fulfill our main ambition: to be the best service provider for our customers. Reaching F ollowing a period of market share With the aim to further stabilize its leading 85% decline KPN has been able to stabilize domestic market positions as well as stabilize its market positions in The Netherlands its financial performance in The Netherlands, as a result of the ‘Strengthen-Simplify- KPN will focus on balancing profitability and Grow’ strategy outlined back in May 2011. market share objectives. The strategy in The In 2012, KPN’s domestic market positions have Netherlands is based on a strong customer of German population stabilized, albeit at lower profitability as a focus by providing the highest quality services, with HSPA+. result of increased investments. KPN operates based on a full product range on best-in-class in a challenging environment impacted by networks while striving for a lean operating regulatory pressure, a slow macro-economy structure. Consumer Mobile is facing a and strong competition in all mobile markets. changing market structure but has the KPN covers The telecom sector is at a crossroads with opportunity to differentiate itself from the 18% new technologies maturing and potential competition by offering the best customer increasing clarity as to European long-term experience by combining 4G LTE with a ~ regulation. Today, KPN covers ~18% of the nationwide fixed network. Consumer Dutch population with FttH and operates an Residential has been successful in 2012 with upgraded VDSL network, reaching ~70% of its strategy to focus on selling an increasing Dutch households with broadband speeds number of products per customer driven by of the Dutch population of at least 40Mbps. In mobile, KPN’s goal is IPTV, combined with growing ARPUs and will with FttH to realize nationwide coverage with 4G LTE continue to pursue this strategy. To address in The Netherlands in 2014, while HSPA+ has the increasing need to access information largely been rolled out in Germany and everywhere on all devices, as of 1 January 2013 Belgium. These networks are the platform for KPN has integrated parts of Corporate Market KPN to offer enhanced customer experience with the Business segment into a one-stop and, following the current period of increased shop for B2B, offering integrated packages commercial and infrastructure investments, with virtually all ICT & Telecom services. the prospect of improved profitability in its different markets in the medium-term. 14 KPN | Anual Report 2012

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In Germany, E-Plus was able to significantly We have made progress with our social grow its market share for several years themes. Our aspiration to have the best ICT accompanied by high profitability, however its infrastructure in the Netherlands is one of market share growth has been less significant those themes. In 2013, 51% of consumers of late. In 2012, E-Plus experienced a slowdown considered KPN’s mobile and fixed network in service revenue growth, but maintained a the best in the Netherlands. We are continuing strong margin. In the past two years, E-Plus to make improvements in our network and upgraded its network with HSPA+ reaching services. We are making progress in more than 85% of the German population. The healthcare too. We are already connecting upgraded network is the platform for the next more than 4,000 healthcare locations and over phase in the Challenger strategy, which is 20,000 healthcare consumers make use of our intended to transform E-Plus into a data-centric personal comfort services. We aim to enhance Challenger and which is expected to provide our contribution in 2013 by further developing new growth opportunities. Market share and rolling out our healthcare products and growth will be targeted in underpenetrated services. We achieved a 17% growth with our regions, based on a high quality network services that facilitate The New Way of Living combined with expanding on- and off-line & Working. We want to increase that distribution capacity, increasing commercial percentage to 20% in 2013, partly through activity and attractive customer propositions. improved propositions and communication. This strategy is expected to lead to service We helped customers save energy and in 2013 revenue growth and market share growth, we will develop a method of keeping track of combined with lower margins in the short- energy savings. Even though the volume of term, and improving from such base in the data traffic increased substantially, we longer term. achieved an energy saving of 6.2% in our own organization. Our target is no longer a The Belgian mobile market has experienced a maximum energy growth of 5%, but we have change in market structure in 2012. In now set ourselves an energy reduction target Belgium, as in Germany, KPN’s upgraded for 2020. With the development and launch network forms the platform for the next phase of our IT Security Top Priority Program, which of its Challenger strategy. KPN Group Belgium we will pursue in 2013, we have made an aims to realize growth through creating a investment in the security of our network. competitive edge by network speed In addition, we will offer our customers even differentiation at low cost based on innovative more products and services that will benefit partnerships. 4G LTE is expected to be the security of their information. available in the majority of the country by end-2014. This will be combined with a strong commercial focus via attractive propositions and increased presence in underpenetrated regions. In addition, KPN Group Belgium is seeing opportunities to challenge the fixed line market. This strategy is expected to lead to service revenue growth and market share growth combined, however, with lower margins. KPN | Annual Report 2012 15

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Introduction STRATEGY AT A GLANCE KPN revised its strategic market objectives to a level at which the respective businesses are expected to operate in the medium to longer term, taking into account the specific market dynamics surrounding the operations and striving for the right balance between growth and profitability. OBJECTIVES AND AMBITIONS The Netherlands ý Minimum broadband market share of >40% ; long-term goal 45% ý Growing Revenue Generating Units and Average Revenue Per User at Residential ý Minimum long-term total mobile NL market share of >40% ý Leading business and ICT player with stable market positions in the Netherlands ý 40-45% medium term EBITDA margin in the Netherlands ý Finalization 4,000-5,000 FTE reduction program end 2013; continued FTE cost efficiency in 2014 and onwards Mobile ý Long-term market share goal of 20% in Germany International ý Medium-term EBITDA margin of 30%-35% in Germany ý Long-term market share goal of 25% in Belgium ý Medium-term EBITDA margin of 25%-30% in Belgium Financial ý Commitment to maintain investment grade credit profile framework Corporate Social ý In 2015 60% of Dutch citizens consider KPN to have the best ICT infrastructure Responsibility ý 6,000 healthcare locations connected and 48,000 healthcare consumers supplied with personal comfort services in 2015 ý KlasseContact: 1250 chronically ill children connected to school and classmates with a webchair in 2015 ý 20% growth in use of services for The New Way of Living & Working in 2013 ý In 2020 climate neutral and save as much energy in the value chain as KPN itself uses every year ý Recycle or re-use 400,000 cellular phones in 2014 ý In 2013 70% of Dutch citizens consider that their data is safe with KPN 16 KPN | Anual Report 2012

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STRATEGIC INITIATIVES STATUS 2012 ý Focus on bundles, offering integrated fixed and mobile services ý Domestic market shares stabilizing, TV market share growing on all devices ý Lower line loss and growing FttH penetration ý Optimizing customer lifetime value ý Accelerated growth triple play packages, increased revenue ý Continued commitment to improve customer experience generating units per customer and quality of services ý Expanded addressable market; ~70% coverage of Dutch Market ý Best in class network with minimum guaranteed speed of 40 Mbps ý Commercial launch of 4G LTE ý Highly valuable spectrum acquired ý Moving towards one-stop-shop for B2B ý Prepared integration of Business Market with parts of Corporate Market ý Accelerated restructuring program resulted in a reduction of ~1,900 FTE in 2012 ý Market share growth in targeted underpenetrated regions ý Lower growth in prepaid and customer optimization in postpaid ý Expanding distribution capacity in Germany in under-penetrated resulted in a slow-down in growth in Germany regions ý Introduction of all-net flat propositions; strong postpaid net ý Improve underlying cost structure in Germany adds in Germany ý Monetize competitive data network in Germany ý Commercial initiatives launched to maintain price-leadership ý Create competitive edge by speed differentiation in Belgium in Belgium ý Seizing opportunities to challenge the fixed line market in Belgium ý Market share Belgium increased to ~20% ý HSPA+ has been largely rolled-out in Germany and Belgium ý Substantial reinforcement of balance sheet and financial position ý As at December 31, 2012 KPN has a credit rating Baa2 with rating ý In February 2013, we announced a EUR 3 billion rights issue and, under review for downgrade by Moody’s, BBB with a credit watch in addition, issuance of hybrid capital instruments negative by Standard & Poor’s and BBB- with a stable outlook by Fitch ý Dividend outlook lowered to EUR 0.12 in 2012 and EUR 0.03 in 2013 and 2014 ý Modernizing the mobile network and improving the quality ý 51% consider that KPN has the best network of the fixed network ý More than 4,000 healthcare locations connected and ~21,000 ý Further roll-out and development of the services ZorgSamen, healthcare consumers supplied with personal comfort services ZorgVrij and ZorgSlim ý 216 webchairs in use ý Further roll-out and expansion webchairs to connect chronically ý 17% growth in use of services for The New Way of Living & Working ill children with school and classmates ý 103,000 tons of CO2 emissions, 6.2% reduction in energy ý Further roll-out and development of propositions and use of our consumption and 93% green power capability to provide service needed to facilitate The New Way ý ~72,000 recycled or reused mobile handsets of Living & Working ý 67% of Dutch citizen consider that their data is safe with KPN ý 6% reduction in energy consumption in 2015 and 100% green ý Security Operations Center set up power as from 2014 ý Energy-efficient equipment in the network and for customers (modems, set top boxen) ý Handset lease and collection of used mobile handsets ý IT Security Top Priority Program and provision of Security Operations Center services to customers KPN | Annual Report 2012 17

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Introduction STRATEGY IN ACTION In The Netherlands, we are approaching a new balance between a focus on market positions and achieving a stable performance. In Germany and Belgium, the next phases in our Challenger strategy are being implemented to fuel underlying growth in 2013 and beyond. More and more, our social policy is a natural part of our business. THE NETHERLANDS KEY Integrated Access Provider OBJECTIVE: We intend to reinforce our position in the providing a quadruple-play offering, involving Dutch market by offering a full range of fixed a converged package of mobile, fixed line, and mobile services that deliver the best broadband internet and TV services. connectivity to our customers, independent of location and device, in the most intuitive We believe that this, in turn, will improve and customer-friendly way. customer loyalty, reduce churn and limit margin erosion. We have started the roll-out of our “KPN Compleet” package as a the first step to THE NETHERLANDS KEY Best in class network OBJECTIVE: We have invested heavily in network to expand our FttH footprint through the infrastructure in the Netherlands, and plan to Reggefiber joint venture. In mobile, we are continue to do so, in order to offer the best the first operator in the Netherlands to have products and services to our customers. We launched 4G LTE services, and we expect to are continuously improving the speed and have covered approximately 50% of the Dutch quality of our fixed and mobile networks. population by mid-2013 and to offer nationwide coverage in the second half In fixed line services, we plan to continue with of 2014. upgrades of our copper network and expects 18 KPN | Anual Report 2012

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MOBILE INTERNATIONAL KEY Next phase mobile challenger strategy OBJECTIVE: We believe that we have considerable under-penetrated regions. We will do this opportunities to grow our German and by expanding our distribution channels Belgian operations. At the core of our strategy and targeted marketing on a region-by- in these markets is the accelerated roll-out of region basis. mobile broadband internet services, with a continued focus on investing in mobile Furthermore, we will challenge the fixed line broadband backhaul and HSPA+ network market in Belgium and offer triple play roll-out as a priority in Germany, and on the products to our customers. In Germany we will deployment of the 4G LTE network in Belgium. continue to focus on expanding our position in the postpaid market. By leveraging the upgraded data network we will continue growing market share in CORPORATE SOCIAL RESPONSIBILITY KEY Enable customers to fulfill their sustainability ambitions OBJECTIVE: Our high position in the Dow Jones society we live in. Notable examples of this Sustainability Index, the Carbon Disclosure are our expanding position in the healthcare Project and the Newsweek rankings sector, the development of products and confirm the course of and appreciation for services that satisfy extra-high privacy and our efforts in the domain of sustainability security requirements, the help we give and social responsibility. customers to make The New Way of Living & Working possible and save energy and CO2. More than ever before, we face the challenge of making a contribution to the quality of the KPN | Annual Report 2012 19

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Introduction OUR ROLE IN SOCIETY Our vision: ICT is indispensable for a modern, sustainable society 51% of consumers consider I n the 2008-2011 period we focused on three social themes: The New Way of Working, Responsible energy use and People connected. So as to be able to utilize our We confirmed that role in 2012 with an external campaign entitled “The network that cares for the Netherlands”. In that campaign, which we will pursue in 2013, we turn the KPN’s network the best company and our core competencies to make spotlight on our five social themes. more of a difference we formulated five social themes with our stakeholders in 2011: Every year we appraise our social themes, 4,000 healthcare locations are ý Best ICT infrastructure ý Healthcare of the future ý The New Way of Living & Working ý Energy efficient taking into account the expectations of stakeholders with respect to social topics, along with the influence that KPN has on them. We want to take the lead in the themes connected to each other through ý Security & Privacy that score the highest. We have therefore the use of advanced ICT services translated them into five social themes and Our themes are based on social challenges three complementary themes: “Our people”, that offer us new opportunities and that are “Our suppliers” and “People connected”. 17% growth in the use of services inextricably linked to our strategic choices. We are convinced that, as a modern ICT service provider, we can make a permanent contribution to society by means of the five In 2012 the analysis did not result in any changes to our social policy and our reporting. In appendix on page 82 of the Sustainability Report we explain the process involved. that facilitate The New Way themes. We believe that through our ICT of Living & Working business we can help improve the world Best ICT infrastructure around us. We want to utilize our energy, Information and Communication Technology employees and resources in the best possible (ICT) forms the basis of our modern society. 6.2% reduction in the energy way. This is why the themes are logical focal points. Moreover, we want to make a difference with our ICT activities, which make a direct contribution to the business. Railways, ports and road and air traffic are all heavily reliant on ICT. Internet-based services, facilities and products for consumers and businesses are growing too, making the vital consumption of the KPN importance of ICT in this segment of society Group compared to 2010 We are more than “just” an ICT service increasingly clear. Moreover, a modern ICT provider; we also want to bring about changes infrastructure drives the innovative power and in society and to set or strengthen trends. As attractiveness of the Netherlands as a business 67% of Dutch people consider market leader in ICT, builder of the network and with our network of ICT experts – our employees – we are the obvious service provider to help the Netherlands to make location. Because of these developments, KPN feels the responsibility and the obligation to provide the best ICT infrastructure in the Netherlands. In this way, a modern ICT their data secure with KPN progress through communication technology. infrastructure can contribute positively 20 KPN | Anual Report 2012

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towards making the Netherlands more Working, which is beneficial to both employee Security & privacy sustainable and economically stronger. and employer, and which is good for the People, companies and governmental economy as well. Our contribution to The New organizations are becoming more reliant Healthcare of the future Way of Living & Working is twofold: around on ICT in our society. The amount of We see solid strategic opportunities in nine thousand KPN people work independently confidential information being sent over the healthcare sector. In the coming decades, of time and place one or more days per week. the internet continues to increase. Society healthcare will undergo great changes. We are also the only ICT company in the must be able to rely on ICT service providers For example, population aging will increase, Netherlands that is capable of providing all to process this data traffic securely and as will the prevalence of diseases of affluence. the ICT services needed to facilitate The New carefully. We want to offer this confidence The number of people requiring care will Way of Living & Working. to our customers – government, companies therefore rise. Technical and medical progress and citizens – any time, any place. However, is creating a difference between supply and Energy-efficient we are also aware that certain developments demand, and medical care is becoming more The concern about climate change and put security and privacy under pressure. expensive. Patients will also demand more renewable energy supplies influences our Digital criminal activity (cyber crime and transparency and more personal, patient-centric strategic agenda as well. Energy shortages, hackers), but also the explosive growth in care. In all these developments we can see CO2 emissions and climate change have a social media, can lead to personal details that, as an ICT service provider, we will have major social impact; ICT consumes a lot of easily getting into the public domain. As the a role that will become more important as power. KPN, for example, accounts for 0.8% largest “transporter” and manager of digital time goes by. The application of advanced of the total electricity consumption in the data we are conscious of our responsibility ICT ensures that the administration and Netherlands. KPN is facing huge challenges: with respect to data security and privacy. communication among healthcare providers data traffic and the use of ICT services are We want to guarantee that every customer and between healthcare providers and growing, yet we want to cut back on energy can use our internet and mobile telephony receivers proceed more efficiently. consumption. We want to be at the heart of services without any concerns. The government, the community as an energy-conscious ICT companies and organizations need to be The New Way of Living & Working service provider. In our view there are certain that we store their data securely in As ICT services become more advanced excellent opportunities for smarter and more our data centers and in the cloud. the opportunities to work any place, any time, efficient data centers, network hardware and are increasing. Being able to work without connections. This will allow us to reduce our The 2012 corporate social responsibility the constraints of time and place enables energy consumption and to ‘make it green’. report, ‘The network that cares for the people to be more in control, which allows Despite the sharp increase in ICT applications Netherlands’, takes an in-depth look at them to achieve a better work-life balance. we have set our organization an important the social themes and our results in 2012. Moreover, The New Way of Living & Working goal: climate neutral business operations in contributes towards a reduction in road traffic. 2020. This means that our operations will no KPN believes in The New Way of Living & longer have a negative effect on the climate. Assessment of relevance of social themes for the telecom industry Monitor: Demonstrable corporate Leadership: High – Biodiversity responsibility: – Quality of Service – Hunger – Competition – Security and Privacy – Shortage of clean – Electromagnetic fields – The New Way of Living Influence of drinking water – Pricing and Working KPN on theme – Corruption – Social media and – Best ICT infrastructure Social participation – Healthcare of the future – Parterships – Our people Expectations of – Young people and debt – Energy-efficient stakeholders for KPN – Sustainable procurement and supply chain management Low High Possibilities for KPN KPN | Annual Report 2012 21

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REPORT BY THE BOARD OF MANAGEMENT

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Report by the Board of Management INFORMATION ABOUT THE KPN SHARE KPN attaches great importance to transparent and regular communication with its shareholders, bondholders, other capital providers and their intermediaries. Presentations for, and meetings with, investors and analysts are held on a regular basis, including those KPN Shareholding in connection with the announcement of KPN’s results. Estimated geographic breakdown Analyst and investor meetings and conference calls were (based on institutional holdings) organized after the publication of the quarterly results and Mexico 25 – 30% broadcasted live via Internet to ensure that all groups of United States 5 – 10% investors receive the same information at the same time. United Kingdom 5 – 10% Netherlands 0 – 5% In all these activities, KPN’s Board of Management is France 0 – 5% supported by the Investor Relations department, which Rest of Europe 10 – 15% is at the investors’ and analysts’ disposal on a daily basis. Rest of World 0 – 5% Other 1) 25 – 30% Listings and Indices Source: Thomson Shareholder ID Q4 2012 Since June 13, 1994, KPN’s ordinary shares have been listed 1) retail, broker/trading and other on Euronext Amsterdam (ticker: KPN). On April 4, 2008, KPN delisted its American Depositary Receipts (ADRs) from the New York Stock Exchange. KPN replaced its ADR program Dividend with a Level I ADR program, which allows investors to trade KPN ADRs in the United States on the Over-The-Counter KPN proposed to declare a cash dividend of EUR 0.12 per market (ticker symbol: KKPNY). share in respect of the year ended December 31, 2012, which was paid out as an interim dividend in August 2012. KPN shares are included amongst others in the following The proposed dividend for 2012 will be presented for leading Indices (weightings at December 31, 2012): approval to the Annual General Meeting of Shareholders AEX 2.0%, EURO STOXX Telecommunications Index 3.6%, to be held on April 10, 2013. STOXX Europe 600 Telecommunications Index 1.6% and MSCI Euro 0.07%. KPN intends to pay a dividend per share of EUR 0.03 over the fiscal year 2013 and 2014, thereafter return to dividend Share ownership per share growth, subject to operational performance and financial position. América Móvil notified the AFM on June 28, 2012 that they held 27.47% in KPN’s ordinary share capital. To KPN’s knowledge, no other shareholder owned 5% or more of Dividend per share KPN’s outstanding shares as at December 31, 2012. (EUR) 0.80 0.85 Shareholder remuneration 0.60 0.69 KPN is committed to strive for a balance between a prudent 0.121 financing policy, investments in the business and shareholder remuneration. In 2012 we have made strategic investments 2008 2009 2010 2011 2012 including spectrum and fiber. Looking forward, we have 1) The proposed dividend for 2012 consist of a on-going investments in customers and infrastructure cash dividend of EUR 0.12 per share which was to support our strategy. Consequently, KPN intends to pay paid out as an interim dividend in August 2012. a dividend per share of EUR 0.03 over the fiscal year 2013 and 2014. From then, KPN strives to return dividend per share growth subject to operational performance and Exchange controls financial position. KPN remains committed to an investment grade credit profile. KPN targets a net debt There are no legislative or other legal provisions currently to EBITDA ratio between 2.0–2.5x at the end of 2013. in force in the Netherlands or arising under KPN’s Articles of Association restricting transfers to holders of its securities not resident in the Netherlands. Cash dividends payable in euro on ordinary shares may be officially transferred from the Netherlands and converted into any other currency. There are no limitations, neither under the laws of the Netherlands nor KPN’s Articles of Association, on the right of non-residents of the Netherlands to hold or vote KPN’s shares. 24 KPN | Annual Report 2012

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Obligations to disclose holdings Pursuant to the Dutch Financial Supervision Act (‘Wet op het financieeltoezicht’ or ‘Wft’), legal entities as well as natural persons must immediately notify the Dutch Authority for the Financial Markets (AFM) when a shareholding equals or exceeds 5% of the issued capital. The AFM must be notified again when this shareholding subsequently reaches, exceeds or falls below a threshold. This can be caused by the acquisition or disposal of shares by the shareholder or because the issued capital of the issuing institution is increased or decreased. Thresholds are: 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%. The AFM incorporates the notifications in the public register, which is available on its website. Failure to disclose the shareholding qualifies as an offense, and may result in civil penalties, including suspension of voting rights and administrative penalties. Financial calendar 2013 February 5, 2013: Publication of results for the full year 2012 April 10, 2013: Annual General Meeting of Shareholders April 23, 2013: Publication of results for the first quarter of 2013 July 23, 2013: Publication half year results 2013 October 22, 2013: Publication of results for the third quarter of 2013 Note that these dates may be subject to change. Share price 2010–2012 (EUR) 15 Source: Bloomberg, prices rebased to KPN 12 share price of EUR 11.84 on January 1, 2010 9 6 3 0 2010 2011 2012 KPN Dow Jones Telecom Index AEX Index KPN | Annual Report 2012 25

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Report by the Board of Management GROUP PERFORMANCE AND OUTLOOK GROUP PERFORMANCE • Mixed performance across the Group • Stabilizing domestic market positions, strong growth in TV • Highly valuable spectrum acquired in the Netherlands • Financial outlook largely achieved, supported by asset disposals Performance versus outlook 2012 KPN Group revenues and other income decreased 3.5% or EUR 455m due to the sale of Getronics International Although the financial outlook was largely achieved, and declining revenues in The Netherlands. The negative the performance in 2012 was supported by asset disposals impact on Group revenues from regulation was EUR 134 and did not fully meet our expectations. The full-year million, the net negative impact on acquisitions and Group EBITDA and free cash flow came at the lower end disposals was EUR 296 million and the net positive impact of the outlook range, primarily due to competitive from incidentals was EUR 105 million. The incidentals in pressure in all our mobile markets. Capex was at the 2012 mainly related to book gains, most notably on the higher end of the outlook range, mainly due to continued sale of mobile towers in Germany and The Netherlands investments in KPN’s domestic market positions and the and the sale of KPN Spain. continued roll-out of mobile broadband networks in Germany and Belgium. A continued difficult market environment was the primary reason for the revenue decline in the Netherlands, while Following the half-year results in July, dividend per share Germany, Belgium and iBasis showed increased revenues. was adjusted to EUR 0.35 as the economic prospects in the All Dutch Telco segments remained exposed to lower Netherlands continued to be difficult and KPN remained traffic volumes, especially Consumer Mobile. The revenue outside its self-imposed financial framework range. decline at Corporate Market was largely attributable to the Following the results of the Dutch spectrum auction in sale of Getronics International in May 2012 as well as the December, the outlook for dividend per share was adjusted continued adverse market conditions. In Germany revenue further in order to accommodate the vital strategic growth slowed in the second half of 2012 as a result of investment in frequency licenses. KPN announced it will increased price competition and high value postpaid not pay a final dividend for 2012; the interim dividend customers who are trading down on their tariff plans payment of EUR 0.12 per share was paid in August 2012. leading to optimization. Furthermore, the dividend per share outlook for 2013 was adjusted to EUR 0.03 per share. Revenues and other income EBITDA (In millions of EUR) 2012 2011 ∆ (In millions of EUR) 2012 2011 ∆ KPN Group 12,708 13,163 -3.5% KPN Group 4,528 5,138 -12% KPN Group Consumer Mobile 1,707 1,900 -10% (excl restructuring) 4,701 5,268 -11% Consumer Residential 1,852 1,903 -2.7% Business 2,352 2,433 -3.3% Consumer Mobile 510 550 -7.3% NetCo 2,621 2,780 -5.7% Consumer Residential 367 497 -26% Other 1 -2,087 -2,252 7.3% Business 758 786 -3.6% – Dutch Telco business 6,445 6,764 -4.7% NetCo 1,461 1,705 -14% Corporate Market 1,405 1,811 -22% Other -18 -17 -5.9% Other 1 -318 -316 -0.6% – Dutch Telco business 3,078 3,521 -13% – The Netherlands 7,532 8,259 -8.8% Corporate Market 57 6 >100% – iBasis 1,035 977 5.9% Other 0 1 100% Germany 3,404 3,243 5.0% – The Netherlands 3,135 3,528 -11% Belgium 804 781 2.9% iBasis 30 31 -3.2% Rest of World 247 302 -18% Germany 1,290 1,354 -4.7% Other1 -84 -118 29% Belgium 272 273 -0.4% – Mobile International 4,371 4,208 3.9% Rest of World -26 9 n.m, – Mobile International 1,536 1,636 -6.1% 1) Mainly elimination of intercompany revenues. 26 KPN | Annual Report 2012

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Our Group EBITDA decreased by 12% or EUR 610 million. Finance income and expenses EBITDA was negatively impacted by regulation of Net finance costs increased by EUR 90 million as a result EUR 64 million, a negative impact from restructuring of of higher accrued bond interest and fair value movements EUR 173 million (2011: EUR 130 million) and a net positive on swaps, while in 2011 net finance costs included a gain impact from incidentals of EUR 87 million. Incidentals in from ineffectiveness on the USD fair value hedges. 2012 mainly related to the sale of mobile towers in the In addition, net finance costs are higher as a result of the Netherlands and Germany. change in value of the Reggefiber call/put arrangements of EUR 100 million during the year, which is recorded The decrease in EBITDA was driven by decreased revenues as a loss under other financial results. in The Netherlands, a continued decline in high margin traditional services and higher activation costs at Residential Income taxes and NetCo. Furthermore, pension costs were EUR 101 KPN benefits from an agreement with the Dutch tax million higher, of which EUR 73 million related to actuarial authorities with regard to the application of innovation tax losses at the Getronics UK and US pension funds and facilities. Innovation tax facilities are facilities under Dutch EUR 28 million related to The Netherlands. corporate income tax law whereby profits attributable to innovation are taxed at an effective rate of 5%. Due to the application of the innovation tax facilities, KPN’s effective Other financial data tax rate in The Netherlands is reduced from the statutory tax rate of 25% to approximately 20%. (In millions of EUR) 2012 2011 ∆ Operating result 1,820 2,549 -29% The effective tax rate for the Group for the full-year 2012 Finance income and is 27.6% (2011 non-adjusted: 10.9%, including the one-off expenses -844 -754 -12% innovation tax benefit for the years 2007 to 2010) and is Share profit of associates and joint expected to be approximately 20% in the years 2013-2015. ventures -13 -24 46% The higher effective tax rate in 2012 compared to the Profit before expected 20%, is mainly due to the non-deductible income tax 963 1,771 -46% goodwill impairment of Corporate Market, revaluation Income taxes -270 -222 -22% of the Reggefiber call/put arrangements and pension Profit for the period 693 1,549 -55% expenses in 2012 for the UK and US pension funds, partly offset by an increase in the deferred tax asset position at E-Plus. Operating results EBIT decreased by EUR 729 million, resulting from Net profit the EBITDA decrease and increased depreciation and Net profit amounted to EUR 693 million and decreased amortization of EUR 119 million. In Germany EUR 101 following the decline in operating results and increased million higher depreciation charges were recorded, finance costs resulting from the change in fair value of the resulting from a total one-off depreciation of assets Reggefiber call/put arrangements. under construction amounting to EUR 74 million (of which EUR 61 million related to prior periods) and higher depreciation resulting from handset leases. Triggered by the changes in the ICT market, continued adverse market conditions and fierce price pressure, the annual impairment testing led to an impairment of goodwill of EUR 314 million at Corporate Market in 2012. In 2011 an impairment of EUR 298 million was recorded and related to goodwill, intangible assets and tangible assets. KPN | Annual Report 2012 27

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Report by the Board of Management Group performance and outlook continued Funding profile strengthened by issuance of new Cash flow long-dated bonds On March 1, 2012, KPN issued a EUR 750 million Eurobond, (In millions of EUR) 2012 2011 ∆ with a 10-year maturity and a fixed coupon of 4.25%. On Operating result 1,820 2,549 -29% August 1, 2012, KPN issued a Eurobond for an amount of Depreciation and EUR 750 million, with an 8.5-year maturity and a fixed amortization 2,708 2,589 4.6% coupon of 3.25%. These bonds were issued under KPN’s Interest paid/received -661 -637 3.8% Global Medium Term Note program and have been listed Tax paid/received -486 -231 >100% on NYSE Euronext Amsterdam. The proceeds have been Change in provision -127 -209 -39% used for general corporate purposes. Change in working capital -7 93 n.m. Other movements -240 -151 71% On November 13, 2012, KPN redeemed the Eurobond Cash flow from 2007-2012 with an outstanding amount of EUR 957 million, operating activities 3,007 4,003 -25% in accordance with the regular redemption schedule. Capital expenditures1 2,209 2,047 7.9% Proceeds from real As at December 31, 2012, the average maturity of the bond estate 519 156 7.9% portfolio was 7.0 years. The average interest rate on the Tax recapture E-Plus 335 337 -0.6% nominal bonds remained stable at 5.1%. Free cash flow 1,652 2,449 -33% 1) Including property, plant and equipment. In June 2012, KPN used an extension option for its EUR 2 billion revolving credit facility. All 14 relationship banks agreed to a one year extension, which brings the maturity of the revolving credit facility to July 2017. Capex The facility contains another one-year extension option Group Capex amounted to EUR 2,209 million and in July 2013, which could extend the maturity to July 2018. increased compared to 2011. The increase is related Per December 31, 2012, KPN had no drawings on its to higher investments to strengthen market positions in revolving credit facility. The Netherlands, including customer driven investments (e.g. handsets, IPTV set-top boxes), and accelerated Equity position network roll-outs in Germany and Belgium. At December 31, 2012, total equity amounted to EUR 2,461 million. Reference is made to Note 29 Free cash flow in the Financial Statements for further information. Free cash flow in 2012 amounted to EUR 1,652 million, which is 797 million lower than last year. Lower EBITDA of Financial position EUR 610 million, higher tax payments of EUR 257 million, higher CAPEX of EUR 162 million, more negative change in To align our financial position with our strategy we working capital of EUR 100 million mainly due to have announced our intention to raise EUR 4 billion of prepayments and other movements of EUR 89 million, equity equivalent capital. The transaction will strengthen were partly offset by EUR 363 million higher proceeds from KPN’s balance sheet and is intended to provide a stable the sale of real estate and EUR 82 million less negative financial position in the coming years. We believe that the change in provisions. The tax payments are impacted by capital raise will support KPN’s commitment to maintain lower innovation tax facilities in 2012 of EUR 290 million as an investment grade credit profile. The capital raise will KPN received a one-off in 2011. consist of a EUR 3 billion rights issue and, in addition, issuance of hybrid capital instruments. The capital issue Pension position is subject to shareholder approval. As at December 31, 2012, the average coverage ratio of the KPN pension funds in The Netherlands was 104%, Outlook compared to 101% in 2011. In 2012, an amount of EUR 100 million related to pension recovery payments was made of ý The Netherlands expected to stabilize towards 2014 which EUR 19 million was due in Q1 2013 but was prepaid ý Next phase German strategy expected to lead to service in 2012. Based on the coverage ratio at December 31, 2012, revenue growth combined with lower EBITDA margin, a pension recovery payment of EUR 19 million is required especially in 2013 in Q2 2013. For more information about KPN’s pension ý Capex in 2013 below EUR 2.3 billion and total planned plans, reference is made to Note 22 of the Consolidated Capex for the period 2013-2015 below EUR 7 billion, Financial Statements. including Reggefiber1 ý DPS of EUR 0.03 in 2013 and 2014, thereafter return to DPS growth, subject to operational performance and financial position 1) As from consolidation: Reggefiber is not expected to be consolidated before the second half of 2014 28 KPN | Annual Report 2012

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Customer satisfaction Non-financial data We use the Net Promoter Score (NPS) to measure customer satisfaction. The key question asked is whether customers 2012 2011 would recommend KPN to friends or family. In 2012, the Energy consumption (in PetaJoule) 5.4 5.6 NPS was −13, a small increase compared to 2011. We failed Reputation 18th place 12th place to achieve our NPS target, score of -7. We continued our Customer satisfaction (NPS) -13 -14 KPN-wide quality program and also implemented several Number of FTE 26,156 30,941 quality improvement measures in our segments. Number of FTEs Energy The number of FTEs amounted to 26,156 FTEs in 2012, With the sharp rise in data usage, efficient energy a decrease of 4,785 FTE. The decrease resulted from the consumption is indispensable. In the Netherlands and sale of Getronics International, the FTE reduction program Belgium energy consumption completely consists of green in the Netherlands and was partly offset by acquisitions energy since 2011, in Germany the usage of green energy and growing business in Germany and Belgium. increased to 76% (2011: 50%). While the data usage increased, our total energy consumption decreased by Since the start of the FTE reduction program in the 6.2% in 2012 compared to 2010, of which 3.3% of the Netherlands last year, EUR 257 million restructuring costs reduction was achieved by energy efficiency measures. have been recorded relating to approximately 2,800 FTEs. The remaining reduction of our energy use was caused The FTE reduction program resulted in ~1,900 FTE exits by the sale of Getronics International. since the start of the program. Since the beginning of the program the reported FTEs decreased by ~1,550, including Reputation a ~350 FTE increase due to the net effect of disposals and We measure our reputation based on the RepTrak ranking, acquisitions and KPN’s investments to strengthen its an annual study of the reputation of the world’s largest market positions (e.g. customer facing staff including companies. In 2012 KPN took 18th place, a decrease of employees in shops and call centers). six places compared to 2011. In January 2012 some of our servers were hacked. We took the incident very seriously, we learned from it and used it to focus even more attention on security and privacy. We have now taken the necessary measures, including setting up the Security Operations Center which enable us to restrict the potential for security incidents to a minimum in the future. KPN | Annual Report 2012 29

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Report by the Board of Management OUR ACTIVITIES AND PERFORMANCE CONSUMER MOBILE We provide consumers in the Netherlands a mobile access portfolio of voice, sms and data services, offering postpaid and prepaid products through a multi-brand approach. Our strategy in action OVERVIEW Taking into consideration the market environment and our focus on achieving the right balance between profitability REVENUE EBITDA and market share our long term strategic objective is €1,707M €510M a minimum total mobile service market share in the Netherlands of more than 40%. (2011: 1,900m) (2011: 550m) New propositions The increasing dominance of smart phones and tablets in the mobile arena, leads to an explosive growth in data Operating highlights traffic. To meet the growing demand for access to data oreinted services, we have introduced a new portfolio for ý Market share stabilizing at around 45% our brands, offering customers transparent, simple and ý New access-centric portfolio launched for KPN, flexible propositions. Furthermore, brand positioning has Hi and Telfort been reinforced by offering differentiating services per ý Distribution expanded through increasing number brand to capture the targeted market segments. of captive channels and new shop formulas ý Improved customer services’ resulting in increased The results of the new mobile access-centric propositions are customer satisfaction positive, resulting in an increased level of committed ARPU. ý Following successful pilots the 4G LTE roll-out has been accelerated for commercial launch in Q1 On the back of the new mobile portfolio launches, we have enhanced our offers with handset lease, providing choice 67,000 of handset without upfront cost. Furthermore a handset repair service is included to ensure that customers are re-connected to the mobile network within hours. POSTPAID NET ADDS (2011: negative 87,000) In January 2013, we introduced ‘KPN Compleet’, a first step towards offering quad play services. Our existing triple play and mobile customers, with subscriptions that ~65% COMMITTED ARPU started before January 1, 2013, can benefit from value- added services, such as 45 additional TV channels, free unlimited calls within the family and a doubling of voice, SMS and data within a mobile subscription. As a next step (2011: ~57%) towards fixed-mobile convergence, we will make ‘KPN Compleet’ accessible for all our fixed and mobile customers in the Netherlands. Environment and competition Optimize distribution and improved Increased competition on the basis of both price service experience and quality from traditional competitors, together with To further increase our sales and service we optimized the regulatory obligations to reduce MTRs and roaming number of our stores in the Netherlands from 239 at the charges, changing customer preference for mobile data end of 2011 to 260 by the end of 2012. This includes new access over traditional voice and SMS as well as a slow formulas such as multi-brand shops and XL shops with macro-economy, have contributed to the overall decline focus on customer service. Furthermore, call centers are in profitability. Our wireless customer base increased to organized differently and include specialist agents to 7.6 million customers, of which 3.5 million are postpaid increase customer satisfaction and have service desks and 4.1 million prepaid. The prepaid segment remained open 24/7. under pressure due to the continued competition in the ethnic segment and migration towards postpaid SIM only propositions. Our wireless service revenue market share in the Netherlands is stabilizing at around 45% (2011: 46%). Our main competitors are T-Mobile and Vodafone following the Dutch Mobile spectrum auction in Q4 2012, Tele2 has acquired mobile spectrum. 30 KPN | Annual Report 2012

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Leading mobile network position Revenues and other income declined by 10% in 2012, Continued improvements have been implemented to including regulatory impact of 2.4%. For retail wireless maintain the best in class network in terms of quality and services the decline was driven by changing customer coverage. Following successful pilots the 4G LTE roll-out behavior resulting in lower traffic volumes and by has been accelerated for commercial launch in Q1 2013. competitive market conditions. The decrease was partly 4G LTE improves the customer experience by providing offset by higher committed revenues driven by the significantly higher speeds and better indoor coverage introduction of new propositions. In 2012, the postpaid than 3G. base increased slightly to 3.5 million customers while the prepaid base declined to 4.1 million customers, impacted Products and services by continued competition in the ethnic segment and migrations to postpaid. Against a backdrop of strong competition and an unprecedentedly rapid transformation into an interactive Mobile Wholesale revenues are below 2011 due to data-centered world, we continued to deploy a multi- increased competition, mainly in the ethnic segment. brand approach, based on our high quality brand KPN, the youth brand Hi, the value for money brand Telfort EBITDA decreased by 7.3% in 2012 as cost reductions and online brand Simyo. were not sufficient to mitigate the impact from changing customer behavior and price pressure due to competition. In line with KPN’s objective to build a future proof The EBITDA margin increased in 2012 to 29.9%, compared portfolio, new integrated mobile access propositions to 28.9% in 2011, supported by the new commercial were launched for our brands. The Hi brand launched propositions including the handset lease model. data-centric propositions with unlimited messaging for the youth segment. In the value for money segment, In 2012 additional costs were incurred concerning the Telfort launched its new modular portfolio, including free introduction of new propositions, the expansion of calls after 10 minutes. The new portfolio for the KPN brand the number of shops and the improvements to customer was launched in July, offering unlimited calling/SMS for service. The higher costs were offset by lower costs of EUR 40 per month. In addition, we have introduced material following the introduction of the handset lease value-added services such as Spotify. model, whereby the costs are capitalized and depreciated instead of expensed. Our Mobile Wholesale activities offer flexible customized platforms to ensure that partners can successfully introduce their own mobile propositions in the market. Operating review Around 2.4 million end-users are connected to the KPN network via our mobile wholesale partners, 2012 2011 ∆ who range from niche brands to strong distributors Service revenue 1,556 1,724 -9.7% to target their market segments. Retail customers (in thousands) 5,177 5,450 -5.0% Wholesale customers (in thousands) 2,402 2,213 8.5% Financial review ARPU wireless blended (in EUR) 17 19 -11% (In millions of EUR, unless indicated otherwise) 2012 2011 ∆ – Wireless services (excluding Mobile Wholesale) 1,491 1,648 -9.5% – Mobile Wholesale 170 207 -18% – Other 46 45 2.2% Revenues and other income 1,707 1,900 -10% Operating expenses 1,317 1,428 -7.8% – of which: depreciation, amortization and impairments 120 78 54% EBITDA 510 550 -7.3% EBITDA margin 29.9% 28.9% KPN | Annual Report 2012 31

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Report by the Board of Management Our Activities and Performance continued CONSUMER RESIDENTIAL We provide a broad portfolio of voice, internet and TV services to consumers in the Netherlands. During 2012, Residential has been able to stabilize the OVERVIEW decline in broadband base and market share, by offering attractive all-in-one packages with our high-quality IPTV service as a driver for sales. Our broadband market REVENUE EBITDA share increased in 2012 to 41% (2011: 40%). On top of €1,852M €367M the organic stabilization of the broadband market share, KPN acquired five fiber service providers from Reggeborgh and Reggefiber to increase our presence in the Dutch (2011: 1,903m) (2011: 497m) FttH market. Our strategy in action Operating highlights In the Netherlands, we seek to maintain a minimum ý Broadband market share increased to 41% broadband internet market share by number of subscribers ý Market-leading IPTV proposition of approximately 40%. Our strategic objective over the ý Strong increase TV market share to 23% longer-term is to increase our market share to ý Organic FttH activations more than doubled in 2012 approximately 45%. 2,697K Improved propositions Consumer Residential offers differentiated propositions both on the copper and fiber infrastructure. We have taken BROADBAND CUSTOMERS significant steps to improve our TV proposition, and (2011: 2,538k) now provide a market-leading IPTV proposition in the Netherlands. Focus is on the triple pay package (voice, broadband and TV), with IPTV as an important driver 979K behind take up of triple-play packages. As a result, the RGU per customer has increased from 1.92 in 2011 to 2.07 in 2012. Triple play packages increased by 321 thousand TRIPLE PLAY PACKAGES in 2012 to a total of 979 thousand. (2011: 658k) Step up in customer service Customer service optimization has resulted in shortened Environment and competition delivery times for our services. In addition, KPN has made several changes to support efficiency and effectiveness The broadband internet market in the Netherlands features in the call centers and offer improved online helpdesk relatively high customer penetration rates with limited functionalities. In addition, the helpdesk is free of charge growth potential. The fixed-line telephony market is and open 24/7. This has supported an improvement in Net declining market as customers increasingly migrate their Promotor Score from -17 to -10. communication patterns towards VoIP and mobile and data services. Our main competitors are the cable Expand addressable market companies, UPC and Ziggo, which have historically We believe FttH is the long-term superior infrastructure, aggressively competed with high-quality TV offerings. while providing good operational results, such as increased We also compete with Tele2 and Vodafone, both of which broadband and TV market shares and higher ARPU. Next provide fixed-line telephony, broadband internet and TV to our FttH network, the upgrades of our copper network services over our own network. is equally essential as this will enable KPN to successfully compete in the short and medium term. In 2012 our market reach offering > 40 Mbps approached ~70% due to upgrades in our network. 32 KPN | Annual Report 2012

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Regionalized approach EBITDA decreased by 26% as a result of higher marketing To strengthen our strategy, we also introduced a regional and sales costs, higher content costs and a continued approach in 2012. Targeted areas are selected and analyzed decline in higher margin traditional services, resulting taking future FttH roll-out and copper network upgrades in an EBITDA margin of 19.8% (2011: 26.1%). into account. Following this analysis, a marketing and sales approach is determined, with strong short-term regional The increase in the broadband customer base was not only offers in selected regions. The regional approach has driven by the acquisition of the fiber service providers but shown good progress with improving broadband market also by growth in the number of FttH activations and good share development in targeted areas. performance by the Telfort brand. KPN’s broadband market share increased to 41% (Q4 2011: 40%). Products and services Wireline revenues benefited from the strong growth We offer fixed-line telephony, broadband internet in IPTV and FttH, but continued to show declining voice and TV on a stand-alone basis and multiplay or triple-play revenues. KPN’s broadband market share remained under packages. In the last years we have taken major steps pressure from churn in the single- and dual-play market to improve our IPTV proposition. The standard IPTV in the copper areas due to competition on speed, partly proposition is supported by value added services, offset by successful growth in the triple-play segment and improved user experience and enriched TV packages. FttH areas. The number of FttH activated increased to 368 In 2012 we took several steps to realize this ambition: an thousand (2011: 102 thousand). agreement with HBO to offer three premium TV channels, HD channels in our standard IPTV proposition, a smaller, faster and ecofriendly set top box, a new user interface Operating review allowing for faster changing channels and the introduction of IPTV on smartphones. 2012 2011 ∆ Voice access lines (in thousands) 2,752 2,761 -0.3% Broadband lines Financial review (in thousands) 2,697 2,538 6.3% TV customers (In millions of EUR, unless (in thousands) 1,766 1,400 26% indicated otherwise) 2012 2011 ∆ ARPU blended (EUR) 40 39 2.6% – Voice wireline 407 512 -21% FttH activated (in – Internet wireline 974 999 -2.5% thousands) 368 102 >100% – TV 200 176 14% – Other 271 261 3.8% Revenues and other income 1,852 1,903 -2.7% Operating expenses 1,741 1,628 6.9% – of which: depreciation, amortization and impairments 256 222 15% EBITDA 367 497 -26% EBITDA margin 19.8% 26.1% Revenues and other income declined by 2.7% in 2012, due to continued decline of traditional voice services, partly offset by increased IPTV and FttH revenues. Revenues were partly supported by the acquisition of five fiber service providers from Reggeborgh with a customer base of 126 thousand FttH customers in Q4 and the acquisition of Lijbrandt with a customer base of 13 thousand FttH customers in Q2. The broadband customer base increased organically in Q4 2012 (35 thousand) for the second consecutive quarter. In terms of activations, 2012 was the first period since 2008 in which we realized a net line gain instead of net line loss. KPN | Annual Report 2012 33

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Report by the Board of Management Our Activities and Performance continued BUSINESS We offer business customers a complete portfolio of services, from (wireline and wireless) voice and internet to various data network services. Our strategy in action OVERVIEW Our objective is to continue to be a leading provider of business-to-business services in the Netherlands REVENUE EBITDA and maintain stable market positions. €2,352M €758M Multibrand approach We have strengthened our multi-brand strategy in 2012 (2011: 2,433m) (2011: 786m) by integrating the business market activities of Telfort with the activities of Atlantic Telecom, operating under the brand name Telfort Zakelijk. Growth was supported Operating highlights by increased mobile activities. In addition, our other challenger brand, Yes Telecom, showed accelerated ý Stable market positions growth in 2012. ý New propositions for SME, LE and corporate clients Multibrand approach addressing Furthermore we entered into a strategic partnership with diverging customer needs GroupIT B.V. (RoutIT) and acquired a stake of 12.5% to ý Migration from traditional to IP based services strengthen our position in the SME segment. This allows steadily continued us to offer a complete range of services such as hosted ý Moving towards one-stop shop for new telephony to all business customers. B2B organization Simple access to an integrated portfolio 2,337K In order to address increasing demand in the business market to access information everywhere on all devices, we will integrate parts of Corporate Market with Business WIRELESS CUSTOMERS into a new B2B organization as from January 1, 2013. The (2011: 2,105k) new B2B organization is uniquely positioned as an one-stop shop for the B2B market, offering integrated packages with virtually focusing on improving our ICT services. 1,134K Furthermore, we successfully introduced improved bundled offers to our customers in 2012. The offers combine voice, ACCESS LINES fixed internet and TV. (2011: 1,285k) Customer experience Unfortunately, the NPS declined in 2012. We recognized Environment and competition opportunities for improvement in customer service and started a 24/7 service desk and added case management In the context of a weak macro-economic environment, functionality to reinforce our customer relationship the Dutch business telecommunications market has management and improve online customer self-care. experienced declining demand for telecommunications services and weaker demand for ICT services as IT budgets among businesses remain under pressure. Business customers are increasingly focusing on flat fee packages and integrated solutions. For larger, enterprise-level customers, we primarily compete with Vodafone. In the small and medium enterprises and small office / home office customers, our competitors are T-Mobile, Tele2, Vodafone, UPC and Ziggo. Despite the increasing competition in this market, we hold a strong market position in both the wireline and wireless market. 34 KPN | Annual Report 2012

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Products and services Traditional wireline services showed a decline in both access lines and traffic volumes leading to a decrease of Our customers want to communicate anytime and 5.4% in wireline revenues. Despite growth in the wireless anywhere, but are increasingly indifferent towards the customer base of 232 thousand in 2012, the service underlying technical solution, be it voice, data (IP), fixed or revenues declined 1.0%. ARPU was lower y-on-y at EUR 37 mobile. Therefore, we offer a wide range of solutions to (2011: EUR 42), impacted by regulation, declining traffic, allow seamless, continued client communication through M2M growth and data mix effects. combined voice-data and fixed-mobile solutions, along with more access based, flat fee, price plans to provide EBITDA decreased by 3.6%, resulting from declined customers with cost assurance. IP technology provides revenues and other income. The EBITDA margin remained the ideal future proof foundation for new ways stable at 32.2% in 2012 compared to 32.3% in 2011. The of communicating, such as mobile banking, migration from traditional to IP-based services continued videoconferencing, e-learning and electronic payments, steadily, with lower prices and margins. These negative enabling a new way of working. impacts are mitigated by the introduction of flat rate tariffs. Voice and broadband services In voice and broadband internet, we provide a wide range Operating review of fixed-mobile communication solutions. Our traditional business is heavily driven by customer demand for mobile 2012 2011 ∆ e-mail solutions and broadband internet access, in Access lines voice (in thousands) 1,134 1,285 -12% particular by smartphones (such as BlackBerry, Windows Business DSL Mobile, iPhone and Android), tablets, laptops, desktops (in thousands) 174 176 -1.1% and mobile internet cards. Our business customers can Connections VPN choose from a wide variety of tariff plans for different (in thousands) 75.3 73.9 1.9% types of products from basic to premium packages Service revenues specifically created for business customers. wireless (in EUR) 996 1,006 -1% Wireless customers (in thousands) 2,337 2,105 11% Data network services ARPU wireless blended We offer network communication services ranging from (in EUR) 37 42 -12% traditional data services to Virtual Private Network services such as IP-VPN and E-VPN. These services are provided both nationally and internationally and are supplied via fiber or high-speed copper connections. Together with Corporate Market we are investing to further improve our ICT services, such as Unified Communications, secure managed devices, private Cloud and service aggregation services. Financial review (In millions of EUR, unless indicated otherwise) 2012 2011 ∆ – Voice and internet wireline 875 942 -7.1% – Data network services 379 384 -1.3% – Wireless services 941 948 -0.7% – Other 157 159 1.3% Revenues and other income 2,352 2,433 -3.2% Operating expenses 1,716 1,761 -2.6% – of which: depreciation, amortization and impairments 122 114 7.0% EBITDA 758 786 -3.6% EBITDA margin 32.2% 32.3% In 2012 revenues and other income decreased by 3.3%, mainly caused by continued decline in traditional services, lower traffic and price pressure. The regulatory impact in 2012 was 1.0%. KPN | Annual Report 2012 35

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Report by the Board of Management Our Activities and Performance continued NETCO We provide network and IT services and facilitate in infrastructure needs of both our retail and wholesale customers with a strong emphasis on operational excellence. mobile network, as average data usage per customer has OVERVIEW increased in the context of declining traditional voice services and SMS traffic, in favor of rising data usage driven by communication applications, mobile internet REVENUE EBITDA and other data-heavy uses. €2,621M €1,461M Our strategy in action (2011: 2,780m) (2011: 1,705m) Expanding and upgrading our networks and introducing new technologies In 2012 we have taken several important steps to Operating highlights strengthen our commitment to Fiber-to-the-Home (FttH) in The Netherlands. We have increased our ý Mobile network upgrades implemented, ownership in the joint-venture Reggefiber by an additional enabling 4G LTE roll-out in Q1 2013 10% to 51%. ý Reggefiber option 1 exercised, stake increased to 51% In addition we acquired Reggefiber Wholesale ý Acquisition of Reggefiber Wholesale operator (Reggefiber’s wholesale operator). This will allow Reggefiber to focus solely on the roll-out of FttH 1,246K and to operate an open access passive FttH network. The acquisition fits neatly with our wholesale strategy and enables larger scale fiber wholesale services. HOMES PASSED FTTH (2011: 813k) We believe FttH is the long-term superior infrastructure, while providing good operational results, such as increased broadband and TV market shares and higher ~70% ARPU. Next to our FttH network, the upgrades of our copper network is equally essential as this will enable KPN to successfully compete in the short and medium COVERAGE FOR SPEED OF >40 MBPS term. At the end of 2012 ~70% of the Dutch market was (2011: ~56%) covered with a minimum guaranteed speed of 40Mbps. To expand the addressable market, we are increasing the Environment and competition bandwidth we are able to offer by simultaneously rolling out technologies over our VDSL network and FttH. We are We are the only operator of fixed copper infrastructure on track with the VDSL upgrades, mid 2012 we introduced with nationwide coverage in the Netherlands. We are a 80Mbps proposition and had connected the first required by OPTA to grant access to our local copper loop commercial customer via pair-bonding. for wholesale fixed telephony and wholesale services on leased lines. We face competition from other regional Maintaining our network quality operators which also operate their own networks in the In 2012 we started our network modernization program Netherlands, including cable networks operated by Ziggo in order to maintain our top quality mobile network. and UPC, and mobile networks operated by Vodafone and We replaced the existing GSM radio network by a radio T-Mobile. However, while Vodafone and T-Mobile compete network capable of providing both enhanced GSM services with us for customers for their mobile networks, they also and UMTS data services. This will enhance the indoor purchase access to our copper and fiber networks to coverage of the UMTS (voice and data) network nation- provide fixed line services. As a result, amongst others wide and further improve the network quality we provide Vodafone and Tele2 compete with Consumer Residential to our customers. In 2012 we upscaled LTE pilots, the next segment, and at the same time are a wholesale customers generation high-speed mobile data network, and as a of NetCo that provide those fixed-line services to their result we became the first operator in the Netherlands to own customers. launch 4G LTE services in the first quarter of 2013, supporting our position as the number one mobile The number of ISDN/PSTN connections in the Netherlands network in the Netherlands. continues to decline as VoIP usage grows. We have experienced a strong increase in data users over our 36 KPN | Annual Report 2012

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Rationalization of legacy networks Copper network Further rationalization of our legacy networks continues. We successfully operate high-quality copper networks and Our aim is a timely phase-out of legacy networks, reducing have continued to invest in copper in 2012, implementing the variety of networks and related costs, and minimizing new technologies, such as VDSL and pair-bonding to enable continuity risks. The further off-load of the legacy bandwidth speeds of at least 40 Mbps. ATM-network towards future-proof Ethernet was continued in 2012. Wireless network In the Netherlands, we operates a 3G UMTS / HSPA Strategic partnering and cost reduction network and a 2G GSM system. In 2012, we began In 2012 we entered into an international partnership upgrading our mobile network to modernize and to enable with TechMahindra to further improve our efficiency and 4G LTE. As our customer portfolio is moving from voice/ effectiveness in our IT environment and operational processes SMS to a data-centric portfolio, the quality and speed of and also to jointly address strategic growth areas. The the wireless network are important differentiators. Mobile majority of the expected savings from this partnership will data continued to grow, up 66% over 2012, and signaling be achieved within Netco. In line with our strategy we have traffic grew at about 80%. To support this growth we set out a clear ambition on cost leadership and the FTE installed new equipment in the radio and core network reduction program. domains, substantially expanding the available network capacity. The number of sites connected to fiber optics was Products and services expanded to 3,427 and the installation of approximately 360 extra sites during the course of the year increased NetCo is responsible for the operation and maintenance UMTS coverage ultimo 2012 to 95% population coverage of our fixed and mobile networks in the Netherlands, by year-end. About 40% of our mobile voice traffic is supporting strategy across our segments by operating carried by our UMTS network. high quality fixed and mobile networks. Wholesale Services Financial review We provide wholesale services that include access to our network infrastructure such as wholesale line rental, (In millions of EUR, unless indicated otherwise) 2012 2011 ∆ wholesale broadband access and wholesale fiber through Revenues 2,519 2,659 -5.3% our copper, fiber and mobile networks. Furthermore we Other income 102 121 -16% provide value-added services for example software and Revenues and other services for third parties so that they can provide content income 2,621 2,780 -5.7% and functionality over our network infrastructure. Wholesale customers can either purchase access to passive Operating expenses 1,995 1,962 1.7% network infrastructure alone or with our active operating – of which: depreciation, services, which allow telecom operators and service amortization and providers to offer their own services to end customers. impairments 835 887 -5.9% We also provide wholesale customers with cloud computing and other services. EBITDA 1,461 1,705 -14% EBITDA margin 55.7% 61.3% Network and IT services By further migrating to fiber and upgrading our copper network, we aim to become an even more highly efficient, Revenues and other income declined 5.7% mainly as a integrated network and IT operator. In the coming years, result of the continuous decline in traditional services and we will focus on accommodating the increasing capacity the effects of regulation. The sale of mobile towers made requirements on our mobile as well as our fixed networks. a positive attribution to revenues and other income of EUR 96 million in 2012 (2011: EUR 100 million). Infrastructure EBITDA was lower due to the acquisition of the active Wireline network operator of the wholesale activities of the Reggefiber Fiber network Group BV, higher costs related to the uptake of FttH Through the fiber network we can offer our customers activations and increased rental costs for mobile sites. options for expansion such as, electronic payment This resulted in an EBITDA margin of 55.7% in 2012 transactions, data networks, and multi-room IPTV as well compared to 61.3% in 2011. as IPTV Online with functionalities on laptop, smartphone and tablet. The roll-out of the fiber network continued in 2012. Reggefiber increased its Homes Passed (‘HP’) base to The fiber-optic network provides unlimited data transport approximately 1,303 thousand by the end of 2012 (2011: to customers with high bandwidth requirements. 951 thousand). Homes activated by Reggefiber reached 419 thousand (2011: 277 thousand). The roll-out of the FttH network is carried out through our joint venture Reggefiber Group B.V., which operates on the basis of an open-access model. KPN | Annual Report 2012 37

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Report by the Board of Management Our Activities and Performance continued CORPORATE MARKET We offer multinational corporations and other large enterprises end-to-end solutions centered on workspace management, connectivity solutions and information security and data centers. Customer focus OVERVIEW Corporate Market has a customer-focused organization. We permanently monitor customer loyalty through our own Net Promoter Score and through external surveys. REVENUE EBITDA In 2012, we improved our customer satisfaction scores. €1,405M €57M In order to achieve this we continued to simplify our organization, improved customer focus, and further standardized our services and internal processes. (2011: 1,811m) (2011: 6m) Products and services Operating highlights Our Cloud strategy: services aggregation We have invested in developing cloud-based services ý Good progress accelerated FTE reduction program that evolve from current focus areas on the workspace to ý Divestment of Getronics International finalized delivering services that bridge the traditional IT services ý Best ICT provider 2012 according to Management and the cloud services environment. Cloud Services Team Magazine Aggregation enables Corporate Market to leverage KPN ý Steps taken to integrate parts of Corporate Market Group IT and network capabilities with our customers. with Business per January 1, 2013 It provides a means for cross- and up-selling and new and compelling offerings to prospects. Workspace management Environment and competition We provide service models to clients to combine existing legacy and new cloud-based services. Together with the In the context of a weak macro-economic environment, Business segment, we sell and deliver packaged online, the Dutch ICT market is highly competitive and has hybrid and traditional workspace services in the Netherlands experienced overcapacity and price pressure. IT budgets of in all segments ranging from the midmarket to the business customers remain constrained, postponing larger corporate enterprise market. ICT investment decisions. In addition, cyclical IT service activities such as consulting and time and material services Data centers are under pressure as customers are prioritizing capital We are responsible for housing and hosting data center expenditures with their limited resources. In particular, the resources for KPN and for external customers. In particular, governmental and financial services sectors, which are our we facilitate the evolution of traditional datacenter largest clients, are competitive. management portfolio to more cloud-based solutions. Our strategy in action Connectivity services The next step up from workspace services and data centers Our objective is to continue to be the leading ICT service requires connectivity services that enable companies to provider in the Netherlands. exchange information effectively and securely. World-class connectivity between employees, customers, partners and Cost efficiency and quality of services suppliers has become business- critical as media-rich forms We have developed a strong partner eco-system that is of communication become increasingly important in the securing integrated end-to-end services for our customers, business environment. combining local presence with global reach. Partners such as the Getronics Workspace Alliance, Mindtree and more Consulting services recently TechMahindra create cost reduction, higher Our consulting services include (private) cloud, workspace effectiveness and flexibility for clients. They are a strategic innovation, business communications, business applications, element in creating customer experience, innovation and sourcing governance, organizational change and security service continuity. and compliance. 38 KPN | Annual Report 2012

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Financial review (In millions of EUR, unless indicated otherwise) 2012 2011 ∆ Netherlands 1,226 1,299 -5.6% International 174 530 -67% Other -5 -23 78% Revenues 1,395 1,806 -23% Other 10 5 100% Revenues and other income 1,405 1,811 -22% Operating expenses 1,770 2,256 -22% – of which: depreciation, amortization and impairments 422 451 -6.4% EBITDA 57 6 >100% EBITDA margin 4.1% 0.3% Triggered by the changes in the ICT market, continued adverse market conditions and fierce price pressure, the annual impairment testing led to an impairment of goodwill of EUR 314 million in 2012. In 2011 an impairment of EUR 298 million was recorded and related to goodwill, intangible assets and tangible assets. The remaining goodwill related to Corporate Market at the end of 2012 amounted to EUR 73 million. In 2012 the sale of Getronics International was completed, resulting in a one off gain on sale of EUR 8 million. As of May 1, 2012 revenues and EBITDA of the international activities are no longer incorporated in the reported financials of Corporate Market. Reported revenues and other income in 2012 were 22% lower. This decrease was primarily due to the sale of Getronics International, as of May 1, 2012, and also resulted from continued price pressure due to overcapacity in the market and postponement of large investments by clients. Reported EBITDA increased by EUR 51 million to EUR 57 million in 2012. EBITDA in 2011 was impacted by restructuring costs of EUR 96 million and a book loss on assets of EUR 30 million related to held for sale classification. In 2012, EBITDA was impacted by lower revenues and continuous pressure on margins, partially offset by lower personnel costs due to the accelerated FTE reduction program. KPN | Annual Report 2012 39

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Report by the Board of Management Our Activities and Performance continued GERMANY We operate through E-Plus to provide customers in Germany multi-brand mobile telecommunications, offering prepaid and postpaid services targeted at multiple market segments. Besides independent service providers such as Freenet/ OVERVIEW Mobilcom, numerous branded resellers including Aldi Talk, Fonic, Congstar, Klarmobil or Tchibo sell products REVENUE EBITDA and services, making normally exclusively use of one of the four network operators to do so. €3,404M €1,290M Our strategy in action (2011: 3,243m) (2011: 1,354m) Our strategic objective in the medium term is to achieve an EBITDA margin of between 30-35% and over the longer Operating highlights term to attain a mobile market share by service revenues in Germany of approximately 20%. We diversified from ý Price competition leading to a slow-down in growth prepaid voice customers to a higher proportion of postpaid in Germany customers and mobile data users. We expanded distribution ý All-net flat postpaid propositions introduced through own and partner shops, online distribution and ý High-speed data network roll-out accelerated to exclusive wholesale channels. support further growth in data revenues Data-centric Challenger We aim to continue our profitable growth based on our +3.0% Challenger strategy. We differentiate ourselves from the other operators by being mobile-centric, offering simple and transparent products with focus on offering the best GROWTH IN WIRELESS CUSTOMERS customer experience. (2011: +11%) In 2012, we continued to focus on expanding our position +2.1% in the postpaid market, by means of increasing net adds and expanding the offerings of our BASE brand. These offerings are aimed to be simple and flexible for the UNDERLYING GROWTH IN SERVICE customer. The offer gives our customers the opportunity REVENUES to select a combination of options such as ‘internet flat’ (2011: +7.6%) and ‘SMS flat’ to fit their needs. Additionally, we have introduced new all-net flat propositions under the brands Yourfone, Blau, and Simyo that address customer demand Environment and competition for unlimited calling, extensive use of Apps and mobile internet, all at very competitive prices. The German mobile market is highly competitive with an increasing customer preference for mobile data over Mobile broadband network traditional voice and SMS. As a result, new competitors, Our HSPA+ network is being rolled out following customer such as OTT players, along with regulatory obligations to demand and based on a regional strategy. We believe reduce MTRs and roaming charges, have led to more we have strong growth opportunities in data and aim pressure on service revenues and ARPU in the mobile to obtain a fair market share in voice and data revenues. telecommunications market in Germany. Corresponding with the strongly growing adoption of mobile data products, E-Plus has ramped up roll-out There are three other significant players in the German activities. At the end of 2012 more than 85% of the mobile telecommunications market: Deutsche Telekom, population was covered with up to 21 Mbps. Vodafone and Telefónica Deutschland. The two largest mobile telecommunications providers are Deutsche Products and services Telekom and Vodafone. All operators are currently expanding capacity to absorb the growth in mobile data. We offer various tariff plans with our multi-brand strategy: E-Plus is the fourth largest mobile provider in Germany E-Plus brand with various bundle packages, BASE offering by service revenue. Our market share remained stable flat-fee packages, Yourfone and Blau with attractive all-net at 15.8%. flat packages, Simyo as web-only mobile operator and Ay Yildiz with a tailor-made offering for Turkish-speaking people. We also provide wholesale solutions to an increasing number of partners acting as branded resellers, 40 KPN | Annual Report 2012

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including Aldi Talk, WAZ, MTV, NABU and MVNOs like Versatel, NetCologne and Ecotel. In 2012 we further expanded our portfolio of data propositions to adapt to our customers’ needs for more mobile data oriented packages with and without the smartphone of their choice. Financial review (In millions of EUR, unless indicated otherwise) 2012 2011 ∆ – Service revenues (wireless) 3,149 3,099 1.6% – Hardware and other revenues 255 144 77% Revenues and other income 3,404 3,243 5.0% Operating expenses 2,871 2,545 13% – of which: depreciation, amortization and impairments 757 656 15% EBITDA 1,290 1,354 -4.7% EBITDA margin 37.9% 41.8% Revenues and other income increased by 5%, driven amongst other things by continued growth of customers at BASE, new propositions and the focus on data in the postpaid segment and a book gain on the sale of towers of EUR 103 million. However, compared to 2011, growth slowed down due to heavier competition in the prepaid market, in which E-Plus is market leader. Additionally, increased price competition in the postpaid market has led high-value customers to trade down on their tariff plans, leading to optimization and consequently to lower ARPU. EBITDA decreased by 4.7% despite the positive effect of the sale of mobile towers in 2012 of EUR 103 million, mainly impacted by commercial investments to support the introduction of the new propositions and increased subscriber acquisition costs to support postpaid net adds. The increased focus on postpaid subscribers resulted in the highest number of postpaid net adds since 2006. Corrected for the clean-up of 576 thousand inactive postpaid customers the postpaid net adds amounted to 740 thousand. Prepaid net adds amounted to 958 thousand corrected for the clean-up of 439 thousand inactive prepaid customers. At the end of 2012 the total customer base is over 23 million customers. Operating review 2012 2011 ∆ Wireless customers (in thousands) 23,400 22,717 3.0% Net adds postpaid (in thousands)1 164 424 -61% Net adds prepaid (in thousands)1 519 1,866 -72% ARPU (in EUR) 11 12 -8.3% 1) Including the effect of clean-up in 2012 of 576 thousand inactive postpaid SIM cards and 439 thousand inactive prepaid SIM cards KPN | Annual Report 2012 41

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Report by the Board of Management Our Activities and Performance continued BELGIUM We offer ‘value for money’ mobile and fixed services to specific customer groups in Belgium through multiple own brands and wholesale partnerships. We primarily compete against three other service OVERVIEW providers in Belgium: Belgacom (Proximus), Mobistar and Telenet. Belgacom is the incumbent telecommunications REVENUE EBITDA provider and is majority-owned by the Belgian state. Belgacom remains the market leader in Belgium with €804M €272M Mobistar (majority-owned by France Telecom) the second largest competitor. We are the third-largest provider. Our market share increased from ~19% in 2011 to ~20% in 2012. (2011: 781m) (2011: 273m) In 2012, the market environment changed significantly due Operating highlights to new telecom legislation allowing customers in Belgium to terminate their telecommunications contracts as from ý Market share exceeded the 20% milestone six months after the starting date of the contract, and new ý First in Belgium to offer mobile services without pricing strategies by competitors, triggering increased contract duration customer volatility and price sensitivity. ý Successfully launched several commercial initiatives and introduced an exclusive offer with Spotify Our strategy in action ý Signed a wholesale agreement with Belgacom, enabling us to further improve the attractiveness of Our strategic objective is to attain a long term market our fixed-line portfolio share by service revenues in Belgium of approximately ý Accelerated network roll-out 25% with an EBITDA margin in the medium term of between 25-30%. 3,424K Mobile-centric Challenger We aim to continue our profitable growth based on our Challenger strategy. We differentiate ourselves from the WIRELESS CUSTOMERS other operators by being mobile-centric, offering simple (2011: 4,131k) and transparent products with a focus on offering the best customer experience. Via our own brands, we deliver +10% high-value products at smart prices. Five months before the new telecom law became applicable, we were the first to give customers no fixed contract duration with the BASE UNDERLYING GROWTH IN SERVICE brand. We leverage our partnership strategy and extend REVENUES it with more innovative solutions adding content to our (2011: +11%) services, for instance Spotify. We continued to increase the share of our own channels in our total distribution landscape (BASE shops, ALLO telecom shops and online). Environment and competition We renewed our wholesale strategy by further improving The Belgian mobile communication market is highly our collaborative way of working and focus on data. competitive. New competitors along with regulatory As of July 2012, Ortel Mobile Belgium became part obligations to reduce MTRs and roaming charges as well as of KPN Group Belgium. customer optimization in terms of mobile service expenses have led to an overall decline in service revenues and ARPU Accelerated network investment in the mobile telecommunications market. The market in We continued and accelerated our mobile broadband Belgian has increasingly been characterized by fixed- internet deployment, as a means of reducing churn by mobile convergence, with competitors offering bundled differentiating ourselves from competitors based on packages combining fixed and mobile services. reputation for network speed and quality. At the end of 2012 our HSPA network has a 90% outdoor population coverage. Furthermore, the first tests for 4G LTE have started in 2012 and we expect 4G LTE to be available in the majority of the country by the end of 2014. 42 KPN | Annual Report 2012

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Products and services EBITDA decreased by 0.4% compared to 2011, affected by negative regulatory impact of 8.1%. Excluding the Our multi-brand strategy offers a full portfolio of mobile regulatory impact, EBITDA increased following revenue services (voice, SMS, data), broadband products and growth. In line with the higher revenues, traffic costs and content services, such as Spotify. This portfolio provides subscriber acquisition costs increased in 2012. The EBITDA both “value for money” and simple solutions. margin for Belgium during 2012 decreased to 33.8% as compared to 35.0% in 2011. BASE is our mainstream retail brand offering prepaid as well as postpaid products. BASE business delivers products for the business market (SoHo-SME). Data continues to Operating review1 be an important growth driver, not only through our own brands but also through our partnerships like Mobile 2012 2011 ∆ Vikings (45% owned by KPN Group Belgium) which is Wireless customers (in thousands) 3,424 4,131 -17% playing a leading role in the growing data market. Net adds postpaid (in thousands) 17 66 -74% Following the changes in the arket environment we Net adds prepaid successfully launched several commercial initiatives. (in thousands)2 -724 337 n.m. Jim prepaid as well as BASE and BASE business portfolio ARPU blended (EUR) 15 14 7.1% were revamped (e.g. launch of BASE All 10, 20 and 1) Relating to Mobile business only. Unlimited; new BASE Check 15). Thanks to the new 2) Including the effect of clean-up in 2012 of 1,264 thousand agreement with Belgacom, signed in September 2012, inactive prepaid SIM cards. we will be able to offer a even broader range of fixed services to our mobile customers. Financial review (In millions of EUR, unless indicated otherwise) 2012 2011 ∆ – Service revenues (wireless) 716 687 4.2% – Hardware and other revenues 88 94 -6.4% Revenues and other income 804 781 2.9% Operating expenses 693 648 6.9% – of which: depreciation, amortization and impairments 161 140 15% EBITDA 272 273 -0.4% EBITDA margin 33.8% 35.0% Revenues and other income in Belgium increased by 2.9%. Belgium continued to show strong service revenue growth of 4.2%, despite regulatory impact of 4.7%. Growth was driven by B2B, wholesale and data. The number of customers declined in 2012 to 3.4 million, as a result of a significant clean-up of the prepaid customer base of around 1.3 million inactive customers. KPN | Annual Report 2012 43

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Report by the Board of Management Our Activities and Performance continued IBASIS We provide international wholesale voice services, terminating international phone calls worldwide. We offer our carrier customers both a range of global call termination products and a portfolio of value-added data services for mobile operators. platform, including LTE Signaling and HD Voice, to address OVERVIEW emerging opportunities in global communications. For 2013 forward we will remain focused on innovating and developing REVENUE EBITDA new services to establish new, profitable revenue streams. €1,035M €30M Products and services We offer a comprehensive voice product portfolio: Direct (2011: 977m) (2011: 31m) Voice, Certified Voice and Premium Voice. The three products offer a progression of code coverage, pricing and features Operating highlights formulated to meet the varied requirements of fixed carriers, mobile operators, consumer voice over broadband carriers, ý Maintained top-5 position in competitive and prepaid calling card service providers. In the mobile international wholesale voice market market, we offer a portfolio of value-added mobile data ý Focus on balancing revenue growth while services, called Mobile Matrix, which includes global maintaining healthy profit levels signaling, mobile messaging and roaming to enhance mobile operators’ average revenue per user and customer loyalty. This product portfolio competes effectively in all international 26.2 BILLION voice markets and gives particular strengths in the fastest- growing segments of VoIP and mobile. TOTAL MINUTES (2011: 25.6 billion) Financial review (In millions of EUR, unless 4.0CENTS indicated otherwise) Revenues and other income 2012 1,035 2011 977 5.9% ∆ AVERAGE REVENUE PER MINUTE (2011: 3.8 cents) Operating expenses 1,023 966 5.9% – of which depreciation, amortization and impairments 18 20 -10% Environment and competition EBITDA 30 31 -3.2% Our main challenges are to maintain margins and market EBITDA margin 2.9% 3.2% share despite increasing price and margin pressure. The international wholesale voice market is a commodity Revenues and other income increased by 5.9% in 2012, business that requires low-cost infrastructure and efficiencies including a favorable currency effect of 3.0%. that result from large-scale traffic volumes. With our global footprint and approximately 26.2 billion minutes of voice In 2012, minutes of customer traffic increased to 26.2 billion traffic annually, we have maintained our position as one of minutes, up 2.3% compared to 2011. Average revenue the five largest carriers of international voice traffic in the per minute increased in 2012, despite increasing world. Our main competitors include AT&T, BICS, Deutsche competitive pressure. Telekom, Tata and Verizon. In addition to our technology leadership in VoIP and global network footprint, we have EBITDA amounted to EUR 30 million in 2012, compared continued to expand our presence in two of the fastest- to EUR 31 million in 2011. The lower EBITDA reflects the growing segments of global telecommunications — mobile increased price and margin pressure in the international services and consumer VoIP. voice market. Our strategy in action Operating review Our strategy is to leverage our global IP infrastructure and 2012 2011 ∆ expertise, sophisticated back-office systems, and substantial Minutes International scale to provide superior international communications (in billion) 26.2 25.6 2.3% services to fixed and mobile operators worldwide. In 2012 we Average revenue per launched innovative new offerings over our multi-service IPX minute (EUR cents) 4.0 3.8 5.3% 44 KPN | Annual Report 2012

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Report by the Board of Management Our Activities and Performance continued INNOVATION AND INVESTMENTS In today’s society communication is key, and it is KPN’s goal to enable customers to enrich their work and leisure time with the range of communication services we offer. To maintain growth, KPN’s innovation and investments are aimed at the customer and to anticipate their changing needs and requirements. Capital expenditures In million of EUR 2,209 2,047 Total capital expenditures for the year ended December 31, 2012, amounted to EUR 2,209 million (2011: EUR 2,047 million). The increase in 2012 as compared to 2011 was mainly the result of customer-driven expenditures, in 790 particular the capitalization of handset costs in the 601 654 669 534 435 Netherlands as a result of the new handset lease option 185 254 which began to be offered to customers from mid 2012, 103 31 whereas in 2011 handset costs in the Netherlands were Wireless Wireless Fixed IT & customer Other Total accounted for as cost of materials within operating network network NL network NL driven Group expenses. Increased capital expenditures in 2012 also Mob. Int. included other elements of customer-driven capital expenditures in the Netherlands, such as IPTV set-top 2011 2012 boxes for TV customers as well as accelerated mobile network roll-outs in the Netherlands, Germany and Belgium, and IT expenditures in Germany as part of a infrastructure in the long-term. In particular, FttH allows multi-year project to replace one of the core IT platforms greater upload and download speeds as compared to cable of E-Plus. The increase in capital expenditures and or traditional copper DSL. investments was partly offset by lower fixed network investments in the Netherlands. Mobile infrastructure (the Netherlands, Germany, Belgium) Infrastructure and network innovation KPN continued to invest in the quality of its mobile networks. In 2012 EUR 855 million was invested in capacity Fixed infrastructure (the Netherlands) upgrades, triggered by increasing customer use of data KPN’s fixed infrastructure is of vital importance for its over our 2G and 3G networks. Of these investments continued business operations and financial performance. EUR 254 million was targeted at the Netherlands, whereas KPN’s hybrid FttH and VDSL network strategy emphasizes investments in Germany and Belgium amounted to expanding the market for the services it delivers with its EUR 601 million. All-IP networks. The use of All-IP networks enables more efficient, effective and scalable telecom infrastructure In the Netherlands, KPN’s aims to operate a best-in-class usage, providing greater bandwidth and higher speeds. network that provides a superior customer experience, both in voice and mobile data services. To be able to KPN is the only operator of fixed copper infrastructure handle mobile data growth, KPN has continued to expand covering the entire population in the Netherlands. KPN the capacity of its mobile network by installing new continues to make investments to upgrade its copper- equipment for radio and core network . KPN provides for based network. Total investments in copper upgrades ethernet connectivity via fiber-optic cable as part of its were about EUR 164 million in 2012. New technologies, mobile network architecture. The number of sites such as pair bonding and vectoring, significantly increase connected to fiber optics was expanded to 3,427 in 2012. the available broadband internet bandwidth on copper With approximately 360 extra sites, UMTS coverage as of networks for subscribers and enable the commercial December 31, 2012 was approximately 95% of the Dutch roll out of multi-room HD TV. Next to FttH roll-out, KPN population. Approximately 40% of KPN’s mobile voice is upgrading VDSL, including pair bonding that has been traffic is carried by its UMTS /HSPA network, with the rolled out commercially. remaining portion carried on its GSM network. KPN’s deployment of FttH in the Netherlands is being In the fourth quarter of 2012, KPN acquired 15 blocks of executed through its joint venture, Reggefiber. In 2012, frequency licenses in the 800MHz, 900MHz, 1800MHz, KPN acquired Reggefiber Wholesale (Reggefiber’s 2.1GHz and 2.6GHz bands for a total of 120MHz of wholesale operator), which will allow Reggefiber to focus frequency licenses in the recently completed spectrum solely on the roll-out of FttH and to operate an open access auction in the Netherlands, which enables KPN to continue passive FttH network. KPN believes FttH is a superior its existing 2G and 3G services, and introduce new services, 46 KPN | Annual Report 2012

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such as 4G LTE which provides significantly higher speeds Interactive TV (Consumer Residential) than are currently available on a 2G network based on GSM KPN has taken significant steps in recent years to improve and 3G network based on UMTS / HSPA technology. its TV proposition. In 2012, HD channels were included in KPN’s standard IPTV package, a new set-top box featuring E-Plus continues the roll-out of its mobile data network. a new customer interface was introduced and IPTV was At December 31, 2012, more than 85% of E-Plus’s UMTS made available on tablets and smartphones. sites in Germany were HSDPA and HSPA+ enabled. Innovation expenditure In Belgium, KPN Group Belgium is implementing EDGE and UMTS technologies. KPN Group Belgium is also The expenditure (operating expenses) related to these deploying 3G UMTS / HSPA+ technology and continues to innovations in 2012 amounted to more than EUR 100 improve its existing mobile network, specifically focusing million in the Netherlands. In 2012 approximately 2,000 on indoor coverage. employees in the Netherlands were involved in projects and activities to innovate KPN’s infrastructure, to create Product and services innovation new products and services and improve processes. KPN believes in a world where IP technology provides Patent applications and the ideal future-proof foundation for new ways of intellectual property rights communicating, such as phone calls over the Internet, videoconferencing, e-learning and electronic payments, KPN’s current portfolio on intellectual property rights enabling the New Way of Working. The use of IP consists of a set of trademark registrations around KPN’s technologies opens the door to new possibilities in such core brands and about 350 patent families. KPN believes it fields as in-store marketing, property surveillance and takes appropriate steps to protect its intellectual property payments. Together with other companies, KPN is rights and generates value from these rights where considering how such solutions can best be used. KPN appropriate. In order to protect these rights, KPN currently is also delivering and implementing the underlying uses a combination of patents, trademarks, service marks, technology necessary to create the new applications. trade secrets, copyrights, database protection, confidentiality agreements with its employees and third A significant part of KPN’s innovation projects covers the parties and protective contractual provisions. improvement and renewal of KPN’s product and services Approximately 50 of the patent families which KPN owns portfolio. Examples of product and services innovations are declared essential for the commercial exploitation of include the following: telecom communication technology and services. FttH roll-out (Consumer Residential) KPN continues to invest in the growth of its intellectual KPN believes FttH to be a superior infrastructure in the property rights portfolio, among others, through KPN’s long-term. In particular, FttH allows greater upload and targeted long-term research and development program download speeds as compared to cable or traditional in close cooperation with TNO Telecom and other research copper DSL. FttH users also do not experience diminished and development institutions and universities. download speeds as more users are online, unlike cable users who share bandwidth. As part of its FttH roll-out, in mid 2012, KPN introduced a standard 100Mbps FttH Capex Dutch Telco package (as compared to 40Mbps for VDSL and 8Mbps 2012 for plain copper DSL) and a premium 500 Mbps package. 4G LTE proposition (Consumer Mobile) Innovative capex 348 In February 2013, KPN launched its 4G LTE proposition, Customer driven capex 431 making it the first to offer 4G LTE in the Netherlands. Regular capex 567 4G LTE improves the customer experience by providing significantly higher speeds and better indoor coverage then 3G. KPN believes that 4G LTE will further contribute to a better customer experience and the integration of a high quality mobile network with its nationwide fixed network. 2011 It will also seek to upsell customers to higher data bundles on the back of its 4G LTE proposition. Innovative capex 404 Mobile data usage apps (Consumer Mobile) Customer driven capex 213 Following the increased use of mobile internet and apps, Regular capex 578 we introduced apps under the KPN and Hi brands that can help our customers to monitor their data usage. KPN | Annual Report 2012 47

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Report by the Board of Management GOVERNANCE CORPORATE GOVERNANCE Compliance with the Dutch Corporate on January 1, 2013. According to this new legislation Governance Code Dutch companies can choose between a one-tier and two tier-board. KPN has – and will continue to have – a two-tier The Dutch Corporate Governance Code finds its statutory management structure with a Board of Management and basis in Book 2 of the Dutch Civil Code and applies to KPN a Supervisory Board. as KPN has its registered office in the Netherlands and its shares are listed on a stock exchange. Under Dutch corporate law, shareholders are entitled to approve decisions of the Board of Management that The Corporate Governance Code defines a company as a have a Company-transforming effect. Moreover, they are long-term form of collaboration between the principal entitled to approve the remuneration policy and share organs of a company. For KPN, these organs include the (option) plans. Also, they are entitled to appoint members Board of Management, the Supervisory Board and the of the Supervisory Board upon proposal by the Supervisory Annual General Meeting of Shareholders (‘AGM’). The Board and to dismiss the Supervisory Board. Board of Management values and considers the interests of the various stakeholders involved, supervised by the Currently, legislation is still pending on shareholder rights Supervisory Board. Good Corporate Governance results such as raising the threshold for proposing items to the in effective decision-making in a manner which enhances shareholders meeting and decreasing the threshold for shareholder value and enables a company to maintain disclosure obligations for shareholders regarding their a culture of integrity, transparency and trust. voting and capital interest. KPN closely monitors these developments. Where relevant, changes in legislation will The current Dutch Corporate Governance Code entered be implemented in KPN’s Articles of Association. It is not the into force on January 1, 2009. KPN fully endorses the intention of KPN to raise the threshold for proposing items underlying principles of the Dutch Corporate Governance for the agenda of the shareholders meeting which means Code which is reflected in a policy that complies with the that shareholders who individually or collectively represent best practice provisions as stated in the Dutch Corporate at least 1% of the issued capital or who, according to the Governance Code. KPN fully complies with the provisions Official Price List of NYSE Amsterdam Euronext represent at of the Dutch Corporate Governance Code. The full text of least a value of fifty million euro (EUR 50,000,000), will keep the Dutch Corporate Governance code is available at their right to propose items for the agenda (notwithstanding www.commissiecorporategovernance.nl. the pending changes in legislation). The Articles of Association were last amended on September 13, 2012. KPN does not fully apply the following principle: II.2.8: “the remuneration in the event of a dismissal may not None of KPN’s shareholders hold special rights and no exceed one year’s salary (the ‘fixed’ remuneration restrictions apply to the exercise of voting rights. For component). If the maximum of one year’s salary would be further information, please see ‘Share capital’ under manifestly unreasonable for a management board member ‘Shareholders’ rights’, and ‘Restrictions on non-Dutch who is dismissed during his first term of office, such board shareholders’ rights’ later in this section. member shall be eligible for severance pay not exceeding twice the annual salary.” Mr. Dirks joined the Board of On the basis of The Dutch Financial Supervision Act (Wet Management of KPN on November 8, 2011. Mr. Dirks’ op het financieel toezicht (Wft), The Dutch Authority for employment contract contains a non-competition clause Financial Markets (AFM) supervises the financial reporting for which he will, as required by German law, receive by Dutch listed companies. compensation equal to 50% of his (German) salary during a maximum period of 12 months. In case of a termination Management of his German contract he will receive this compensation on top of the severance pay of one year’s base salary that Supervisory Board may be due under KPN’s remuneration policy. The Supervisory Board oversees strategic and commercial policy-making by the Board of Management and the way in KPN’s application of the Corporate Governance Code is which it manages and directs KPN’s operations and affiliated/ available on the website (www.kpn.com) under the section associated companies. Members of the Supervisory Board Investor Relations, Corporate Governance. are appointed by the AGM upon binding nomination by the Supervisory Board. The Central Works Council has an Legal structure of the Company enhanced right to recommend persons for nomination Under Section 6, Part 4 of Book 2 of the Dutch Civil Code, up to one-third of the Supervisory Board. the rules for large companies (‘structuurvennootschap’) are mandatory for KPN. New legislation to amend the rules The Supervisory Board must nominate the recommended on management and supervision within Dutch companies persons unless it is of the opinion that 1) any such person (the ‘Act on management and supervision’), including the would be unsuitable to fulfill the duties of a Supervisory possibility of introducing a one-tier management structure Board member, or 2) such appointment would cause the for Dutch NVs (public limited liability companies) and BVs Supervisory Board to be improperly constituted. (private limited liability companies) entered into force 48 KPN | Annual Report 2012

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