France: Telecom and Information Technology Update

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SUBJECT: France: Telecom and Information Technology Update


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1. This is another in a series of periodic updates on the
French telecommunications and information technology
sectors, including internet and e-commerce.

Contents:
New CEO named for France Telecom (para 2)
France Telecom Announces 2004 Results (para 3)
A Victory for ART ... (para 4)
... And a Setback (para 5)
ART Finds Insufficient Competition in Mobile Phone Market
(para 6)
ORANGE and SFR Respond to ART Report (para 7)
GOF Selects Standard for Subscription Digital TV (para 8)
TF1 Predicts Large Growth in ASDL Subscribers by 2010 (para
9)
FT Joins Others to Bid for Stake in Czech Telecom Company
(para 10)


2. New CEO named for France Telecom: Didier Lombard has
been appointed Chairman and CEO of France Telecom (FT),
succeeding Thierry Breton, who was appointed French finance
minister following the resignation of Herve Gaymard.
Lombard, 63, is head of strategy and partnerships at FT, and
began his association with the company in 1967. Breton, who
took the helm of FT in 2002, is credited with implementing a
three-year recovery plan, now in its final year, and Lombard
is expected to continue his predecessor's strategy. This
will be the first time Lombard has run a publicly listed
company. Previously, he was scientific and technical
director at the Ministry of Research and Technology, and
later general manager of industrial strategy at the Ministry
of the Economy, Finance and Industry. Lombard also helped
achieve the creation of STMicroelectronics, a French high-
tech sector success, via a Franco-Italian agreement. In
addition to his FT experience, Lombard served as Ambassador-
at-Large for international investment at the Ministry of the
Economy, Finance and Industry from 1999 to 2003. According
to a source close to the departing Breton, Lombard's
appointment is a sign of continuity of corporate strategy,
although Lombard will face challenges in maintaining the
momentum of recovery initiated by Breton.


3. France Telecom Announces 2004 Results: France Telecom
has announced that its net profit for the 2004 fiscal year
was 2.8 billion euros; this was a decline of 13% and smaller
than analysts' forecasts of a 3.15 billion euro profit.
However, 2005 dividend payments for FY 2004 were 0.48 euro
per share, almost twice as high as 2003's 0.25 euro
dividend. Dividend payments in 2005 amounted to a total
outlay of 1.2 billion euros. Investors noted, however, that
return on FT shares was only 2%, well below the sector
average of 3.8%. FT has promised to raise its return to the
industry average, without providing further details. During
FY 2004, FT saw declines in the fixed-line market that were
somewhat compensated by growth in Wanadoo, FT's internet
service unit. In the last quarter of 2004, Wanadoo took
41.6% of new subscribers to ASDL internet, giving the
company a 46% share of France's 6.3 million ASDL users. In
2005, Wanadoo plans to launch the LivePhone, an internet-
compatible telephone that will complement its popular
LiveBox modem. FT also recently sold 8% of its subsidiary
PagesJaunes, ceding 22.3 million shares. FT still remains
the largest shareholder in the company, with a 54% stake.


4. A Victory For ART ...: In a move that may pave the way
for increased network access for FT competitors, French
telecom regulator ART rejected a fixed charge increase by FT
that contained no provisions for greater opening of the
market. The plan submitted by FT would have increased the
fixed monthly subscription charge from 13 euros to 15.99
euros over the period of 2004 to 2007, while simultaneously
reducing pro-rated call charges by 26%. After consultations
with ART, the French government allowed FT to make a one
euro increase in monthly subscription charges (to 14 euros),
applicable only for 2005. ART approval of further
subscription increases for 2006 and 2007 is contingent upon
FT's steps towards allowing greater market access.
Competitors wish to see a 30% discount from the monthly
retail charge to FT subscribers to establish the monthly
wholesale rate that FT charges to competitors who wish to
resell FT subscriptions. (At present, the retail charge is
10.87 euros next of taxes, while the wholesale charge is
10.50 euros.) FT has suggested an 8% discount, while ART is
pressing for one at least twice as large. In addition to
the increase in monthly residential subscription charges, FT
is also planning a 6% increase in subscription fees for
professionals. This new increase, which had been requested
by former FT CEO Thierry Breton, has yet to be approved by
ART.


5. ... And a Setback: The Conseil d'Etat, France's highest
administrative court, ruled that the 2002 tariff scheme
imposed on FT by ART lacked transparency. The scheme
applied to the tariffs assessed by FT for the use of its
network by competitors. ART would still like to see these
tariffs lowered, but the court's ruling has weakened ART's
hand considerably, just as the GOF has given it all future
authority to regulate telecom tariffs. According to the
court, ART failed to disclose that in 2002 it changed its
calculation method for determining the network unbundling
tariff. The 2002 scheme provided the basis for the one
approved by ART and the GOF in January. Although the ruling
has no immediate material impact on the company, it makes it
possible for FT to sue the French state for indemnity.


6. ART Finds Insufficient Competition in Mobile Phone
Market: In December, ART found that France's three largest
mobile operators, ORANGE, SFR and Bouygues Telecom were
colluding to maintain a dominant position in the market that
disadvantages competitors. Of particular concern to ART
were the "virtual" mobile companies (MVNO),which lease
their mobile infrastructure from the major providers. In
its first analysis of the mobile market, ART maintained that
the major operators must set more reasonable access
conditions for the MVNOs that wish to use their networks.
ART was also unimpressed by the recent profusion of
agreements made between the major operators and various
MVNOs. In ART's view, none of the MVNOs have attained the
critical size that would give them more influence and
leverage via a vis their host operator. Agreements with
MVNOs were thus judged by ART to be insignificant as long as
the major operators continue to set conditions of access
that prevent the MVNOs from effectively competing in the
market. The fact that Bouygues Telecom has excluded itself
from any agreements with MVNOs was taken by ART as a further
sign of the unimportance of such deals, and suggested to ART
that the three operators have not deviated from their
strategy of collusion. However, ART resisted calls from
MVNOs to fix the operators' wholesale charges, responding
that the MVNOs would eventually grow and be able to exert
such downward pressure themselves.


7. ORANGE and SFR Respond to ART Report: Responding to the
ART analysis cited above, ORANGE and SFR had harsh words for
ART's conclusions about the level of competition in the
mobile phone market. ORANGE denounced the report as full of
"obvious errors of judgment" that gave a "false and
disparaging" picture of the market. SFR called the report
"erroneous and biased," while Bouygues Telecom refused to
comment on it. ORANGE and SFR insisted that contrary to
ART's assessment, competition within the mobile market is
very intense, and that this greatly benefits French telecom
consumers. The two companies also criticized ART's
dismissal of their agreements with MVNOs, insisting that
their access charges are competitive, and that the virtual
operators maintain a high level of independence from the
host companies.


8. GOF Selects Standard for Subscription Digital TV: The
French government has chosen the MPEG4 standard for
broadcasts of subscription digital terrestrial television
(DTT),against the recommendation of the audiovisual
administrator CSA. The MPEG2 standard will be used for the
13 free DTT channels that will begin broadcasting in March.
The MPEG4 standard was reportedly selected for subscription
DTT because of its greater signal compression, which will
allow several high-definition channels to be launched within
two years, in addition to the 31 DTT channels already
planned. According to the GOF, selecting the MPEG2 standard
for subscription DTT would have delayed the arrival of high-
definition television until 2015. As a result of the
decision to employ two broadcast standards, some short-term
difficulties are anticipated for the launch of DTT.
Subscription-based and free channels will share broadcast
costs, but the smaller signal size of MPEG4 means that
subscription channels may ask for a proportionately smaller
cost share. Also, broadcast bouquets currently consist of a
mixture of free and subscription channels, but the MPEG4
standard is most efficient if it is the sole standard in the
bouquet. Although transmission of the DTT channels is
scheduled to start between September 2005 and March 2006,
launch delays are possible as the MPEG4 decoders are not yet
ready for commercial distribution.


9. TF1 CEO Predicts Large Growth in Television over ASDL:
Patrick Le Lay, CEO of TF1, has projected that within five
years, 2.5 million French homes will subscribe to free
programming via ASDL television, and 1 million homes will
have ASDL subscriptions to paid programming. ASDL providers
Neuf Telecom and France Telecom responded that their vision
for the future of the ASDL market did not extend past two
years. However, current trends indicate that the figures
put forth by Le Lay are highly plausible. At the end of
January 2005, the total number of ASDL subscribers in France
cleared the 100,000 hurdle, and FT, which currently has
90,000 of those subscribers, hopes to have 210,000 by year's
end, while Neuf TV expects to have 100,000 subscribers.
Sources project a total of 600,000 paying ASDL subscribers
by the end of 2006, with one million by 2010. Depending on
the rate of distribution of Neuf TV modems and Freeboxes, it
is also possible that Le Lay's prediction of 2.5 million
free programming subscribers by 2010 may indeed come true.


10. FT Joins Others to Bid for Stake in Czech Telecom
Company: FT has joined a consortium to participate in the
tender process for Cesky Telecom, the primary telecom
operator of the Czech Republic. Once the Government of the
Czech Republic decided that it will sell its 51% stake in
Cesky Telecom, France Telecom teamed up with an
international consortium of three private investment firms
to participate in the tender process of the National
Property Fund (NPF) of the Czech Republic. The value of
this majority equity interest is estimated at $2.6 billion,
according to news reports, which also noted that the Czech
telecom company successfully turned a 2003 operating loss
around in 2004 through growing sales and consolidation of
its highly profitable mobile division. Besides France
Telecom, the consortium includes the Blackstone Group, CVC
Capital Partners and Providence Equity Partners Inc. Should
their bid be successful, FT would enter into a strategic
partnership with Cesky Telecom via a minority stake in the
consortium.

Leach