ORANGE 20-F 2007
As filed with the Securities and Exchange Commission on June 25, 2007
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended December 31, 2006
Commission file no. 1-14712
(Exact name of Registrant as specified in its charter)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report:
Ordinary Shares, nominal value 4.00 per share: 2,606,673,130 at December 31, 2006
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which financial statement item the Registrant has elected to follow:
Item 17 x Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
TABLE OF CONTENTS
PRESENTATION OF INFORMATION
Since January 1, 2000, France Telecom has published its consolidated financial statements in euros. Solely for the convenience of the reader, this annual report on Form 20-F (Form 20-F) contains translations of certain Euro amounts into U.S. dollars. These translations should not be construed as representations that the converted amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated or at any other rate.
Unless otherwise stated, translations of euros into U.S. dollars have been made at the rate of 0.7577 to $1.00 (or $1.3197 to 1.00), the noon buying rate in New York City for cable transferts in Euro as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate), on December 29, 2006. See Item 3. Key Information 3.2 Exchange Rate Information for information regarding the U.S. dollar/Euro exchange rate since January 1, 2002.
Unless otherwise indicated, the financial information contained in this Form 20-F has been prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) as adopted for use by the European Union, which differs in certain significant respects from U.S. GAAP. See Note 37 to the consolidated financial statements included elsewhere in this Form 20-F for a description of the principal differences between IFRS and U.S. GAAP, as they relate to France Telecom and its consolidated subsidiaries, and a reconciliation to U.S. GAAP of net income and shareholders equity.
This Form 20-F contains certain information presented on a comparable basis. The basis for the presentation of this financial information is set out in Item 5. Operating and Financial Review and Prospects 5.7 Transition from data on an historical basis to data on a comparable basis. There can be no guarantee that France Telecom would have achieved results similar to those set forth in the financial information presented on a comparable basis. The unaudited financial information presented on a comparable basis is not intended to be a substitute for, and should be read in conjunction with, the consolidated financial statements included in Item 17, including the Notes thereto.
In this Form 20-F, references to the EU are to the European Union, references to the Euro or are to the Euro currency of the EU, references to the United States or U.S. are to the United States of America and references to U.S. dollars or $ are to United States dollars.
As used herein, the terms Company, France Telecom, France Telecom group and the Group, unless the context otherwise requires, refer to France Telecom together with its consolidated subsidiaries, and France Telecom S.A. refers to the parent company, a French société anonyme (corporation), without its subsidiaries. References to shares are to France Telecoms ordinary shares, nominal value 4.00 per share, and references to ADSs are to France Telecoms American Depositary Shares, each representing one share, which are evidenced by American Depositary Receipts (ADRs).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 20-F contains forward-looking statements about France Telecom (within the meaning of Section 27A of the U.S. Securities Act of 1933 or Section 21E of the U.S. Securities Exchange Act of 1934), including, without limitation, certain statements made in the Item 5. Operating and Financial Review and Prospects 5.1.3 Outlook. Forward-looking statements can be identified by the use of forward-looking terminology such as believes, expects, may, is expected to, will, will continue, should, would be, seeks or anticipates or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by the forward-looking nature of discussions of strategy, plans or intentions. Although France Telecom believes these statements are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties and there is no certainty that anticipated events will occur or that the objectives set out will actually be achieved. Important factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements include, among other things:
Item 3 KEY INFORMATION
3.1 SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and other operating data of France Telecom. The selected financial data set forth below should be read in conjunction with the consolidated financial statements and Item 5. Operating and Financial Review and Prospects appearing elsewhere in this Form 20-F. France Telecoms consolidated financial statements were prepared in accordance with IFRS as adopted by the EU for the years ended December 31, 2004, 2005 and 2006 and in accordance with French GAAP for the years ended December 31, 2002, 2003 and 2004. IFRS differ in certain significant respects from U.S. GAAP. See Note 37 to the consolidated financial statements for a discussion of the principal differences between IFRS and U.S. GAAP as they relate to France Telecom and a reconciliation of its net income and shareholders equity to U.S. GAAP.
The selected financial information presented below relating to the years ended December 31, 2004, 2005 and 2006, is extracted or derived from the consolidated financial statements audited by Ernst & Young Audit and Deloitte & Associés.
Periods prior to 2004 (except required U.S. GAAP information) are not presented as such financial information was prepared in accordance with French GAAP and, pursuant to SEC Release 33-8567, First-Time Application of International Financial Reporting Standards, is not required to be included because it is not comparable to the IFRS information provided below.
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF CASH FLOWS
3.2 EXCHANGE RATE INFORMATION
Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro-denominated prices of the shares and, as a result, will affect the market price of the ADSs in the United States. In addition, exchange rate fluctuations will affect the U.S. dollar equivalent of any cash dividends received by holders of ADSs.
The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate in New York City for cable transfers for foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York expressed in U.S. dollars per 1.00. Such rates are provided solely for the convenience of the reader and are not necessarily the
rates used by France Telecom in the preparation of the consolidated financial statements included elsewhere in this Form 20-F. No representation is made that the euro could have been, or could be, converted into U.S. dollars at the rates indicated below or at any other rate. See Section 3.3.3 Risks relating to financial markets: France Telecoms earnings and cash position are exposed to changes in exchange rates.
For information regarding the effects of currency fluctuations on France Telecoms results, see Item 5. Operating and Financial Review and Prospects 5.1.2 Group Business and Profitability.
3.3 RISK FACTORS
In addition to the other information contained in this document, prospective investors should carefully consider the risks described below before making any investment decisions. These risks, or any one of them, could have an adverse effect on France Telecoms business, financial position or earnings. Moreover, additional risks not currently known to France Telecom, or risks that France Telecom currently deems immaterial, may have a similar adverse effect and investors could lose all or part of their investment.
The risks described below concern:
Risks relating to France Telecom, the telecommunications sector and financial markets are described below by category, in order of decreasing importance, according to France Telecoms current assessment. The occurrence of new external or internal events may lead France Telecom to modify this order of importance in the future.
Legal risks are presented in Section 3.3.1 Risks relating to France Telecom, for risks relating to legal proceedings or disputes, and Section 3.3.2 Risks relating to the telecommunications sector, for risks relating to regulation and regulatory pressure. For further information, refer to Note 33 Litigation and claims to the consolidated financial statements and to Item 4 Information on France Telecom 4.7 Regulation respectively.
Industrial and environmental risks are presented in Section 3.3.1 Risks relating to France Telecom, for risks relating to the vulnerability of the technical infrastructure and environmental risks. For further information, refer to Item 4 Information on France Telecom 4.14 Environmental policy.
For risks relating to the financial markets, Note 24 Exposure to market risks and financial instruments to the consolidated financial statements presents the management of rate, foreign exchange, liquidity, covenant, counterparty and equity market risks. For further information, refer to this note. In addition, derivatives are described in Note 23 to the consolidated financial statements. The framework for managing rate, foreign exchange and liquidity risks is set by the Cash Management and Financing Committee.
The dedicated insurance program for covering what are seen as the highest risks is presented in Item 4. Information on France Telecom 4.9 Insurance. For further information, refer to this section.
3.3.1 RISKS RELATING TO FRANCE TELECOM
France Telecoms strategy is based on the implementation of an integrated operator model in line with the NExT plan (New Experience in Telecommunications) plan, which covers the period from 2006 to 2008. The NExT plan also aims to drive down costs and strengthen the Orange brand. If France Telecom fails to implement this integrated operator model successfully as part of the NExT plan, or if it fails to implement it completely, or if the development of integrated and convergent services fails to meet customer expectations, then the objectives of the NExT plan may not be achieved, adversely affecting France Telecoms business, financial position and earnings. Similarly, if France Telecom is unable to reduce its costs or strengthen the Orange brand, its business, margins and earnings would be adversely affected.
France Telecoms profitable growth strategy is based on the implementation of an integrated operator model, built around the core wireless and broadband activities, forming the basis for a multi-service offer (see Item 4. Information on France Telecom 4.2 Strategy). This strategy is being rolled out in connection with the NExT plan, the Groups three-year transformation program aiming to make France Telecom the benchmark operator for new telecommunications services in Europe.
The success of this strategy and the NExT plan depends on the following:
If France Telecom fails to implement this integrated operator model in line with the NExT plan, or if it fails to implement it completely, then the objectives of the NExT plan may not be achieved, adversely affecting France Telecoms business, financial position and earnings.
Furthermore, France Telecoms costs, notably its fixed costs, are still high compared with some of its rivals, due to its status as the historical operator. The NExT plan notably aims to reduce France Telecoms costs, and more specifically its fixed costs. If France Telecom is unable to reduce such costs quickly enough, the level of its margins, its financial position and its earnings could be adversely affected.
Lastly, the NExT plan is based in part on the consolidation of the Groups products and services under the Orange brand, both in France and abroad. France Telecom could find it difficult to implement this new brand policy or even maintain this brands positive image, notably in the event of a significant incident or the level of service would fall short of expectations, which could adversely affect its image, reputation, business and financial results.
France Telecom may not succeed, in whole or in part, in integrating the companies that it has acquired into the Group or in achieving the planned synergies.
In January 2005, France Telecom acquired the remainder of the stock in Polish operator TP S.A. held by its partner Kulczyk. Since then, France Telecom has directly held 47.5% of the equity and voting rights of TP S.A. In line with its strategy, France Telecom is pushing ahead with the integration of the TP Group, which adopted the Orange brand for its mobile activities in 2005, working to apply its standards, controls and procedures, while complying with the governance rules applicable for the TP Group.
In November 2005, France Telecom acquired nearly 80% of the wireless operator Amena in Spain for 6.4 billion euros. France Telecom aims to achieve synergies of more than 1.1 billion euros in current value with a positive impact on net cash flow of around 130 million euros per year as of 2008. The Groups subsidiaries in Spain were merged within France Télécom España in 2006. In October 2006, France Telecoms activities in Spain adopted the single Orange brand.
Amena and TP Group are strategic assets for the Group. As such, successfully consolidating Amena and achieving the synergies planned, as well as the continued integration of TP Group, represent major challenges for the success of the NExT plan.
In the process for integrating the companies acquired and achieving the synergies expected, France Telecom could, however, in the case of Amena, TP Group or other companies acquired by it:
Any major difficulties related to the consolidation of Amena or the TP Group or other businesses acquired by France Telecom could adversely affect its business, financial position and earnings.
France Telecom faces risks relating to certain subsidiaries and joint ventures in which it shares control or does not hold a controlling interest.
In some of the Groups activities, France Telecom does not have a controlling interest. Under the documents or agreements governing some of these activities, certain key decisions such as the approval of business plans or the timing and amount of dividend payments require the agreement of France Telecoms partners.
Such risks may involve the following companies specifically, in which France Telecom shares control with another shareholder: ECMS (Mobinil), a subsidiary of Orange in Egypt, which is consolidated at 71.25%, as well as the operator in Mauritius (Mauritius Telecom), in which France Telecom has a 40% controlling interest. France Telecom has a minority interest in various telecommunications companies in Europe such as ONE (17.5%, Austria, wireless business) and Sonaecom (19.2%, Portugal, wireless, fixed and Internet).
The occurrence of the risks relating to certain subsidiaries and joint ventures in which France Telecom shares control or does not hold a controlling interest, the main examples of which have been mentioned above, could have an impact on France Telecoms ability to pursue its stated strategies with respect to those entities or have a material adverse effect on its earnings or financial position.
On an ongoing basis, France Telecom is involved in legal proceedings and disputes with regulatory authorities, competitors or other parties. The outcome of such proceedings is generally uncertain, and could have a significant impact on its earnings or financial position.
France Telecoms position as the main operator and provider of networks and telecommunications services in France and Poland, one of the leading telecommunications operators worldwide, attracts the attention of competitors and competition authorities. In addition, France Telecom - notably in France and Poland - is frequently involved in legal proceedings with its competitors due to its preeminent position in their market, and the complaints filed against France Telecom may be highly significant in certain cases. The outcome of disputed proceedings is by definition unpredictable. For proceedings involving the competition authorities, the maximum amount of fines prescribed by law represents 10% of the consolidated revenues of the company at fault (or the group that it is part of, as relevant). In 2005, the competition authorities fined France Telecom 40 million euros and then 80 million euros for unfair trade practices and abuse of its dominant position respectively, followed by a further 256 million euro fine for collusion. These three rulings were confirmed in 2006, with the last two currently being appealed.
The main proceedings in which France Telecom is involved are described in Note 33 Litigation and claims to the consolidated financial statements. Developments in or the outcome of some or all of the proceedings underway could have a significant impact on its earnings or financial position.
France Telecoms technical infrastructure is vulnerable to damage or interruptions caused by floods, storms, fires, power outages, war, acts of terrorism, intentional misdeeds and other similar events. Technical network and information technology system failures may result in reduced user traffic, reduced revenues and harm to France Telecoms reputation.
A natural disaster, such as the December 1999 storms, which disrupted service in France in early 2000, and other unexpected occurrences affecting its facilities or any other damage or failure of its networks may lead to service disruptions. In 2000, such damage amounted to approximately 150 million euros. France Telecom has no insurance for damage to its aerial lines under certain conditions and must finance this damage itself. Information technology system (hardware or software) failures, human error or computer viruses could also affect the quality of its services and cause temporary service interruptions. Currently, there is an increased risk of failure of the information system due to the acceleration of the implementation of new services or new applications relating to invoicing and customer relations management. More specifically, incidents may occur while new applications or software are being installed. While the risk cannot be quantified, such events could result in customer dissatisfaction and reduced traffic and revenues for France Telecom.
France Telecom has recorded significant levels of goodwill following the acquisitions made since 1999. Impairment having a material adverse effect on France Telecoms earnings and balance sheet may be recorded in the accounts.
France Telecom has recorded significant goodwill in connection with its acquisitions since 1999, notably including the acquisitions of Orange, Equant, Amena and the 47.5% stake in TP SA. At December 31, 2006, goodwill represented approximately 31.5 billion euros.
Pursuant to IFRS, the current value of goodwill is reassessed annually and, when events or circumstances indicate that a decrease in value may occur, France Telecom amortizes this goodwill, particularly in the case of events or circumstances that involve lasting material adverse changes affecting the economic environment or the assumptions and objectives used at the time of the acquisition. For example, France Telecom has notably amortized its investments in Equant, TP Group and in some subsidiaries of Orange and Wanadoo in 2002, 2003, 2004 and 2006. France Telecom cannot guarantee that any new events or adverse circumstances will not occur that would cause it to review the current value of its goodwill and record significant new amortizations that could have a material adverse effect on France Telecoms earnings.
In addition, when reviewing the present value of goodwill, France Telecom conducts impairment tests at the level at which the Group assesses the return on investment of the goodwill. This level may be a cash generating unit or a group of cash generating units for the same business or geographic region. These groups of cash-generating units can be modified based on changes in the Groups structure, as was the case in 2006 (see Note 7 Impairment to the consolidated financial statements). Moreover, with the possibility that new rules will be adopted for the definition of business segments, the Group may have to modify the groups currently defined. Such changes may have an impact on the results of impairment tests and, therefore, on the impairments recognized.
For further details on the impairment of goodwill, see Item 5. Operating and Financial Review and Prospects 18.104.22.168. From Group gross operating margin to operating income.
The value of France Telecoms international investments in telecommunications companies outside Western Europe may be materially affected by political, economic and legal developments in those countries.
France Telecom has invested in telecommunications businesses in Eastern Europe, the Middle East, Asia and Africa, and plans to make further investments in countries in these regions, with such companies contributing significantly to the Groups growth. The political, economic and legal systems of the countries in these regions of the world may evolve in an unpredictable manner, as was the case in the Ivory Coast. Furthermore, certain planned changes, which should have a positive or stabilizing influence on France Telecoms business and results, such as the adoption of the euro by Poland, Slovakia and Romania, could be delayed. Such political, economic or legislative changes may adversely affect the operations of companies in which France Telecom has invested or may invest in the future. This could affect the value of such investments or the earnings of France Telecom.
If France Telecom failed to meet the commitments made under its UMTS licenses, its licenses could be withdrawn or it could be charged penalties, which would have an adverse effect on its business, earnings or financial position.
Under the terms of its UMTS licenses, France Telecom has agreed to make significant investments in its networks in order to be able to offer new products and services. If France Telecom was unable to meet such commitments or have them changed, the
licenses could be revoked and France Telecom could in certain cases be liable for damages to the State that awarded the license, or to its partners in UMTS development in these countries, as well as to its creditors or suppliers. All of these risks could have a material adverse impact on France Telecoms financial position and earnings.
France Telecoms debt ratings were downgraded in 2001 and 2002 by rating agencies, then upgraded from 2003 to 2005. The lowering of its debt rating may limit France Telecoms borrowing capacity and raise the cost of its access to the capital markets.
France Telecom cannot guarantee that its credit risk, which was downgraded in 2001 and 2002, then upgraded from 2003 to 2005, will not be downgraded again by the rating agencies, particularly if the NExT Plan does not produce the anticipated results or if France Telecom fails to continue reducing its debt. Moreover, certain factors outside France Telecoms control, including factors relating to the telecommunications industry or specific countries or regions in which it operates, may affect the rating agencies assessment of France Telecoms credit profile.
For reference, France Telecom believes that downgrading of its long-term debt rating by S&Ps and Moodys by one level would automatically increase its annual interest expense by around 35 million euros, based on its current level of indebtedness, and would also adversely affect its ability and conditions for access to the financial markets.
Furthermore, France Telecom S.A.s securitization programs require, where applicable, a rating above BB-. Lastly, in the event of a ratings downgrade, certain derivative contracts and certain contracts related to lease transactions with third parties may be terminated or may require cash collateral to be given. France Telecom has already been required to give additional security cash collateral for some such contracts.
For further information on guarantees relating to financial debt and the management of covenants, refer respectively to Notes 19 and 24 to the consolidated financial statements, respectively Net financial debt and Exposure to market risks and financial instruments.
France Telecom applied the new IFRS accounting standards in 2005, which forced it in some cases to adopt positions in relation to their application in the absence of any specific information from the standardization authorities.
France Telecom has applied International Financial Reporting Standards (IFRS) since January 1, 2005. In certain cases, if the standardization authorities have not issued specific guidelines, France Telecom has had to take up positions, as outlined in Note 2 to the consolidated financial statements. France Telecom cannot guarantee that these positions will be confirmed by the standardization authorities, or, as relevant, by the market authorities. Furthermore, the comparability of France Telecoms accounts with those of other companies may be affected by the accounting options or methods adopted by each company as part of the first application of IFRS.
France Telecom uses certain facilities, products or substances that might represent a danger or disadvantage for the environment.
France Telecom believes that its activities as a telecommunications operator present no major risks for the environment. Indeed, its activities do not use any production processes that seriously threaten rare or non-renewable resources, natural resources (water, air) or biodiversity (see Item 4. Information on France Telecom 4.14 Environmental policy).
However, France Telecom does use certain facilities, products or substances that might represent a danger or disadvantage for the environment. Prevention programs have been adopted in light of the corresponding risks.
In general, France Telecom applies the accounting rules relating to environmental liabilities, and notably those concerning provisions for the regeneration and dismantling of sites, in accordance with current legislation and regulations (see Note 28 to the consolidated financial statements, Provisions). However, France Telecom cannot rule out the possibility of a change in legislation or regulations that would require it to incur additional expenditure and to set aside larger provisions in this respect.
The French government directly and indirectly owns 32.4% of France Telecoms share capital and voting rights, which could, in practice, allow it to determine the outcome on matters put to a simple majority vote at ordinary Shareholders Meetings.
On the date of this document, the French government directly and indirectly owned 32.4% of France Telecoms share capital and voting rights(1), and had three representatives on its Board of Directors out of a total of 14 members. As the main shareholder, whose interests could differ from those of other shareholders, the French government could in practice, given the low participation rate for shareholders meetings and in the absence of any other significant shareholder blocks, determine the outcome on matters put to a simple majority vote at ordinary shareholders meetings. However, the French Government does not have a golden share, which does not exist in France Telecom, or any other special advantage other than the right to have representatives on the Board of Directors in proportion to its interest in the share capital (see Item 7. Major shareholders and related party transactions 7.1.2 Direct or indirect control of France Telecom).
3.3.2 RISKS RELATING TO THE TELECOMMUNICATIONS SECTOR
The telecommunication sectors in-depth transformation is accelerating. A deficiency in France Telecoms response to technological developments and new customer practices could lead to the loss of customers or market shares in the sectors in which France Telecom operates, adversely affecting its revenues, margins and earnings.
The telecommunications industry has undergone a number of major changes over the last few years, and France Telecom believes that these changes are accelerating, with the development of wireless and fixed-line broadband, and notably voice over IP. If France Telecom fails to rapidly and cost - effectively adapt its networks, its technologies, including technologies acquired from third parties under patents and licenses, its processes and its services in response to developments in the telecommunications industry and the expectations of its customers, it may be unable to compete effectively and its business, financial position, margins and earnings may be affected.
Furthermore, new technologies that France Telecom chooses to develop may incur significant costs and may not be as successful as planned. As a result, France Telecom may lose customers or market shares or may be obliged to spend significant amounts in order to keep its customers.
Intense competition in the European telecommunications sector may affect France Telecoms resources.
France Telecom faces intense competition in all areas of its business. For further information regarding competition within each one of the France Telecom Groups business segments, see Item 4. Information on France Telecom 4.6 Competition.
On the mobile telecommunications market, France Telecom faces intense competition on all of its main markets from existing players, new firms on the market and virtual mobile network operators. As these markets have become increasingly saturated, the focus of competition is starting to shift from customer acquisition to customer retention, which could lead to higher expenses for customer loyalty initiatives. Mobile call prices have fallen over the past few years and may continue to fall on the main markets on which France Telecom operates, notably due to decisions by third parties over which France Telecom has no control. For example, national regulatory authorities have already decided to reduce call termination prices and the authorities may decide on further cuts in the future.
On the French market for fixed telephony services, France Telecom is facing competition that has resulted in a massive lowering of rates, as well as a reduction in its market share. Recent changes in regulations, such as the unbundling of the local loop, the pre-selection of operators and the portability of numbers have made it easier for customers to use services offered by rival operators. France Telecom is expecting a further reduction in its market share, with rates continuing to fall in the fixed-line sector in France. In addition, telephone calls that used to be carried over the switched telephone network are increasingly being carried over the Internet (Voice over IP), or using mobile telephones. The arrival of internet players, such as Yahoo, Google, MSN and Skype, on the electronic communications market is contributing to this trend. Similar changes are being seen in Poland, affecting TP Group. France Telecom also faces competition on the market for Internet and multimedia services, and more specifically in ADSL broadband internet access, reflecting the development of unbundling, the implementation of a naked ADSL wholesale offering, and new Wimax technology-based access conditions. In addition, France Telecom has had to launch ADSL consumer access services without any telephone subscription, pointing to a downturn in revenues from subscriptions.
On the enterprise communication services market, France Telecom faces intense competition. The France Telecom Groups success in this market will depend on its ability to compete with the other major telecommunications operators, IP and data specialists as well as new entrants in this market, including rival network operators and suppliers of internet services or other high value added services. France Telecom believes that the number of rivals or the presence of competitors with a greater critical mass - due to the vertical and horizontal consolidation of this business - may increase in the future, which could generate pressure over prices, reduce its market share and cut its margins.
Competition in any or all of France Telecoms business lines could lead to:
If mobile telephony and internet revenue growth slows down, and if revenues from fixed-line services and business calls continue to fall, France Telecoms revenues may fail to increase or may even drop, which could adversely affect its profitability.
Over the last few years, growth in France Telecoms revenues on a constant exchange rate and structural basis has been driven primarily by the rapid expansion of its Internet and wireless communications businesses, in line with growth in the Internet and wireless markets in Europe.
If these markets do not continue to develop, particularly in France, Poland, the United Kingdom and Spain, France Telecoms revenues may not grow or may even decrease, which in turn could affect its financial position and earnings, notably in the event of a continued downturn in revenues on fixed line and business communication services.
For further information on changes in France Telecoms revenues and its components over 2006, refer to Item 5. Operating and Financial Review and Prospects 22.214.171.124.1 Revenues.
France Telecom operates in highly regulated markets and is subject to extreme regulatory pressures that limit its flexibility to manage its business.
France Telecom must comply with an extensive range of regulatory obligations relating to the supply of its products and services, as well as the control of authorities that oversee the maintenance of competition in the electronic communications markets. Furthermore, France Telecom faces a number of regulatory constraints as a result of its dominant position in the fixed line telecommunications markets in France and Poland, including certain obligations that lead to significant costs. For example, France Telecom is required to provide interconnection services for other operators in terms that must be approved by the regulatory authorities, as well as providing local loop access at prices approved by the regulatory authorities and having its rates for fixed line voice telephony services subject to approval by the regulatory authorities prior to implementation. France Telecom believes that, in general, it fulfills the requirements imposed by the applicable regulations, but it cannot predict the any opinions that may be expressed by regulatory or judiciary authorities, which could be asked to review or which have already been asked to review France Telecoms compliance.
France Telecoms activities and operating income may be significantly impacted by legislative, regulatory or government policy changes, and in particular by decisions made by regulatory and competition authorities in relation to:
Such decisions could have a significant adverse impact on France Telecoms earnings.
Furthermore, in the European Union, the national laws enacted under EU directives require the national regulatory authorities to create lists of relevant markets, for which they will conduct market analyses. Following this market analysis phase, they will be entitled to impose remedies on operators that exert a significant influence on the wholesale markets, such as the publication of a standard term offer, access to components of networks and related resources, and the accounting separation of certain interconnection or access activities. With regard to retail rates, the national regulatory authorities will be able to prohibit bundling deemed abusive, impose rates reflecting costs, or strictly contest the implementation of a rate. The regulators therefore have various tools that could enable them to increase the burden of regulatory constraints for France Telecom. Given their position in certain markets, France Telecom S.A. in France and TP Group in Poland are particularly susceptible of being affected by the strengthening of regulatory pressure.
In France, the ARCEP has strong control and sanction power since it can conduct in-site and in room investigations as part of its mission, and impose preservation measures without advance notice.
Overall, the regulatory, investigative and sanctioning powers granted to the regulatory authorities have been strengthened, which could have a material adverse impact on France Telecoms business and results.
Furthermore, licenses are required in most countries to provide telecommunications services and operate networks. This type of license often entails various obligations concerning network completion times and the quality of network coverage. Non-compliance with these obligations could result in fines and other penalties, ultimately including the withdrawal of licenses awarded.
For further information on regulations, see Item 4. Information on France Telecom 4.7 Regulation.
Alleged health risks in relation to wireless communications devices could lead to decreased wireless communications usage or increased difficulty in obtaining sites for base stations or litigation, which could adversely affect France Telecoms results.
In some countries in which France Telecom conducts its wireless telephony business, doubts have been expressed over the last few years as to the possible health risks to humans caused by exposure to radio-frequency emissions or electromagnetic fields emitted by mobile telephones and wireless transmitter sites, at exposure levels lower than the existing permitted thresholds. Such concerns have been taken up by opinion campaigns, but they do not currently reflect any consensus among experts in the countries in which France Telecom operates.
While to date France Telecom is not aware of any substantiation of health risks associated with wireless telephony, actual or perceived health risks may have a material adverse effect on France Telecoms earnings or financial position due to a reduction in the number of customers, reduced usage per customer, a slowdown in the deployment of transmitter sites, the Orange brand being adversely affected; exposure to potential litigation or other reasons, including acts of vandalism at transmitter sites. If evidence is considered to show that health risks do exist, the use of mobile phones could be subject to regulations which, for example, could limit emission levels from handsets or transmitter sites. Such regulations could have an adverse effect on France Telecoms operations and performance.
In May 2006, in a report entitled Electromagnetic fields and public health, the World Health Organization (WHO) stated that recent surveys have shown that the exposures to radio-frequencies (RF) from base stations range from 0.002% to 2% of the levels of international exposure guidelines, depending on a variety of factors such as the proximity to the antenna and the surrounding environment. This is lower or comparable to RF exposures from radio or television broadcast transmitters. The WHO concluded that considering the very low exposure levels and research results collected to date, there is no convincing scientific evidence that the weak RF signals from base stations and wireless networks cause adverse health effects.
In December 2005, with regard to handsets, the WHO stated that (in a report entitled : What are the health risks associated with mobile phones and their base stations ?) no recent national or international reviews have concluded that exposure to the radio-frequencies fields from mobile phones or their base stations causes any adverse health consequence. However, areas have been identified by the WHOs EMF Project for further research to better assess health risks and have led to over 250 million dollars in research worldwide to study radio-frequencies effects on health. It will take about two to three years for the required radio-frequencies research to be completed, evaluated and to publish an updated WHO health risk assessment.
The effect of mobile telephony on children is a recurring issue in some countries in which Orange operates. In a statement issued in July 2005, the World Health Organization confirmed its position that in fact there have been no adverse health consequences established from exposure to radio-frequencies fields at levels below the international guidelines on exposure limits published by the International Commission on Non-Ionizing Radiation Protection (ICNIRP, 1998). The limits incorporate large safety factors to protect workers and even larger safety factors to protect the general public, including children.
In the future, France Telecom cannot be certain that these publications or that medical research in general will rule out any link between radio frequency emissions and health risks. If such a link were discovered, it could have an adverse impact on France Telecoms business and performance.
France Telecoms earnings and cash position are exposed to changes in exchange rates.
A significant portion of France Telecoms revenues and expenses are accounted for in currencies other than the euro. The main currencies for which France Telecom is exposed to a significant foreign exchange risk are the pound sterling, the Polish zloty and the U.S. dollar. From one period to another, fluctuations in the average exchange rate for a given currency may significantly affect the revenues and expenses in this currency, which could significantly affect France Telecoms earnings. For example, based on data for 2006, the theoretical impact of a 10% depreciation against the euro for all the currencies in which the Groups subsidiaries operate would have translated into a 2.9% reduction in consolidated revenues and a 3.0% reduction in the gross operating margin.
In addition, France Telecom manages the exchange risk for commercial transactions (linked to operations) and financial transactions (linked to financial debt) under the conditions set out in Note 24.2 to the consolidated financial statements: Exposure to market risks and financial instruments: Foreign currency risk management.
In general, France Telecom uses derivative instruments to hedge its exposure to the exchange rate risk, but it cannot guarantee that these derivative transactions will effectively or totally limit its risks. To the extent that France Telecom has not acquired any derivative instruments to hedge some of this risk, or if its strategy for using such instruments is not successful, France Telecoms cash flow and earnings could be adversely affected. See Notes 23 and 24 to the consolidated financial statements, respectively Derivatives and Exposure to market risks and financial instruments.
For consolidation purposes, the assets and liabilities of foreign subsidiaries are converted to euros at the year-end exchange rate. This conversion, which does not affect the income statement, has an impact on consolidated balance sheet items, assets and liabilities, against the lines for shareholders equity currency translation differences, representing amounts that may be significant.
The following table presents a breakdown of net assets by currency, before and after factoring in net financial debt, in million euros at December 31, 2006 (unaudited data).
Breakdown of assets, liabilities and net assets by currency
EUR refers to the euro, GBP pound sterling, PLN the Polish zloty, USD the U.S. dollar, and CHF the Swiss franc.
The figure for assets per currency (net assets excluding components contributing to net financial debt) in currencies other than the euro, primarily the pound sterling, the zloty, and the U.S. dollar came to 19.1 billion euros at December 31, 2006, representing 26% of net assets excluding debt. A 10% depreciation of all currencies other than the euro would have resulted in a 1.9 billion euro reduction in net assets excluding debt, i.e. 2.6%.
The figure for liabilities per currency at December 31, 2006 represents the net financial debt contributed by each currency after management, in other words after factoring in any derivative instruments put in place, as presented in Note 19 to the consolidated financial statements: Net financial debt. For currencies other than the euro, these are primarily the pound sterling and the zloty. On this date, it came to 7 billion euros, representing 17% of net financial debt. A 10% appreciation in relation to the euro for all currencies other than the euro would have resulted in a 0.7 billion euro increase in net financial debt recorded on the balance sheet, i.e. + 1.7%.
The figure for net assets in currencies other than the euro was 12.1 billion euros at December 31, 2006, representing 38% of net assets. Depreciation by 10% of all the currencies compared with the euro would have led, due to conversion to euros, without any impact on the income statement or on cash flow, to a reduction of 1.2 billion euros of net assets, i.e. 3.8%.
France Telecoms business may be affected by fluctuations in interest rates.
In the ordinary course of its business, France Telecom is exposed to changes in interest rates. Where appropriate, France Telecom uses derivative instruments to hedge its rate risk exposures, but it cannot guarantee that such derivative transactions will effectively or completely hedge this risk. To the extent that France Telecom has not used any derivative instruments to hedge part of this risk, or if its strategy for using such instruments is not successful, France Telecoms cash flow and earnings could be adversely affected.
Managing the interest rate risk and analyzing the sensitivity of the Groups position to changes in interest rates are described in Note 24.1 to the consolidated financial statements: Exposure to market risks and financial instruments: Interest rate risk managements.
France Telecoms earnings and financial position could be affected by an equities market downturn.
A downturn on equities markets could have a negative impact on France Telecoms earnings and financial position in one of the following two cases:
France Telecoms share price may fluctuate due to a wide range of factors.
These factors include:
Future sales by the French government of its shares in France Telecom may impact France Telecoms share price.
At December 31, 2006, the French government, directly or indirectly through the ERAP, owned 32.4% of the share capital of France Telecom (see Item 7. Major shareholders and related party transactions 7.1.2 Direct or indirect control of France Telecom). If the French government decides to further reduce its stake in France Telecom, such a sale by the French government, or even the perception that such a sale is imminent, could have an adverse impact on France Telecoms share price. See Note 37.3 to the consolidated financial statements: Subsequent events.
The price of France Telecoms ADSs and the U.S. dollar value of any dividends will be affected by fluctuations in the U.S. dollar/euro exchange rate.
The ADSs are quoted in U.S. dollars. Fluctuations in the exchange rate between the euro and the U.S. dollar are likely to affect the market price of the ADSs. For example, because France Telecoms financial statements are reported in euro, a decline in the value of the euro against the U.S. dollar would reduce France Telecoms earnings as reported in U.S. dollars. This could adversely affect the price at which the ADSs trade on the U.S. securities markets. Any dividend that France Telecom might pay in the future would be denominated in euro. A decline in the value of the euro against the U.S. dollar would reduce the U.S. dollar equivalent of any such dividend.
Holders of ADSs may face disadvantages compared to holders of France Telecoms shares when attempting to exercise voting rights.
Holders of ADSs may face more difficulties to exercise their voting rights as shareholders than it would be if they directly held shares. To exercise their voting rights, holders of ADSs must instruct the depositary how to vote their shares. Because of this extra procedural step involving the depositary, the process for exercising voting rights will take longer for holder of ADSs than for holders of shares. ADSs for which the depositary does not receive timely voting instructions will not be voted at any meeting.
Preemptive rights may be unavailable to holders of France Telecoms ADSs.
Holders of France Telecoms ADSs or U.S. resident shareholders may be unable to exercise preemptive rights granted to France Telecoms shareholders, in which case holders of France Telecoms ADSs could be substantially diluted. Under French law, whenever France Telecom issues new shares for payment in cash or in kind, France Telecom is usually required to grant preemptive rights to its shareholders. However, holders of France Telecoms ADSs or U.S. resident shareholders may not be able to exercise these preemptive rights to acquire shares unless both the rights and the shares are registered under the Securities Act of 1933 or an exemption from registration is available.
If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case no value will be given for these rights.
Trade register no.: 380 129 866 R.C.S. Paris APE code: 642 C
4.1.3 DATE OF INCORPORATION AND DURATION
France Telecom S.A. was incorporated as a French limited company (société anonyme) on December 31, 1996 for a period of 99 years as of that date. Barring early liquidation or extension, the company will expire on December 31, 2095.
4.1.4 REGISTERED OFFICE, LEGAL FORM AND GOVERNING LAW
6, Place dAlleray, 75015 Paris, France Telephone: +33 1 44 44 22 22
France Telecom is governed by French corporate law, subject to specific laws governing the company, notably Law 90-568 of July 2, 1990 relating to the organization of public postal and telecommunications services, as amended by Law 96-660 of July 26, 1996 and Law 2003-1365 of December 31, 2003.
The regulations applicable for France Telecom S.A. as an operator are set forth in Section 4.7 Regulation.
4.1.5 IMPORTANT EVENTS IN THE DEVELOPMENT OF THE COMPANYS BUSINESS
France Telecoms shares have been listed on the Euronext Paris Eurolist market and on the New York Stock Exchange (NYSE) since October 1997, when the French government sold 25% of its shares to the public and France Telecom employees. France Telecoms transfer from the public sector over to the private sector took place on September 7, 2004 further to the governments disposal of 10.85% of France Telecoms share capital. At December 31, 2006, the French government directly or indirectly owned 32.4% of France Telecoms share capital. See Note 37.3 to the consolidated financial statements: Subsequent events.
In recent years, France Telecoms business and the regulatory and competitive environments in which it operates have undergone significant changes that have affected the structure of its revenues, as well as its business and its internal organization. All segments of the telecommunications market in France have been opened up to competition since January 1, 1998 with the exception of local calls, which were opened up to competition on January 1, 2002.
In this context of deregulation and increased competition, from 1999 to 2002 France Telecom pursued a strategy aimed at developing new services and accelerating its international development through external growth. In this way, France Telecom has extended its activities towards new areas of telecommunications services, including wireless telephony, the Internet and data transmission services in France and internationally. Also in line with this strategy, France Telecom has made many strategic investments (acquisitions, minority investments, UMTS licenses). In particular, it acquired Orange plc. in 2000, Global One and Equant in 2000 and 2001, interests in NTL between 1999 and 2001, in the Polish operator TP S.A. in 2000 and 2001, and in Mobilcom in 2000. However, following various operations, France Telecom no longer has investment in NTL and its investment in the share capital of Mobilcom is limited to 1%. The majority of such strategic investments could not be financed through equity issues, leading to a significant increase in France Telecoms debt.
In December 2002, France Telecom launched the Ambition FT 2005 plan, focused on refinancing its debt and strengthening its equity, as well as the TOP operational improvement program, whose success has enabled the Group to develop its global integrated operator strategy by anticipating changes in the telecommunications industry.
Since the end of 2003, this strategy has been reflected in the acquisition of all minority shareholder interests in Orange and Wanadoo, the acquisition of all the assets and liabilities of Equant, the integration of Wanadoo into France Telecom S.A., the implementation of a new organization for the Group in line with this strategy, and the sustained launch of new services.
At the same time, France Telecom has rationalized its asset portfolio, selling off non-strategic assets, including the following subsidiaries and equity interests:
Lastly, PagesJaunes Group, the Groups directories subsidiary, was listed on the stock market (Euronext Paris) in 2004, and France Telecoms stake in PagesJaunes Group (54% at the end of 2005) was sold off in October 2006.
In June 2005, France Telecom presented the Groups NExT plan (New Experience in Telecommunications), aiming to transform the Group over three years, making France Telecom the benchmark operator for new telecommunications services in Europe.
Within this context, France Telecom acquired close to 80% of the share capital of the Spanish mobile operator Amena in November 2005 for 6.4 billion euros. In 2006, all France Telecoms mobile, fixed-line and internet activities in Spain were consolidated within one single 79.3% owned entity (France Télécom España), operating under the Orange brand.
For a definition of financial terms, especially organic cash flow, net financial debt and gross operating margin (GOM), see Item 5. Operating and Financial Review and Prospects 5.9 Non-Gaap financial measures and 5.10 Glossary of financial terms.
France Telecoms strategy is designed to respond to the changing telecommunications service sector which, because of technological innovation, is being profoundly transformed by significant changes in the offer, usages and the competitive context.
France Telecom believes that the primary components of this transformation are:
As a result, in the broadband fixed network segment, we are seeing a consolidation in the market for Internet services providers (ISP) around a few major players that offer Multiplay (Internet, Voice over IP, TV), as the competitors of the historical operator take advantage of the unbundling of local loops. In the mobile market, the MVNO (Mobile Virtual Network Operators) are now strong players. Finally, the players in the Internet services market intend to expand significantly in the communication and content services market on a non-regulated basis.
4.2.1 THE NEXT PLAN
For the NExT plan, on June 29, 2005, France Telecom presented the Groups 2006 2008 strategy. The NExT plan - Nouvelle Expérience des Télécommunications (new telecommunications experience) is a 3-year plan for transformation that will enable the Groups customers to access a universe of enriched and simplified services and the Group to pursue its transformation as integrated operator. It is designed to make France Telecom the benchmark operator for new telecommunications services in Europe, in terms of innovation, service quality and economic performance.
Backed by a complete portfolio of offers and solutions, its control of all networks, and its capacity for integrated innovation, France Telecom intends to develop a new world of services in communication, information and entertainment, everyday life and business services to meet the expectations of all customers (consumers, professional customers, businesses, local authorities) in all situations (mobile, home, office), whatever the network, platform or handset used. To reflect this strategy, the Group adopted a new brand identity based on the simplified Orange brand with greater international recognition in June 2006.
Four major challenges framed the strategy of the NexT plan:
The major objectives of the NExT plan
The NExT plan has defined twenty major objectives spread over six different areas : Revenues and finance, Products and services, Subscriber base, Customer relations, Efficiency and performance, Human Resources. The main objectives of the NExT plan for 2008 are as follows:
Moreover, the objective for financial debt reduction is confirmed with a ratio of net financial debt to GOM of less than 2 by the end of 2008.
Because of the nature of these objectives, they are subject to a number of risks and uncertainties that could result in differences between the objectives announced and actual achievements. The most important risks are discussed in Item 3. Key Information 3.3 Risk factors.
Directing the transformation and mobilization of skills
In order to ensure the success of the NExT plan, France Telecom controls the management of the activity, implements rigorous management of the transformation, adapts its human resources, and develops its expertise.
Steering the activity
France Telecom has set up a small organization around the Chairman with the formation of a Group Management Committee consisting of nine people mobilized to focus on the creation of organic cash flow and the achievement of the key objectives of the NExT plan. The management structure is a matrix-based structure that combines country responsibility (integrated management of operations by country) and transversal responsibility (strategic marketing, business offers: fixed and mobile, content, networks and information system, Human Resources).
Steering the transformation
One member of the Group Management Committee is responsible for managing the Groups transformation, and for leading the team dedicated to NExT Transformation. By giving priority to the integration of networks and the integration of countries, NExT Transformation provides support and reporting on the transformation programs conducted in the divisions and identifies, supports and directs approximately one hundred critical projects.
Adaptation of Human Resources
France Telecom is adapting its human resources to the needs arising from the change in its businesses and the transformation of its organization by:
At the same time, France Telecom is planning 22,000 departures in France and an overall reduction in the work force of 17,000 at Group level from 2006 to 2008.
Mobilization and development of skills (Anticipation and Competence for Transformation=ACT)
The goal of the ACT program is to mobilize and develop the skills and expertise of the Group by implementing the following measures:
4.2.2 THE FRANCE TELECOM STRATEGY: A NEW EXPERIENCE IN TELECOMMUNICATIONS
In a rapidly changing market, France Telecom is basing its strategy on the integrated operator model, offering its customers a new generation of telecom services.
An integrated operator strategy
The objective of this integrated operator strategy is to create value by implementing the following, which are inherent to an integrated operator:
A new generation of telecommunications services
By moving from a logic of access to networks to a logic of access to services, France Telecom is offering its customers a new generation of telecommunications services:
In order to invent and set up this new generation of services, France Telecom is relying on the following vectors within the NExT plan:
Research and Development to offer the best of technology
As both a telecommunication service provider and a network operator, the goal of France Telecom is to provide its customers with the best of technology, as soon as it is available, while taking into consideration the next generation technologies. For this reason, France Telecom has enhanced its Research and Development effort. See Item 4. Information on France Telecom 4.12 Research and Development.
Strategic partnerships to develop new services and accentuate the differentiation
France Telecom is based on strategic partnerships in order to forge a competitive advantage or integrate new technologies every time it is necessary to obtain critical mass. The strategic partnerships are founded on four priorities:
Centralized strategic marketing
The centralized strategic marketing pursues three objectives:
Set up in February 2006, the main mission of the Product Factory Technical Center (Technocentre) is to industrialize the launch of innovative services in order to increase the Groups speed and reactivity. It is organized around co-located teams which manage the development cycles of the offer. Each team (3 PTeam) has three leaders:
The launch of convergent offers
Convergent offers form the core of the New Experience in Telecommunications. In addition to the commercial convergence (single contract, single customer service and single bill), these offers provide customers with a seamless experience in communication services (voice, email, SMS, IM) and call management services (voice mail, address book, presence), whatever the access (fixed lines, mobile or Internet) or the network used (switched telephony, ADSL, fiber optics, mobile).
The convergent offers are targeted first at customers using both broadband fixed and mobile, the number of which continues to grow in the countries in which the Group operates in Europe because of high rates of mobile penetration and the sharp increase in the use of ADSL. France Telecom believes that in Europe 63% of the households will be equipped with broadband and mobile in 2008, 66% of which are expected to subscribe to convergent offers.
Unik: the first convergent offer
Launched by Orange France, Unik is the first really convergent product that illustrates the NexT strategy. Rolled out on October 5 in France for individuals and professionals, it was also launched in Spain and the Netherlands, and will be launched in the United Kingdom and Poland in 2007. Unik is a mobile phone connected to the Livebox that allows unlimited calls to fixed lines and all Orange mobiles from home, with a single number, a single address book, and an automatic change of network when one leaves home, without any break in the communication.
The new Orange brand policy
On June 1, 2006, the Group launched the new Orange brand: a single brand for Internet, television and mobile, to create a brand leader for introducing digital services. On June 1, the Orange, Wanadoo and Ma LigneTV brands were combined under the Orange brand in France and the United Kingdom, and all business services moved under the brand Orange Business Services. After Poland, where the mobile businesses adopted the Orange brand in September 2005, the other subsidiaries progressively adopted the single Orange brand (Spain, Senegal, Mali). Traditional telephony offers remain under the France Telecom brand or the brand of the historical operator, as applicable.
The new brand simplifies and homogenizes the customer experience, strengthens the offers against the competition, and optimizes marketing and communication costs. Finally, it represents a managerial vector for the construction of the integrated group and the transformation of the Group.
Integration of the networks, the information system and the service platforms
The Group is pursuing its strategy to integrate the networks, information system and service platforms, with three objectives:
In order to accelerate the implementation of the integration strategy, a new organization has been defined with:
The deployment of an NGN / IMS architecture in order to offer fully integrated IT services and networks is the next step in this integration strategy beginning in 2007.
4.2.3 THE PRINCIPAL VECTORS FOR IMPLEMENTATION OF THE GROUPS STRATEGY
The Groups strategy of profitable growth, founded on the integrated operator model, is based first on the development of broadband fixed-line and mobile access, which is crucial to providing a diversified and broad offer of services.
For the consumer customers, this strategy is organized in three service areas:
For businesses, France Telecom stands out from its competitors because of its integrated operator strategy, the geographic coverage of its operations, both in France and in Europe, with all the extensions possible thanks to the Equant network, and ongoing substantial investments in R&D to serve its customers.
This strategy is also being applied internationally under the NExT plan which, after the acquisition of Amena in November 2005, does not require a major acquisition in Europe.
The growth of mobile and fixed-line broadband
The mobile broadband offer (Orange Intense in France) uses the different technologies available, such as EDGE, UMTS, HSDPA, and Wi-Fi to offer customers a full range of new usages (content, mobile payment, GPS, etc.) on a line of handsets that will gradually replace the 2G handsets.
In the fixed-line broadband segment, the growth in ADSL accesses continues at a high rate and Internet access via broadband in Europe is gradually becoming the norm. This strategy to increase speeds is deployed internationally in all the countries in which the Group is a fixed-line network operator, particularly in Poland, but also in the countries in which France Telecom is a newcomer to fixed-line telephony as it is in Spain, the United Kingdom and the Netherlands, by building the offer on the basis of unbundling, and by capitalizing on the new services developed by the Product Factory.
The Livebox domestic gateway is the first Pan-European integrated product from the Group, around which it is developing digital services for the home. It allows a broadband connection for all home communications services in order to surf the net, watch television, telephone on IP, communicate by video phone, or play in a network and access Liveservices. Livebox is thus becoming the cornerstone of Home Networking, the point of convergence for home broadband equipment and services.
In order to create an ecosystem open to everyone around Livebox, the objective of the Livebox Lab, inaugurated in July 2006, is to use the innovative capacities of third-party partners.
Pre-deployment of very high speed access
In the very high speed segment, France Telecom launched the first pilot on its optical fiber network in 6 Paris districts and 5 cities in Hauts-de-Seine on June 1, 2006. On December 15, 2006, the Group launched the second stage of its plan with pre-deployment, which will run from 2007 to 2008. This phase will enhance the customer experience outside the Paris region. The Group is targeting 150,000 to 200,000 connected customers out of a base of over one million connectable customers by the end of 2008. Investments over 2007-2008 are expected to represent some 270 million euros, in line with the guidelines of the NExT plan in terms of the ratio of CAPEX to consolidated revenues.
Beginning in 2007, the line of FTTH (Fiber to the Home) offers proposed will include Internet access at speeds of up to 100 balanced Mbit/s, several High Definition channels on television and PC, as well as unlimited telephone communications. It is available since March 2007 in Paris and several adjacent zones. It will be progressively available as of June 2007 in about ten cities, the first of which will be Lille, Lyon, Marseilles, Poitiers and Toulouse.
126.96.36.199 Developing consumer communication services
Developing interpersonal communication usages
Interpersonal communication usages, both voice and data exchange (SMS, instant messaging, MMS) continue to grow steadily. In increasingly competitive markets, France Telecom is working to grow revenues on interpersonal communications, both mobile and fixed line, which continue to represent the majority of customer usages and their bill, by offering customers a larger range of usages and by taking into account the specific needs of each major customer segment.
In mobile communication services, this strategy is implemented through a permanent rate innovation by including in the contracts a large number (even unlimited usage) of communications, voice or SMS, to certain numbers selected by the customer or at certain periods during the day. These yield management methods allow the Group to offer the customer a significant increase in his usages with only a slight increase in his monthly bill, and promotes the loyalty of the best customers.
In the area of fixed-line person-to-person communication services, the Groups strategy is, first, to develop abundance packages and, second, to succeed in the migration to broadband and Voice over IP. Thus, France Telecom proposes two types of offers. On the switched telephone network, it is enhancing its Atout line (abundance packages) and is developing its Optimales offers, which combine telephone subscription with unlimited or à la carte plans. On the IP ADSL network, the Group is heavily expanding its unlimited Voice over IP offer to all fixed lines in France. Finally, France Telecom is also marketing Optimale 8 megamax, an offer that includes traditional telephony with 4 hours of selected calls, broadband 8 megamax Internet, television, and telephone subscription.
In the segment of convergent communication services, launched on a multi-domestic basis, Unik represents the Groups first offer.
In addition, Orange Messenger by Windows Live, the convergent offer of instant messaging for PC and mobiles resulting from the agreement signed between Orange and Microsoft, offers users the benefits of the synergies of Orange and Windows Live Messenger, providing a permanent link with their circle, both on PC and on mobile.
Developing content services through the Content Everywhere strategy
With higher speeds and the progress made in content coding, France Telecom intends to propose an entire series of multimedia content, both on mobile and fixed lines, adapted to each terminal, through its Content Everywhere strategy. It is designed to serve the diversity of customers usage needs and the diversity of the terminals they use (PC, television, mobile phone).
It contributes to the Groups objectives in three ways:
The Content Everywhere strategy is being developed on the main types of accessible on-line content: television and video on demand (VOD); music and handset customization; games; Infotainment.
Thus, in fixed-line telephony, the television offer is now crucial to the broadband offer. IPTV is part of the Groups triple play offer in France, Spain, Poland, Senegal, Mauritius and, soon, in the United Kingdom. Video on Demand is also available on television and PC with a rich catalogue of over 2,300 films at the end of 2006. In the mobile segment, higher speeds means access to television on mobile (already 52 channels are available on mobile in France) or music on mobile.
The music offer is a key offer for targeting the youth segment. It includes music downloads, handset customization, the offer of customized radio and, in the near future, unlimited streaming offers on PC and mobile along with VOD with subscription. Orange music is already a convergent offer available on PC and mobile.
In the online game market, Orange is present in the different segments (games on television, mobile and PC). In particular, Orange is well positioned in the mobile game segment (more than 1,000 games available on mobiles in the United Kingdom) and in massively multi-player games (MMG) with Dark Age of Camelot and the acquisition of the exclusive European rights for the new Warhammer game.
Developing everyday services
The new communication services enable the creation of new services, most often in partnerships, in all aspects of everyday life: citizenship, health, transportation, housing, online purchases, safety, education, personal services, and local communities. In each of these areas, the challenge is to create ecosystems that use communication services, which give France Telecom the possibility of becoming a service provider.
In particular, the broadband ADSL connection associated with Livebox, because of its permanence, allows the development of new services related to home security or remote assistance for residents, such as remote monitoring and LiveZoom, which uses a camera accessible from any PC or mobile phone.
In health, France Telecom intends to promote the use of communication and information service technologies to meet the needs of patients, healthcare professionals and government services. France Telecom has created a new line of business to better serve this sector, the objective of which is to coordinate and accelerate the Groups actions in four priority areas:
188.8.131.52 Developing enterprise communication services
Orange Business Services, the division of enterprise communication services, is pursuing its strategy to become a global communication services operator on the basis of three vectors:
Being the leader in the transformation to IP
The migration of data networks to management IP solutions has largely been completed for all businesses, both in France and abroad, thanks to the Orange Business Services coverage of 220 countries and territories. On the basis of this IP infrastructure, businesses are launching the deployment of Voice over IP. For the Major Corporations, the flexible and modular offer adapts to the needs expressed. For the small and medium businesses, packaged offers are defined, such as the Centrex IP offer, which provides a complete telephony solution managed on a centralized platform.
To meet the need to customize customer networks through an adapted line of services.
In order to assist customers in their IP transformation, Orange Business Services offers a set of assistance services:
These services are provided either separately or globally under outsourcing agreements for communication and complex network integration infrastructures. Orange Business Services, which ranks 7th in the French service market, according to the Pierre Audouin Conseil firm, is reinforcing its strategy through targeted acquisitions (Diwan, Néocles, Silicomp).
To bring convergence offers to the business end user
The transformation to IP brings a growing number of communication services. This expansion has led Orange Business Services to propose new contact services.
In order to assist the growth of its customers in France and in Europe (Spain, Belgium, Poland, United Kingdom, Netherlands), France Telecom is offering employees who work at home or are travelling solutions that allow them to connect with complete security to an IP network, and to access the business applications of their remote company using a variety of technologies (Wi-Fi, xDSL, 3G, GPRS, ISDN or telephone line) and terminals (PC, PDA). This Business Everywhere Multimedia plan offers a permanent bilingual hot line. The goal of France Telecom is to have a customer base of over 1 million Business Everywhere users by the end of 2008.
Convergence of the networks supported by France Telecom means it can offer fixed-line and mobile service integration offers, Business Talk for example.
Orange Business Services has also just launched Business Together, a unified communication suite, which meets all the needs of the business end user: voice, image, data, audio/web/videoconferencing, messaging, availability of the contacts connected, the transfer of files that are accessible simultaneously on a PC with a few clicks from a single user software interface or from an IP Phone or a mobile Smartphone.
4.2.4 INTERNATIONAL STRATEGY
France, United Kingdom, Spain (after the acquisition of Amena), and Poland are clearly considered to be essential and strategic for the France Telecom group. France Telecom believes that its positions in those countries are competitively strong, economically sustainable, and constitute a solid foundation for the implementation of the NExT plan. In addition, France Telecom believes that Europe is the extension of its national market.
Focusing on its most strategic and profitable assets, since 2003 the Group has reviewed all of its subsidiaries and equity investments, and disposed of certain operations.
At the end of November 2005, France Telecom finalized the acquisition of nearly 80% of the Spanish mobile operator Amena and, in 2006, merged Amena and France Telecom España (which holds the fixed-line and Internet operations of the Group in Spain). At the end of these operations, the France Telecom group held 79.3% of the new entity, whose operations were combined under the Orange brand in October 2006. France Telecom is now in a position to launch convergent offers based on fixed-line and mobile broadband in an additional key market.
With the acquisition of Amena in Spain, the Group believes there is no longer a need for a major acquisition in Europe in order to implement the NExT plan.
In addition to its strong positions in Western Europe, the Group has substantial operations in the emerging markets, particularly in Central and Eastern Europe, Africa and the Middle-East. These markets with high growth potential include the activities of France Telecom in the following countries: mobile services in Poland, Botswana, Cameroon, Ivory Coast, Egypt, Equatorial Guinea, Mauritius, Jordan, Madagascar, Mexico, Moldova, Dominican Republic, Romania, Senegal, Slovakia, Vanuatu and Vietnam. These emerging market are important to the Group in terms of growth in the number of customers, but also for their contribution to the Groups revenues and profitability. All these activities represent approximately 12% of the Groups revenues and 16% of its Gross Operating Margin.
The Group will continue to review carefully and selectively any opportunities in the high-growth countries, based on the strategic and financial criteria defined in the NExT plan. Any acquisition opportunities will, therefore, have to:
France Telecom believes, in any event, that strengthening the competitive position of its current operations and rapidly improving their profitability are its top priorities, and that these actions will improve its attractiveness and its ability to act no matter what the subsequent changes in the European market.
4.3 PRESENTATION OF THE BUSINESS
Unless otherwise indicated, all information provided in this section is given as of December 31, 2006.
4.3.1 GENERAL DESCRIPTION OF THE BUSINESS
The France Telecom group offers its individual customers, businesses and other telecommunications operators an extended line of services covering fixed and mobile communications, data transmission, the Internet and multimedia, and other added-value services.
As of December 31, 2006, France Telecom provided services to 158.6 million customers, up from 144.6 million customers at December 31, 2005.
The definition of customers is provided below for each category of service:
Mobile service customers
A mobile service customer is anyone holding a SIM card or anyone holding a prepaid card who has placed at least one call and has not passed the date after which it is contractually impossible to receive calls.
Fixed-line telephony service customers
This number is the aggregate of standard analog lines and ISDN access lines in service (including fully unbundled lines), each ISDN channel being treated as one line. ISDN: Integrated Services Digital Network.
Internet access customers
Internet access customers are those who have entered a monthly payment subscription contract as well as the active customers of free access accounts, i.e. access customers showing activity in the last month, identified by measurable consumption.
In order to reflect the change in the Group and the structure of its businesses, France Telecom has selected the following three business segments:
The Groups businesses are described in this document, in this order, for each of these business segments.
184.108.40.206 Overview of the segment
The Personal Communication Services (PCS) segment consists of the telecommunication mobile services in France, the United Kingdom, Spain, Poland and Rest of the world. It includes all the Orange subsidiaries, and the mobile operations of France Telecom España in Spain and TP Group in Poland (with its subsidiary PTK Centertel), and the other Group companies abroad.
These operations are described in the following sections:
220.127.116.11 United Kingdom
18.104.22.168 Rest of the world
22.214.171.124 Licensing agreements
These activities are focused primarily on the transmission of voice and data over digital networks using the GSM standard. In order to enhance its services, France Telecom has deployed the General Packet Radio Services (GPRS) system over its network in most of the subsidiaries and the EDGE technology in some of its networks in Europe.
In order to offer third-generation services, France Telecom has participated in several UMTS licensing award procedures in Europe. The controlled companies hold UMTS licenses in France, the United Kingdom, Spain, Poland, Belgium, the Netherlands, Romania, Slovakia, and Switzerland.
France Telecom considers the development of mobile broadband and the third generation to be a strategic priority and an activity with high growth potential, and wants to be a leader in these services in Europe.
France Telecom also intends to remain at the leading edge of changes in the mobile telecommunications market by pursuing a policy of systematic innovation, particularly by offering enhanced, simplified and convergent services and by continuing to rely on an exclusive line of portable telephones, the Orange Signature phones.
The Personal Communication Services segment recorded revenues of 27.7 billion euros in 2006 (compared with 23.5 billion euros in 2005 and 20.5 billion euros in 2004). As of December 31, 2006, France Telecom had 97.6 million mobile customers worldwide (up from 84.3 million at December 31, 2005 and 62.7 million customers at December 31, 2004).
The following tables list the countries in which France Telecom currently operates, the operators, the interest held in each operator, the total number of customers, and the licenses held in each country.
(1) Orange and Orascom Telecom jointly control MobiNil, which holds 51% of the operational company ECMS. Therefore, pursuant to IFRS, the financial and operating data of MobiNil/ECMS are consolidated proportionately at 71.25%. The total customer base of MobiNil (100%) was 9.3 million at December 31, 2006.
(2) At December 31, 2005 and 2004, France Telecom held 40% control of the operator Jordan Telecom, which itself controlled 100% of its mobile subsidiary Mobilecom. Thus, pursuant to IFRS, the financial and operating data for Mobilecom were consolidated proportionately at 40% on those dates.
(3) France Telecom controls 40% of the operator Mauritius Télécom, which itself controls 100% of its subsidiary CellPlus. Thus, pursuant to IFRS, the financial and operating data of CellPlus are consolidated proportionately at 40%. The total customer base of CellPlus (100%) was 480,000 as of December 31, 2006.
(4) Companies operating under the Orange brand.
The table below presents the principal features of the French mobile telecommunications market and the businesses of Orange France (including, except where otherwise indicated, the French Overseas Departments).
As of December 31, 2006, France was the fourth largest mobile telecommunications market in Western Europe, behind Germany, Italy and the United Kingdom (source: EMC Database).
The penetration rate of 85.7% calculated on the basis of the 1999 census (source: ARCEP) (79.7% at December 31, 2005, 73.9% at December 31, 2004), which is lower than the European average, is due to three specific features of the French market :
As of December 31, 2006, Orange France had approximately 23.3 million customers registered (excluding the MVNO) (22.4 million at December 31, 2005, 21.3 million at December 31, 2004). Including MVNO, Orange France had 24.1 million customers at December 31, 2006.
The priority for Orange France has moved from customer acquisition to value creation and customer retention.
The Orange brand, present in France since June 2001, enjoyed spontaneous brand recognition of 93% in January 2007.
As of December 31, 2006, the Orange France network covered, according to its estimates, 99.0% of the French population (excluding Overseas Departments), as much as in 2004 and 2003. For mobile broadband (3G + Edge), the population coverage rate was 95%.
GSM and UMTS licenses
Orange France holds a GSM license, which was renewed for a 15-year period as of March 25, 2006, and a UMTS license obtained in August 2001 for a period of 20 years from the date it was granted. See Section 126.96.36.199 Frequency management.
Moreover, in the Overseas Departments, Orange Caraïbe operates a GSM network in Guadeloupe, Martinique and Guyana under the Orange brand. Orange Caraïbe had approximately 582,000 customers as of December 31, 2006, compared with about 600,000 customers at December 31, 2005, and approximately 593,000 as of December 31, 2004. In December 2000, Orange Réunion launched its GSM service in La Réunion, where it competes with the existing operator. At December 31, 2006, Orange Réunion had about 256,000 customers, compared with about 229,000 customers as of December 31, 2005 and approximately 177,000 at December 31, 2004 (Source: ARCEP).
188.8.131.52.1 The Orange France offers
Orange France offers four major types of products targeted at different categories of users: the offers with subscription, offers without commitment, the new multimedia Orange World offer and, for businesses, the Orange Business Solutions offers. In addition, Oranges first convergence offers were launched in the fourth quarter of 2006.
Offers with subscription
Orange France proposes two categories of offers with commitment:
These packages are all included and are blocked once the threshold is reached, but can be reloaded using a credit card, a mobicarte, or using the function Reload me.
The customer can change contract or plan at any time.
In October 2005, Orange France launched a new line of contract packages that include mobile broadband access in all plans. The Orange Intense line is now the multimedia benchmark for all customers, whatever the mobile phone selected (2G, Edge or 3G).
The new Orange Intense contracts consist of a voice and video communication credit and the multimedia offer includes which has a usage credit for sending SMS (up to SMS), MMS (up to 13MMS), or data transfer (up to 10 Mb). Television and video are free on weekends for one year. The new line consists of 7 voice and video plans (from 1 to 10 hours). All these contracts offer free voice and video calls to 3 Orange numbers 24/7.
The Orange Pro contracts were launched in April 2005 with a high-end positioning. There are intended for both premium customers and professional customers (those who hold a Siren business number), who are demanding and heavy mobile users.
The Orange Pro all included packages offer a range of 8 plans (from 3 to 30 hours, starting at 46 euros including tax/month). All communications and usages are counted against the contract (international calls, roaming, surf, SMS, MMS). Services are also included: after-sales service 24 hrs/24 months, coverage against theft, suspension of the contract, carryover of minutes, mobile conferencing.
The contracts also include:
Moreover, the option of unlimited calls to fixed-line phones in France 8:00 a.m. to 6:00 p.m. 7 days/week is offered in addition to the Orange Pro contract for 15 euros including tax/month.
For artisans, merchants, professionals, independent works, business entrepreneurs (those holding a Siren number), the professional option offers, for 15 euros including tax/month, unlimited calls to fixed-line phones from 8:00 a.m. to 6:00 p.m. 7 days a week, including professional services (dedicated customer service open 24/7, after-sales service 24hrs/24 months, annual consulting report, a backup SIM card, the PC Card at 1 euro to connect everywhere with a portable PC).
Finally, Orange offers solutions to allow receiving emails on mobiles (Orange Black Berry), or solutions to work while traveling via a portable PC with the Internet Everywhere offer. This offer gives Internet access, and integrates the GPRS, EDGE, Wi-Fi, 3G and 3G+ technologies. The Internet Everywhere access offers are available starting at 24 euros including tax/month (3 hr plan).
Offers without commitment
Orange proposes two categories of offers without commitment, billed by second from the first second:
The Orange multimedia offer: Orange World
The Orange World portal offers a multitude of rich and diversified content. This portal offers access to more than 50 live television channels, 700,000 music titles, 3000 videos, over 200 games, Orange League 1, and the Top 14 in video. At the same time, Orange is developing exclusive partnerships to offer its customers pre-premiere content, for example for the release of the film Arthur and the Minimoys.
In June 2006, Orange World launched new, unlimited multimedia options, offering simple themes (TV, Surf, Sports, Music). Orange proposes a line of 7 unlimited theme options (from 6 to 12 euros) and 3 Internet options billed by data volumes transmitted, along with a large selection of handsets.
The introduction of the 3G+ in November 2006 allowed an offer of high definition TV for unlimited viewing on mobile handsets.
As of December 31, 2006, Orange had 1.6 million customers with a multimedia option and over 4 million active customers on the Orange World portal. In December 2006, they made 6.2 million TV/video connections.
Orange Business Solutions
The objective of Orange France is to assist all businesses every day (very small businesses, small and medium sized enterprises (SMEs), major corporations or multinationals) by assisting them with mobile and convergent solutions to boost their efficiency and competitiveness. Thus, Orange France offers these customers:
Since June 2003, mobile number portability has enabled more than one million French consumers to change mobile operators without having to change their mobile telephone number. In May 2007, the conditions governing mobile number portability became much simpler and much faster: the customer opts for a transfer within 10 days or on a subsequent date of his/her choice, and Orange reduces the period of notice of termination for its customers from 45 days on average to 10 days. For reasons of simplicity and equality, this new period of notice will apply to all customers wishing to terminate their contracts, whether or not they wish to opt for mobile number portability.
184.108.40.206.2 Convergence offers
Unik, the first convergence offer for consumers, was launched October 5, 2006. Unik is a mobile phone that connects to Livebox for unlimited calls to fixed-line phones and all Orange mobile phones from home, with a single number, a single directory, and automatic network change when the customer leaves home, without call cut-off.
The mon PC à distance services introduced on November 16, 2006 gives access to multimedia content (music, photos, emails, Office documents, videos stored on PC) from the customers PC by connecting to the Orange World mobile portal.
Net et Mobile, launched on December 1, is the first mobile access and Internet convergent offer without subscription to a traditional telephone line. This is one option in the Orange mobile contract that includes broadband Internet access, including ADSL line, television at home and on mobile and unlimited calls from the mobile phone.
220.127.116.11.3 Sales, distribution and customer service
In metropolitan France, Orange France sells its products and services through a full range of retail circuits:
Orange France has also developed its own network of points of sale: 169 Mobistore stores were open as of December 31, 2006 (175 at December 31, 2005 and 150 at December 31, 2004).
The offers for Businesses are sold by specialized networks: 5 Major Account Agencies, 11 France Telecom Business Agencies, and independent distributors.
Mobicarte reloads are available primarily from retailers, particularly in tobacco shops and in France Telecom points of sale.
About 6,000 advisors are available to serve Orange customers in France 7 days a week. These specialists are located in the customer centers of the France Telecom group (Orange France and France Telecom), and at outside service providers. Customer service is also available in the France Telecom points of sale and the Mobistore stores. Finally, subscribers may access certain customer service features via the Orange World portal or the Orange voice servers. They can check information concerning their bill, change their rate plan or select a new one.
18.104.22.168 United Kingdom
The table below indicates the principal features of the mobile telephony market in the United Kingdom and the activities of Orange UK.
In terms of number of users as of December 31, 2006, the United Kingdom was the third largest mobile telephony market in Western Europe after Germany and Italy.
The number of mobile telephone users in the United Kingdom represented approximately 116% of the population of the United Kingdom (110.6% at December 31, 2005 and 101.1% as of December 31, 2004).
As of December 31, 2006, Orange UK had approximately 15.3 million active customers (14.9 million at December 31, 2005 and 14.2 million as of December 31, 2004) (source: Orange UK) with a market share estimated at about 21.8% of active customers in the United Kingdom (22.1% at December 31, 2005 and 23.55% at December 31, 2004) (source: Informa Telecoms & Media).
Orange UK owns one of the most extensive mobile networks in the United Kingdom. As of December 31, 2006, its network covered, based on its own estimates, about 99.4% of the population (99.4% at December 31, 2005 and at December 31, 2004).
22.214.171.124.1 GSM and UMTS licenses
A GSM license was awarded to Orange UK in February 1994 and remains in effect on the basis of an annual renewal. Moreover, Orange UK holds one of the five UMTS licenses for twenty years awarded in 2000 for a cost of approximately 6.6 billion euros (see Section 126.96.36.199. Frequencies).
Orange UKs third-generation network was officially opened in July 2004 with the launch of the Mobile Office Card PC card for businesses. In December 2004, Orange opened the third generation to all users.
188.8.131.52.2 Orange UK offers
Orange UK offers two kind of plans for consumer and special plans for businesses under the name Orange Business Services.
Orange has introduced four new plans in order to simplify its offer. Each plan is design to fit the different type of lifestyles customers lead. Dolphin is intended for heavy text message users, with an option for unlimited text transmission for 35 pounds sterling per month under an 18-month contract. Racoon is primarily geared to users who call fixed lines, with an option for unlimited calls to fixed lines for 30 pounds sterling per month under an 18-month contract. Canary is targeted primarily at users who make calls in the evening and on weekends, with an unlimited call option on evenings and weekends for 40 pounds sterling per month under an 18-month contract. Finally, Panther is the broadest rate plan designed for heavy users, which includes for 75 pounds sterling per month the transmission of text messages and unlimited mobile Internet navigation, voice mail, a dedicated customer service, mobile insurance and a package of 1,500 minutes of communications.
Orange believes that it continues to offer an excellent quality/price ratio in the United Kingdom and has, as a result, developed Orange Value Promise, thanks to which Orange is able to offer a large selection of rate plans than any other competing network. If a customer or potential customer of Orange UK thinks that a contract being offered by a different United Kingdom operator would suit him better than one of Orange UKs offers, Orange UK undertakes to provide him with an equivalent service on the Orange UK network and to bill this customer essentially the same as its competitors. Orange Value Promise offers the equivalent of a selection of non-promotional rates to customers subscribing to a monthly service contract with an O2, Vodafone or T-Mobile retailer.
Customers to subscribe to a monthly service plan may, in principle, terminate their contract with one-month advance notice, subject to a minimum initial term which is generally eighteen months.
Pay as you go offers without commitment
The Orange Pay as you go offers allow customers to purchase a phone and call time when they need it, depending on the quantity they want. This offer currently includes no fixed fees, the reloads have no expiration date, and there is no minimum commitment period. Customers have several quick methods to reload their account: reloads, credit cards, cash payment or payment with a Swipe card at a point of sale, or the use of some automated teller machines.
The Any Time Fixed Rates offers are based on a price structure set by call with bonus time for communication or transmission of text messages based on the amount of the reload.
The Free Text Top-Up offers combine a fixed price per call with text message bonuses granted for the month following the phone reload. The number of free text messages increases with the amount of the reload, with 300 messages for 10 pounds sterling and 1,000 for 30 pounds sterling. The rates are fixed regardless of the time or day of the call.
These offers are completed by the Orange Extras, which offer customers the possibility of purchasing, text, voice or access to Orange World at a reduced price. The Orange Extras must be used within a certain time (one day, one week, a weekend, one months, etc) from the date of purchase, but there is no time commitment for any of the Pay as you go plans.
Orange Business Services
Orange Business Solutions was renamed Orange Business Services in June 2006 and is a fully integrated entity that can meet the mobile and fixed-line communication needs of medium and large companies and government agencies.
Orange Business Services, which is responsible for the complete management of its customers, offers a broad portfolio specific of products and services for businesses, including a flexible line of options for voice, Orange business messaging, and a full series of other innovative wireless services. Orange also meets the needs of small companies by offering voice and data transmission services designed to facilitate work on the road.
The Orange Business Services offer currently consists of two main rate plans: Business Plus and Business Advance.
Business Advance is designed to provide a simple alternative to the complexity of mobile rates, ensuring better budget control, greater transparency, and better cost projections. With a single monthly payment, customers can decide how to use the paid amount as text messages, data communication, national or international calls, or roaming. Consumers are thus not forced to commit to specific amounts for voice or data communications. Calls to toll-free numbers are included in their monthly rate and they pay for calls exceeding the plan at the plan rate. Business Advance has been designed as a complement to Business plus, as an advantageous offer for customers who use data transmissions, voice communication and international services.
Business plus is a plan designed primarily for customers who use voice communications and national services.
Orange UK offers its customers mobile Internet access and content from the Orange World portal. Orange World is a customized, continuously updated portal, which offers access to the best mobile Internet sites and content. Orange World facilitates the content sharing created by users with flagship services such as Buff or Rough (photo sharing) and Chat. The content includes: entertainment and news services from Sky, BBC and many other media; streaming from more than thirty television channels through Orange TV; films like Superman returns; music and ringtone downloads from Warner Music, EMI, Sony/BMG, Universal Music, and Ministry of Sound; console-type games like Sonic the Hedgehog and Deal or No Deal; sports info including privileged access to the locker rooms of several soccer clubs; and practical applications including Traffic TV and Photography. This last service allows users to store high-quality photos from their mobile in an online album.
As of December 31, 2006, Orange World had approximately 3.1 million active customers (compared with 2.8 million at December 31, 2005).
In June 2006, Wanadoo UK moved under the Orange brand and is now under the same operational management as mobile telephony.
This change was followed in September with the launch of the Unique telephone, a new convergent product that combines fixed and mobile line in a single telephone with a single number, a single directory, a single voice mailbox, and a single bill. When it is used at home, the mobile connects through Wi-Fi to the Livebox and calls are transmitted over the Internet, providing expanded coverage at home. Outside the home, the Unique telephone becomes a standard mobile phone and all calls are transmitted via the mobile network.
184.108.40.206.4 Sales, distribution and customer service
Orange UK sells its products and services in the United Kingdom through a full range of distribution circuits:
A specialized sales team under the responsibility of Orange UK Business Services is dedicated to the acquisition and retention of business customers.
Customers can also obtain Orange products and services and purchase accessories at the Orange UK website: www.orange.co.uk.
The table below presents the principal characteristics of the mobile telephony market in Spain and the mobile activities of France Telecom España, which operates under the Orange brand and is referred to below as Orange.
Orange is one of three mobile telephony operators in Spain, along with Telefónica Móviles (Movistar) and Vodafone. At the end of 2006, other operators entered the Spanish market, including the 3G mobile operator Yoigo and the MVNOs The Phone House, Carrefour Mobile and Euskaltel.
Euskaltel, a fixed-line and Internet alternative operator in the Basque country, which had signed an exclusive distribution agreement with Amena, decided at the end of 2006 not to renew it and to enter into an MVNO contract with Vodafone.
As of December 31, 2006, Orange ranked third in this market with 11.1 million subscribers (10.3 million at December 31, 2005, 9.3 million at December 31, 2004) (Source: Orange) and a market share of 23.9% (24.1% at December 31, 2005 and 24.0% at December 31, 2004) (Source: Orange and CMT).
At year-end 2006, Orange covered nearly 99% of the Spanish population with the 2G network and nearly 72% for the 3G and, in 2006, signed an agreement to share network infrastructures with Vodafone.
Convergence in 2006 was a high priority, resulting in the merger of the mobile, fixed-line and broadband businesses under the Orange brand, and in the launch of new services, such as Unico, Business Everywhere, and Family talk.
GSM and UMTS licenses
Orange (previously Amena) obtained the third GSM license in June 1998 and launched its commercial activity in January 1999, thus ending a duopoly in mobile telephony, held until that date by Telefónica and Vodafone.
Four UMTS licenses were awarded in March 2000, through competitive bidding, to Amena, Telefónica Móviles España, Vodafone, and Xfera. UMTS was effectively launched on the Spanish market in 2004. Yoigo, the successor to Xfera, and the fourth operator to win a UMTS license launched its activity in December 2006.
For its customers who choose pre-paid plans, Orange offers a broad range of rates (Tarjetas), which are targeted on the basis of the different needs of the market (same rate over 24 hours, peak/off-peak hour rate, special rates for immigrant residents, etc).
Customers can also enjoy special rates for frequently called numbers by designating, for example, an Orange number that will be billed at only 3 euro cents per minute, or by subscribing to new offers launched at the time the Orange brand was adopted: Disfruta tu fin de semana (attractive weekend rates) and Disfruta tu momento (attractive rates during a two-hour period selected by the user).
A number of possibilities are available to reload the prepaid card, by combining the traditional scratch cards, automatic bank distributors and call centers.
The contract plans offer the customer lower prices once a minimum monthly usage is reached. Special rates are offered, for example, for off-peak hours or for the youngest customers.
As with the pre-paid plans, the customer can enjoy lower rates for the most frequently called numbers, choose an Orange customer and be billed at only 3 euro cents a minute, or choose other options.
Continuing its efforts at innovation in order to anticipate customer needs, in 2006 Orange launched the first contract rate in Spain with Tarifa Plana de Orange, which allows the customer to call all national fixed lines or mobile destinations from 6:00 at night to 8:00 in the morning for a pre-paid or post-paid monthly rate, as well as the first convergent service that offers economical rates for calls between Orange fixed lines and mobile phones. Orange recently launched the Unico de Orange plan which offers customers economical rates on their mobile phones when they use them at home with their ADSL access.
The offer for this market is based on the optimization of both useful and entertainment services, and on a reduction in the total number of services; the goal is to give customers a better understanding of the services available. Thus, the offer is designed to ensure user-friendliness and transparency, and to allow customers to easily try the various services offered. The portfolio of Orange data services includes SMS, MMS, WAP, news alerts via SMS and MMS, and other services including chat, tunes and images, video calls, television, email video games and music, and Internet access.
For residential customers, a complete customer loyalty program has been set up for renewal of handsets (Renove sin puntos), with significant discounts on market prices.
For the professional market, Orange adapts its offer to different needs, uses, types of calls, number of lines and other characteristics of businesses.
Custom solutions have been specifically developed for different sectors (real estate, transport) and are offered in partnership with other companies (software designers and others).
In data services, email receipt is the most frequently requested service. For this purpose, a full line of handsets and technical solutions is available to meet individual customer needs. The other data services completing the portfolio are news services, video calls, Internet or Intranet access.
Orange offers solutions to businesses to meet their needs, independently of the technology and with full transparency including, for example, Números plus Empresa (economical rates for calls between the fixed-line and mobile lines of the same customer).
The table below shows the principal features of the mobile telephony market in Poland and the activities of PTK Centertel, the mobile subsidiary of TP Group, which is wholly owned by TP S.A.
The Polish mobile telephony market has been growing rapidly in recent years. At the end of 2006, the penetration rate was 96.5% and subscribers totaled 36.8 million (Source: PTK Centertel). At year-end 2006, the market share of PTK Centertel, which has operated since 2005 under the Orange brand, was approximately 34.0%.
Licenses and brand
PTK obtained four licenses to supply telecommunication services: one 15-year license (expiring in August 2012) to operate a GSM1800 digital networks, a 25-year license (expiring in December 2016) to operate an NMT 450i analog network, and a 15-year license (expiring in July 2014) to provide GSM900 services, as well as a UMTS license obtained in December 2000 for 650 million euros, 260 million of which had been paid, with the balance scheduled in 18 payments beginning in 2005. This license expires in January 2023. Under the general conditions of the UMTS license, PTK is required to provide by the end of 2007 minimum coverage of 20% of the population through the UMTS services. PTK commercially launched the UMTS services in November 2005. The UMTS coverage serves five major metropolitan areas, including Warsaw, and will be systematically extended. The UMTS services are available both for residential customers and business customers. For more information, see Section 220.127.116.11 Numbering and frequencies.
In April 2005, PTK and Orange Brand Services Ltd signed a brand licensing agreement, under which PTK acquired the rights to operate under the Orange brand. PTK launched the Orange global brand in September 2005. Pursuant to this agreement, PTK pays a fee of 1.6% of its operating revenues for full use of the Orange brand and the benefit of agreements on roaming and interconnection, technology, terminal signatures, and Orange support services.
PTK Centertel products
Currently, PTK Centertel offers two prepaid offers (POP and Orange Go) throughout Poland, which are targeted at two different customer segments, and three subscription plans (Twój Plan, Twój Mix and Orange Premium) for residential customers. Each of these offers allows customers to choose among services based more on cost control or service flexibility in order to adapt better to the needs of each customer.
An innovative offer known as Zetafon was introduced in 2006. It allows customers to purchase a handset at a lower price as part of the Orange Go and POP offers, provided that they reload their account monthly. This offer has been well received by the market.
In 2006, PTK Centertel developed initiatives to encourage customers to migrate to subscription plans and increase their loyalty. And, finally, a plan named Orange dla Firm is targeted for businesses.
On all its networks, PTK Centertel offers several dozen leading edge mobile services, which include: video calls on the 3G network, the interactive Orange voice mailbox, bundled voice and SMS plans, data and fax transmissions, Internet access (Orange World, MultiBox, HotSpots, W-LAN), high-speed data transmissions on GPRS, EDGE and UMTS (with two maximum speed options: Business Everywhere and Your Internet), MMS, premium SMS services, mobile banking services, news and local services, intelligent network services, location services (What/Where/Which Way, Orange Navigator, Where Are You, Where Are They), customer loyalty programs (Profit, ProPosal), and roaming services.
The Orange offer is available in several thousand retail stores throughout Poland.
18.104.22.168 Rest of the world
The table below provides the principal characteristics of the mobile telecommunications market in Belgium and the Mobistar activities.
Orange is present in Belgium through Mobistar. The Mobistar company was formed and obtained its GSM900 license in 1995 and launched its services in August 1996. As of December 31, 2006, Orange held 50.17% of the share capital of Mobistar. The balance is held by the public following the public offering of Mobistar stock in October 1998 on Euronext Brussels.
Mobistar was the second operator to enter the Belgian market and held the second largest marketing share as of December 31, 2006 (Source: Informa Telecoms & Media).
Mobistar currently offers a broad range of both fixed-line and mobile solutions to meet all the needs of the various market segments, from residential customers to major corporations. In the home market, Mobistar offers a combination of prepaid cards (Tempo Essential and Tempo Music) and subscriptions. The new BestDeal contract offer launched in February 2006, at a price of 5 euros and without contract commitment, has been the most successful, representing more than half the new residential subscribers acquired in 2006. In addition to its mobile offers, Mobistar has also offered its customers ADSL broadband solutions since October 2005.
For the business market, an entire line of solutions that integrates both fixed and mobile lines is targeted for SOHO (Small Office Home Office), comprising small and medium businesses and large corporations.
Mobistar distributes its services through retail outlets and in more than 140 specialized stores.
In 1998, Mobistar received fixed-line telephony licenses and infrastructure licenses and can, therefore, offer indirect access telephony service to consumers and small and medium businesses. Mobistar also provides fixed-line telephony services, data transmission, and mobile telecommunications services to businesses.
In March 2001, Mobistar obtained a 20-year UMTS license from the Belgian Government for an auction bid of 150 million euros. Mobistar fulfilled its initial commitments by introducing the technology in Belgium in September 2003. This first step was approved by the regulator. The terms of the license stipulate that it may be withdrawn from the licensee and penalties could be applied if it does not meet its obligations. The second obligation set for Mobistar for the UMTS launch was the deployment before January 1, 2007 of a network covering 40% of the population, which has been achieved.
The table below shows the principal features of the mobile telecommunications market in the Netherlands and the activities of Orange Nederland N.V.
Orange provides mobile services in the Netherlands through Orange Nederland N.V., its wholly-owned subsidiary. Formed in 1997, Orange Nederland N.V. won a GSM 1800 license in February 1998 and launched its operation in January 1999. In March 2003, Orange Nederland N.V. changed its name (abandoning Dutchtone N.V.) and now operates under the Orange brand. As of December 31, 2006, Orange Nederland N.V. covered, by its own estimates, 99.9% of the Dutch population, with a market share of 12.9% and approximately 2.0 million active customers (source: Informa Telecoms & Media).
At December 31, 2006, Orange Nederland N.V. was one of the four major operators in the competitive mobile telephony market in the Netherlands. Orange Nederland N.V. expanded its business with the commercial launch of UMTS, the Orange Unique handset (a convergent fixed-mobile offer from the Group), Orange Music, Orange handsets, backed by the strength of the Orange brand and the attention paid to customer services. Orange Nederland has also developed by hosting on its network several known MVNOs such as UPC, Scarlet and Rabo Mobiel. Finally, Orange Nederland N.V. has diversified its activity in order to increase its revenues substantially through the sale of transit traffic to the other operators in the Netherlands.
Orange Nederland N.V. owns 63 stores, including a flagship brand megastore, and operates two sale portals on the Internet.
In July 2000, Orange Nederland N.V. received one of the five UMTS licenses auctioned at a cost of 436 million euros. This license expires on December 31, 2016. It is for two 10 MHz spectra and one 5 MHz spectrum. The terms of the license stipulate that Orange Nederland N.V. must, among other obligations, cover Dutch cities with more than 25,000 inhabitants before early 2007 and that the license could be pulled if the licensee does not meet this obligation. As of March 31, 2007, the control for this obligation had not yet been completed, but it is likely that failure to meet it would result in a simple fine.
The table below shows the principal features of the mobile telecommunications market in Romania and the activities of Orange Romania.
Orange provides mobile services in Romania through its subsidiary Orange Romania. Orange Romania was formed and obtained a 15-year GSM900 license in 1996. As of December 31, 2006, Orange Romania estimated that it covers approximately 96.8% of the Romanian population and holds the leading market share in the country with about 8 million active customers, ahead of Vodafone. Orange holds 96.82% of the share capital of Orange Romania, and the balance is held by minority shareholders.
In July 2006, the Romanian regulatory authority required an 11.3% reduction in the interconnection rates of Orange Romania and Vodafone as of September 2006.
Orange Romania was the third mobile operator to enter the Romanian market and believes that it currently ranks first in this market.
Following a bid tender launched in August 2004, 15-year UMTS licenses were awarded to Orange Romania and Vodafone Romania (ex. Mobifon) in November 2004. A minimum coverage is required for Bucharest and ten major cities in 2011. The cost of the license was 35 million US dollars and an annual fee which amounted to 1.2 million euros in 2006.
The table below summarizes the principal features of the mobile telecommunications market in Slovakia and the activities of Orange Slovensko.
Orange provides mobile services in Slovakia through its wholly-owned subsidiary Orange Slovensko. Orange Slovensko was incorporated in 1996 and obtained its GSM900 license the same year. In August 2001, the license of Orange Slovensko was extended to GSM1800. As of December 31, 2006, Orange Slovensko estimated that its network covered 99.3% of the Slovak population and that it held the largest market share (55%) in the country with approximately 2.7 million active customers.
In addition, Orange Slovensko was awarded a UMTS license in June 2002 for about 1.5 million Slovak crowns (approximately 35 million euros) and an annual royalty of 0.08% of the revenues generated by the license. The UMTS license was granted for twenty years from the date of award.
The table below shows the principal characteristics of the mobile telecommunications market in Switzerland and the activities of Orange Communications S.A.
Orange is present in Switzerland through its wholly-owned subsidiary Orange Communications S.A. At December 31, 2006, Orange Communications S.A. held a market share of approximately 18.6% with 1.4 million active customers and estimated that its network covered 99.3% of the Swiss population.
Orange Communications S.A. was the third operator to enter the Swiss market and, as of December 31, 2006, was the second in terms of market share (Source: Informa Telecoms & Media).
In December 2000, Orange Communications S.A. was awarded a UMTS license for 15 years at a cost of 55 million Swiss francs, i.e. approximately 35 million euros.
The table below shows the principal characteristics of the mobile telecommunications market in Moldova and the activities of Voxtel:
Orange is present in Moldova through its subsidiary Voxtel, a 61% subsidiary controlled by the France Telecom group. Voxtel was formed in 1998 and obtained its license the same year. In 2003, the license was extended to GSM1800 MHz.
In May 2006, Voxtel signed a brand agreement with Orange, which will lead to the adoption of the Orange brand by Voxtel.
In 2006, the Moldovian regulatory authority awarded a first CDMA license and a third GSM license.
22.214.171.124.7 Other controlled mobile operations outside Europe
Egypt: Orange holds 71.25% of MobilNil (MobiNil Telecommunication S.A.E.), which holds 51% of Egyptian Company for Mobile Services (ECMS), the operational company that carries out its operations under the MobiNil brand. The remaining 28.75% of MobilNil is held by the Egyptian group Orascom Telecom, which also directly holds 17.88% of ECMS, of which the shares are listed on the Cairo and Alexandria stock markets.
ECMS was formed in 1998 and was awarded its GSM900 license the same year. As of December 31, 2006, according to its estimates, the ECMS network covered about 99% of the Egyptian population, compared with 94% at December 31, 2005 and 91% at December 31, 2004. ECMS estimates that it held a market share of about 51.5% as of December 31, 2006 (about 55.1% at December 31, 2005 and 53.75% at December 31, 2004), with approximately 9.3 million active customers as of December 31, 2006 (6.7 million active customers at December 31, 2005 and 4.0 million active customers at December 31, 2004), representing 6.6 million active customers for the Orange share (4.8 million active customers at December 31, 2005 and 2.9 million active customers at December 31, 2004). ECMS believes it is the leader in its market. (Sources: NTRA for 2006, Informa Telecoms & Media for 2004 and 2005).
Botswana: Orange holds a 51% stake in Orange Botswana, which launched its GSM900 network in June 1998 under the Vista Cellular name. Since March 2003, Orange Botswana has operated under the Orange brand. Orange Botswana had approximately 436,000 active customers at December 31, 2006 (244,000 active customers as of December 31, 2005 and 194,000 active customers at December 31, 2004) and ranked second in market share between the two operators present in this market (second in 2005 and 2004 ). (Source: Informa Telecoms & Media for 2004 and 2005. Data for 2006 provided by Orange Bostwana).
Cameroon: The France Telecom group holds 99.5% of the share capital of Orange Cameroon, which launched its GSM900 service in January 2000 under the Mobilis name. Since June 2002, Orange Cameroon has been operating under the Orange brand. Orange Cameroon had approximately 1,353,000 active customers as of December 31, 2006 (943,000 active customers at December 31, 2005 and 748,000 active customers at December 31, 2004). Orange Cameroon ranked second in market share between the two operators in this market (second in 2005 and 2004). (Source: Informa Telecoms & Media for 2004 and 2005. Data for 2006 provided by Orange Cameroon).
Ivory Coast: Orange holds an 85% stake in Orange Côte dIvoire, which began operating its GSM900 network in 1996 under the Ivoiris brand. Since January 2002, Orange Côte dIvoire has been operating under a GSM900/1800 license. Since May 2002, Orange Côte dIvoire has been operating in Ivory Coast under the Orange brand. As of December 31, 2006, Orange Côte dIvoire had approximately 1.7 millions active customers (1.3 million active customers as of December 31, 2005 and 844,000 active customers at December 31, 2004) and ranked first in market share among the three operators in this market (first in 2005 and 2004) (Source: Informa Telecoms & Media for 2004 and 2005. Data for 2006 provided by Orange Ivory Coast). The risk in Oranges business in Ivory Coast is affected by the events in the country (see Item 3. Key Information 3.3 Risk factors). The regulatory authority announced the award of two new mobile licenses in 2006, one of which should be commercially available in 2007.
Madagascar: Orange holds 60.8% of Telsea, which holds 65.9% of Orange Madagascar (formerly Société Malgache de Mobiles), which launched its GSM900 network in March 1998 under the name Antaris. Since June 2003, Orange Madagascar has operated under the Orange brand. Orange Madagascar had approximately 644,000 active customers at December 31, 2006 (279,000 active customers at December 31, 2005 and 169,000 active customers at December 31, 2004). Orange Madagascar ranked first in market share between the two operators present in this market (first in 2005 and in 2004). (Source: Informa Telecoms & Media for 2004 and 2005. Data for 2006 provided by Orange Madagascar).
Dominican Republic: Orange holds 100% of Orange Dominicana, which launched its GSM900 network in November 2000 under the Orange brand. Minority interests, representing 14% of the share capital, were purchased in September 2005. As of December 31, 2006, Orange Dominicana estimated that it had about 1,513,000 active customers (950,000 active customers at December 31, 2005 and 704,000 active customers at December 31, 2004) and ranked second in market share as of December 31, 2006 among the five operators present in this market (second at December 31, 2005 and December 31, 2004). (Source: Informa Telecoms & Media for 2004 and 2005. Data for 2006 provided by Orange Dominicana for 2006).
Senegal: Sonatel Mobiles SA, a wholly-owned subsidiary of Sonatel SA, in which France Telecom owns 42.3%, carries out its activities under the Alizé brand. Sonatel Mobiles SA was founded in 1999, assuming a GSM license awarded to Sonatel SA in 1996. As of December 31, 2006, according to estimates by Sonatel Mobiles SA, its network covered approximately 84% of the inhabited surface area in Senegal. As of December 31, 2006 Sonatel Mobiles SA estimated a market share of about 70% (about 58.8% at December 31, 2005 and about 69.6% at December 31, 2004), with approximately 2,087,000 customers at December 31, 2006 (982,000 customers at December 31, 2005 and about 780,000 customers as of December 31, 2004). (Source: Informa Telecoms & Media for 2004 and 2005. Data for 2006 provided by Sonatel). Sonatel Mobiles has operated under the Orange brand since November 2006.
The competition is the Sentel company, a subsidiary of the Millicom International group.
Mali: Ikatel SA, a 70.2% subsidiary of Sonatel SA, operates under the Ikatel brand. Ikatel SA launched its commercial operations in 2003 after receiving a license from the Mali government in 2002 for fixed-line, mobile and Internet operations. At December 31, 2006, Ikatel SA estimated a market share for its mobile activities of about 80% (about 71.3% at December 31, 2005 and about 83.2% at December 31, 2004), with approximately 1,165,000 customers at December 31, 2006 (about 561,000 customers at December 31, 2005 and 336,000 customers at December 31, 2004). (Source: Informa Telecoms & Media for 2004 and 2005. Data provided by Ikatel for 2006). Ikatel has operated under the Orange brand since November 2006.
Jordan: In 2000, MobileCom (Petra Jordanian Mobile Telecommunications Co.), a wholly-owned subsidiary of the operator Jordan Telecom, which is itself 51% held by France Telecom, was the second GSM operator to enter the mobile telephony market in Jordan, after five years of exclusivity held by Fastlink (owned by MTC). MobileCom introduced the GRPS and MMS services in mid-2003, and limited EDGE coverage in 2004. MobileCom covers 97.7% of the population.
As of December 31, 2006, MobileCom held a market share of about 30% (22.6% at December 31, 2005 and 27.8 % at December 31, 2004) with approximately 1,406,000 customers at December 31, 2006 (660,000 customers at December 31, 2005 and 455,000 at December 31, 2004). (Source: Informa Telecoms & Media for 2004 and 2005. Data provided by MobileCom for 2006).
Mauritius: Cellplus Mobile Communications Ltd, created in March 1996, is a wholly-owned subsidiary of Mauritius Telecom, which is 40% controlled by France Telecom. Cellplus Mobile Communications Ltd was the second operator to enter the mobile telephony market in Mauritius after seven years of the exclusive presence of Emtel (a joint company formed by Millicom and a local company). Emtel launched its GSM services in November 1999 and its 3G mobile telephone services in November 2004. MTML, a subsidiary of the Indian operator MTNL, entered the mobile telephony market in December 2006.
Cellplus Mobile Communications Ltd obtained a license and started its commercial operations in October 1996. The company is expanding its services on the GSM900 MHz and GSM1800 MHz bandwidths and has offered GPRS service since December 2004. Cellplus covers 99% of the population. Cellplus is the leader in the local mobile market, with a market share of about 67% as of December 31, 2006 (65.2% at December 31, 2005 and 69% at December 31, 2004), with about 480,000 customers at December 31, 2006 (394,000 customers at December 31, 2005 and 380,000 at December 31, 2004) (Source: Informa Telecoms & Media for 2004 and 2005. Data for 2006 provided by Cellplus).
126.96.36.199.8 Mobile activities: Other equity investments
Orange holds a stake of about 17.5% of ONE GmbH. The other members of the consortium are the German conglomerate E.ON and the Norwegian (Telenor) and Danish (TDC) mobile telecommunications operators.
The ONE consortium was awarded the third Austrian mobile license in 1997. As of December 31, 2006, the ONE network covered, based on its own estimates, about 98% of the population, and it had 2.0 million active customers, with a market share of about 21.5% to rank third.
One was awarded a UMTS license on November 20, 2000 for a 20-year term for the payment of a royalty of 120 million euros.
Portugal: Sonaecom / Optimus
In November 2005, the France Telecom group contributed to Sonaecom the interests (20.18% of the stock and 10.09% of the voting rights) that it held in Optimus, the third largest Portuguese operator, and its stakes in Novis (43.33%, fixed-line operations) and Clixgest (43.33%, Internet activities). France Telecom no longer holds any direct interests in these Sonaecom subsidiaries, but now holds 19.2% of the share capital of Sonaecom.
At December 31, 2006, the Sonaecom network, through its subsidiary Optimus, covered about 99% of the Portuguese population, based on its own estimates. On that date, Optimus had approximately 2 million customer registered (2.4 at December 31, 2005, and 2.1 million customers at December 31, 2004) (source: Informa Telecoms & Media).
Optimus was the third operator to enter the Portuguese market and ranks third in market share with 17.2% as of December 31, 2006 (20.4% at December 31, 2005 and 20.1% at December 31, 2004) (Source: Informa Telecoms & Media).
When the Portuguese government awarded four UMTS licences in December 2000, Optimus acquired a license for 100 million euros. This license was awarded for a period of 15 years.
188.8.131.52 Licensing agreements
The Orange brand was first launched in the United Kingdom in 1994 and has since been licensed to more than 20 mobile telecommunications operators in Europe, Africa, Asia and in the countries of the Caribbean and South Pacific.
Under these licensing agreements for the Orange brand, Orange provides assistance to the licensees to promote the brand in their national markets.
In 2006, pursuant to the strategy of the NExT plan to extend the Orange brand, the brand was expanded beyond mobile to broadband fixed-line telecommunications services in Europe, and to business telecommunications services internationally.
4.3.3 HOME COMMUNICATION SERVICES
The Home Communication Services (HCS) segment includes the fixed-line telecommunication activities (fixed-line telephony, Internet services, operator services) in France, Poland and the Rest of the world, as well as the distribution and support functions provided to the other segments of the France Telecom group.
The HCS business segment recorded revenues of 22.5 billion euros in 2006, as in 2005, and 22.4 billion euros in 2004, before intra-group eliminations.
The operations in this segment are conducted in three geographic regions: France; Poland, which includes TP S.A. and its subsidiaries, excluding mobile operations; and Rest of the world, with primarily (in Europe) fixed-line and Internet activities of the Groups subsidiaries in Spain, the Netherlands and the United Kingdom and (outside Europe) the non-mobile operations Sonatel in Senegal, Côte dIvoire Télécom in Ivory Coast, Jordan Telecom in Jordan and Mauritius Telecom in Mauritius.
In the home communication services segment, France Telecoms strategy in Europe is above all to offer enhanced services, based on the development of ADSL broadband and rapid deployment of the Livebox. This strategy led to the integration of Wanadoo within France Telecom S.A. and the acquisition of a leading position in the ADSL market in Europe.
In the ADSL access market in Europe, France Telecom had 9.7 million customers as of December 31, 2006 and estimated that it ranked first in Europe.
The table below details the breakdown of France Telecoms ADSL customer base (in thousands) for all European countries in which France Telecom is present.
The operations of the home communication services segment are presented in the following sections:
184.108.40.206 Rest of the world
The operations of the HCS segment in France essentially include:
As of December 31, 2006, France Telecom in France recorded 25.5 million fixed lines in the consumer market (26.9 million at December 31, 2005 and 27.5 million as of December 31, 2004).
Growth of ADSL and multi-service offers
The table below indicates the rate of coverage of the population by ADSL services in France:
As of December 31, 2006, 12 million lines carried ADSL (8.9 million at December 31, 2005 and 6.1 million at December 31, 2004), marketed by France Telecom or by other Internet service providers or operations (source: ARCEP Observatoires de lInternet haut débit).
As of December 31, 2006, 5.9 million customers had subscribed to an ADSL offer with France Telecom, which held a market share in ADSL of about 49.3% (4.5 million at December 31, 2005, or a 50% market share; 2.9 million at December 31, 2004, or a 47.9% market share).
Finally, the number of customers subscribing to a France Telecom multi-service offer (Livebox and/or voice over IP (Voice over IP) and/or television) increased as follows:
220.127.116.11.1 Consumer fixed-line telephony services
France Telecoms standard fixed-line telephone services include subscriptions, local and long-distance telephone calls throughout France, and international calls. In addition, France Telecom offers its fixed-telephone subscribers a broad range of added-value services.
The rates charged by France Telecom for fixed-line telephony are governed by specific regulations. In the bid tender for universal service launched by the French government in 2004, France Telecom submitted a general proposal defining rate changes for 2005-2008 and additional commitments, for which the French Telecommunications Regulatory Authority (ARCEP) issued a favorable opinion in February 2005:
The wholesale offer for subscription to telephone service has been effective since April 2006 and the naked ADSL wholesale offer since July 2006.
Subscriptions and services
Access to the telephone network is through the telephone line, which results in flat service fees for line installation and a monthly subscription fee for line maintenance and basic service (publication in the directory, access to quality customer service, use of France Telecom services including voice mail, restricted calling line identification, itemized billing). This service offer is regularly upgraded.
Connection to the telephone network
Startup costs for a telephone line have been at 55 euros including tax since March 2005. Call out costs are also billed where the installation of a line requires the onsite presence of a technician.
Subscription to telephone service
France Telecom offers a range of subscriptions designed to meet the various needs of residential, professional and business customers.
The differences primarily relate to levels of service commitments (guaranteed return of service time), line-related services (caller ID, for example) or publication in professional directories.
The range of contracts for professionals includes the Professional Services Contract, which comprises three additional services to be selected from a number of services offered (for example: caller ID, my contacts, call forwarding, call waiting and, since 2006, enhanced voice mail or the 15 SMS package).
The price for a home subscription was raised to 15 euros including tax in July 2006. A Professional subscription (the Pro contract) was set at 13.95 euros ex-tax in May 2006.
As of October 2005, the general sales conditions for a telephone subscription were modified and the minimum contract term for opening a telephone line was reduced by half, from 12 to 6 months. Greater flexibility was introduced to allow customers wishing to subscribe to a full unbundling offer to terminate his subscription without penalty.
As a fixed-line telephony operator, France Telecom manages the directory database containing subscriber records. This database, subject to the subscribers expressed rights for protection of personal information, is made available to information service providers and directory publishers who request it.
France Telecom sells this database for various purposes, including direct marketing, file enhancement and assistance in saving human life for the emergency services (hospital services (SAMU), Firemen, Police).
In addition, France Telecom has publishing responsibility for the alphabetical directory media: the Annuaire® (white pages printed by department) and the 3611 alphabetical search directory.
In an order dated March 3, 2005, France Telecom was designated for a 2-year period to supply, as part of its universal service, a universal directory (print and electronic) and a universal information service.
France Telecom continues its policy to develop services, some of which require payment of a monthly subscription fee. Thus, for individuals, for several years already France Telecom has been offering added-value services such as voice mail, call waiting, automatic redial, call forwarding, three-way conference calls, caller ID, retention of the number if moving, and 3699 (talking clock), announcement of a new number.
The offer continues to be expanded with innovative services: after SMS from fixed lines, Fun Tones a service for customized ringtones on both mobiles and fixed lines, France Telecom launched in July 2006 the Stop Secret service, which allows a customer to identify and then filter calls with blocked numbers, along with expanded voice mail (MVE), the convergent service from the integrated operator, which was launched in August 2006 and allows customers to consult and manage voice messages from the Orange Internet mailbox.
Telephone calls are billed either by unit, or by duration or at a flat rate. When telephone calls are billed by unit, the price includes a fixed amount (connect charge), and a variable amount charged per second. The portion billed by time is based on a price that varies by call destination, with the application of a standard rate and a reduced rate depending on the time of day.
In October 2003, France Telecom reorganized the price scale for international calls by reducing the number of zones from fourteen to eight and establishing rates per second starting at the first second (introducing the connect charge).
In March 2005, France Telecom reformulated the rate scale for local and national calls, which resulted in a cut in the price per minute for local and national calls, and in two measures to simplify rates:
In January 2005, as in previous years, France Telecom lowered the rates on calls to mobiles in metropolitan France and, in March 2005, replaced the time credit with a connect charge.
In January 2006, rates for calls to mobile handsets applied by France Telecom were again reduced: to Orange, SFR and Bouygues Télécom mobile handsets, for all residential, professional and business customers.
Rate plans for residential customers
The line of rate plans from France Telecom continues to evolve and it was simplified in August 2006 with the end of the sale of the oldest plans, including Les Heures, Le Plan or Appel à Prix Unique.
The Atout Téléphone line introduced in August 2005 includes seven plans that combine flat rates and/or prices per minutes that are advantageous for calls other than flat-rate calls. The flat rates include minutes to all mobile phones in France, fixed-line and mobiles in the Overseas Departments, Europe and North America.
The Atout Partout service, included in all Atout offers (with the exception of the 100 % Illimités offers) gives a customer the benefits of the plan away from home just as simply as at home.
In June 2006, France Telecom launched a new line named Les Optimales, the first telephone offer that includes subscription to the telephone line, a flat call rate and the following services: caller ID, Atout partout, 15 SMS/month to fixed-line and mobile phones in France and, since January 2007, call waiting and call forwarding.
Each offer in the line proposes specific telephone fixed rates (tax included):
Optimale Illimité + 120 at 59 euros/month: unlimited calls 24 hours a day to fixed-line telephones in France, the Overseas Departments and Europe, and all fixed-line and mobile phones in North America + 120 minutes/month to mobiles in France, the Overseas Departments, and Europe.
Optimale Illimité at 39 euros/month: unlimited calls 24 hours a day to fixed lines in France, the Overseas Departments, and Europe, and all fixed lines and mobiles in North America.
Optimale 2hr at 25 euros/month and Optimale 4hr at 32 euros/month: two or four hours of use, 24 hours a day, to all fixed lines and mobiles in France, the Overseas Departments, Europe and North America.
In July 2006, France Telecom added Optimale 8 MégaMax, which includes a flat Internet rate. At 59.90 euros tax included/month, it includes the Atout + 240 telephone plan, the Internet 8MégaMax + TV, telephone subscription, and caller ID, call forwarding, Atout Partout and 15 SMS per month to fixed lines and mobile phones in France.
Rate plans for professional customers
The professional packages line (forfaits Pro) includes local and national call flat rates to Europe and North America. The Plans Pro and Illimités Pro complete this line of offers.
As it did for residential customers, France Telecom launched two Optimales plans for professionals in June 2006: Optimale Illimitée Pro (42 euros pre-tax/month) and Optimale Pro 8MégaMax (55.90 euros/month), both in the form of limited series.
18.104.22.168.2 Consumer online services, Internet access and multimedia
France Telecom offers online services on the Télétel (Minitel) network, Internet access services and multimedia and communication services on ADSL. The changes in these offers are in line with a strategy of convergence in a context of continually expanding customer equipment (fixed-line telephony, broadband Internet, television, mobile).
Minitel and Internet+ kiosks
Minitel is an online service offer accessible through the Télétel network, which allows service publishers to distribute added-value content and receive compensation per consultation based on time.
Minitel is progressively losing ground with the growth of the Internet, but this practical and secure tool still maintains a large audience. Business services like banking/stock market continue to head the list of uses, followed by a multitude of practical everyday services (weather, transportation, routes, tickets, auto prices, games of chance, messages, directories).
The Télétel kiosk model, which has driven the growth of online services, will be extended to the Internet with the Internet+ kiosk. The Internet+ purchase button allows Internet users to easily purchase added-value content billed to their Orange Internet bill. A large number of publishers are offering pay services for both consumers and professionals. At the end of 2006, Orange enhanced its Internet + offer with a subscription plan.
Internet access and multimedia
Since June 1, 2006, France Telecom has combined the Orange, Wanadoo and MaLigne TV brands under the Orange brand name in France, reflecting the transformation of the France Telecom groups offer toward more convergence and simplicity.
The number one objective of the Group is to promote higher speeds for its customers so that they can access more services and multimedia content.
The plans offered to customers include:
In addition and thanks to Livebox (leased for 3 euros including tax/month), the customer may benefit from the following multimedia services in addition to digital television:
Launched in August 2004, Livebox, which is the core of France Telecoms broadband strategy, consists of a domestic gateway connected to the fixed-line telephone that connects various types of domestic terminals at high speed using several communications interfaces: Wi-Fi, Ethernet, Bluetooth. It allows one wireless ADSL connection to be shared among several PCs or online game playing with a console.
Services for Internet users:
New fixed-line/mobile convergent services
On October 5, 2006, Orange launched Unik, the first convergence offer for the general public. Unik is a mobile phone that connects to Livebox for unlimited calls to fixed-line telephones and all Orange mobile phones from home, with a single number, a single address book and an automatic network change when the customer leaves home, without a break in the call.
On December 1, 2006, Orange launched Net et Mobile, the first convergent mobile and Internet access without traditional telephone line subscription. This is an option for the Orange mobile flat rate that includes broadband Internet access, an ADSL line, television at home and on a mobile, and unlimited calls from the mobile.
22.214.171.124.3 Other consumer services
Other consumer services include:
Public phone and card services
With the growth in mobile phones, the use of public telephones and card services is declining steadily. This trend has led France Telecom to gradually reduce the number of its public telephones as follows:
However, France Telecom maintains telephones installed on public roads, including 41,000 installed for Universal Service requirements (which stipulate the equipment obligation to one booth for communities of fewer than 1,000 inhabitants, and two booths above that number).
France Telecom offers several payment methods for its customers who wish to use public telephones. The most widely used is the telecard (prepaid chip card dedicated to public phones). Other payment methods exist: bank card, France Telecom card which charges the price of the call later to the bill for the customers fixed-line phone, coded prepaid cards (including Ticket Téléphone from France Telecom). Since the end of 2006, France Telecom has also offered payment for calls using MONEO in a selection of public telephones.
Communication services using card from any fixed-line station are also offered: France Telecom cards allows customers to call from fixed-line stations in France, from abroad (France Direct services), and from Orange and SFR mobiles to fixed lines, mobile telephones or public phones; calls are billed to the fixed line of the holder of the France Telecom card or to a bank card (CB Phone service).
The telephone ticket is a prepaid calling credit sold in the form of a coded card or a credit card slip. It can be used from public telephones or fixed-line phones, including those with selective access. It includes 4 families of tickets: France Europe, International, Maghreb, Alizés.
This business is highly competitive, particularly to international destinations.
As part of market deregulation, France Telecom, backed by its experience in the information business, on November 2, 2005 launched a full line of new telephone information services, organized into voice multi-channel and web (118712.fr and orange.fr, information tab). The media investment made in 2006 generated strong recognition for the 118 712 number which, thanks to the quality of the service, recorded the best performance per communication euro invested (source: Secodip, July 2006).
The offer includes:
Innovative services complete the information:
According to the IOD study completed in July 2006 with 2,000 persons, out of the four main 118 numbers, the 118 712 number earned the highest rate of user satisfaction for the accuracy of the information provided, quality of operator service, wait time, and speed in obtaining requested information.
Portals and e-merchant
With the regrouping of the Orange and Wanadoo brands under the Orange brand on June 1, 2006, customers now benefit from a unique portal, www.orange.fr, to access the brands Internet and mobile universe.
France Telecom is the leader among all Internet service provider portals in terms of audience in France: the audience for the Orange portals in France was 13.8 million internet users in December 2006 (12.8 million in December 2005 for the Wanadoo portal and 11.7 million in December 2004) (Source: Nielsen/NetRatings Home & Work panel).
The creation of value for the content and services offers is based on the expansion of this audience, using three essential revenue sources:
Online advertising, with an Internet advertising business for the Orange portal and a set of other sites managed by Orange (like Voila, Cityvox, mappy.com, Ifrance, EMW, sports.fr, Leguide.com). This allows advertisers to reach 69% of Internet users through the Orange Advertising network (66% in December 2005) (Source: Nielsen/NetRatings Home & Work panel).
Commercial links, through a search engine or directly marketed by the Orange advertising sales agency, available on the content of the portal.
Pay services, with everyday services (horoscope, meeting services, classified ads, music, ringtone and logo downloads, SMS/MMS transmission), entertainment services (on-demand video and downloads of casual and video games with the Options jeux vidéo and Option Juniors - educational gaming), and the services proposed in partnership with Microsoft in the areas of connected game consoles (XBox Live).
The e-merchant activities (or electronic commerce), are carried by the Alapage brand in a full offer of culture, high tech and entertainment products.
The audience for the alapage.com site totaled 3.1 million single visitors in December 2006 (3.3 million in December 2005) (source: Nielsen/NetRatings).
126.96.36.199.4 Content-related activities
The content-related activities are placed under the responsibility of the Content division, which defines the Groups strategic positioning on the content value chain and ensures the development of the Groups content offer over all its networks (fixed-line, mobile, Internet) in France and abroad. In this respect, it is the only department authorized to make commitments to partnerships and/or acquire rights for films, music, games, sports and news.
France Telecom is developing offers in compliance with French laws in the music, film and audiovisual sectors. All its content services platforms include technical protection measures and tools for digital rights management which ensure the integrity of the works and fair compensation for the copyright holders. France Telecom works to offer the most attractive and the richest content possible, in association with various partners, including: Arte, France Télévisions, Warner, Sony, Lagardère. In addition, France Telecom is present in content security through its subsidiary Viaccess.
In the content segment, the most important operations completed in 2006 were the following:
Finally, France Telecom decided to position itself higher on the content value chain and announced plans to create in 2007 a subsidiary that will invest in film rights, both in co-production and in the purchase of a catalogue, to be attached to the Content division.
188.8.131.52.5 Services to operators
Relations with international operators
Payment agreements signed by carriers for international communications ensure that France Telecom will be paid a fee by carriers using its network for their international calls to France and that France Telecom will pay fees to use the networks of other carriers for calls made from France.
French telecommunication regulations require that France Telecom provide the interconnection of its switched public network with other operators for calls leaving the France Telecom network or incoming from the networks of competing operators.
This area of activity is regulated by the ARCEP. The call volumes exchanged between France Telecom and the other operators are valued using rates approved by the ARCEP.
184.108.40.206.6 Sales, distribution and customer service
In the area of sales, distribution and customer services, the sales department of the France Operations division is responsible for customer relations for all Group products and services intended for consumers and small and medium businesses.
The Enterprise division works with very large national and international companies, primarily through Equant in the rest of the world.
The Networks, Operators and Information System division distributes France Telecom products and services to other telecommunication service providers and operators.
Consumer products are sold through a variety of channels, in particular:
Business customers (excluding major accounts) are also served by the sales department of the France Operations division for voice, mobile and data transmission activities, with a network of 11 Business Agencies throughout France. These agencies have sales personnel dedicated to a portfolio of customers along with a network of telephone advisors ready to provide customers with information on the offers, the status of their orders, and the service quality of their installations. Moreover, the France Telecom Internet site allows companies to manage their contracts and to place additional orders in real time.
220.127.116.11.1 Fixed-line services and Internet access
TP Group offers a line of fixed-line telephony services that includes local and long-distance calls and international calls, calls from fixed-lines to mobiles, low-speed and broadband Internet. In December 2006, TP had 10.1 million access lines and 1.7 million ADSL customers.
In order to stabilize fixed-line telephony revenues, TP Group has set up a new rate plan (NTP) offering either a reduction or free call minutes on weekends and during non-peak hours, with the goal of moving customers from standard rate plans to monthly fixed-rate plans that generate higher revenues. TP Group heavily promoted this new rate plan through the period of 2004-2006.
In the first half of 2005, TP Group introduced a free 60-minute call service for both local and national calls, which reinforced the appeal of the new rate plan. As a result, these offers became the subscription plans most frequently subscribed by TP customers in 2005 and 2006 and the majority of the customers with standard subscription plans moved to the new rate plan. At the end of December 2006, more than 3.9 million customers had subscribed to the new plan. The percentage of monthly subscriptions in all fixed-telephony revenues at the end of December 2006 was 54%.
In February 2006, TP launched the startowy tp rate plan, identical to a simple lease of one line based on costs. TP also developed convergent offers in 2006, like the single fixed-line and mobile voice mailbox for TP and Orange customers, launched in March 2006.
In addition, TP is developing an integrated operator strategy with the introduction in December 2005 of the Livebox tp based on the Livebox model, with Wi-Fi connection. The Livebox tp offers users telephony over IP (since February 2006), television over ADSL (June 2006), video on demand (September 2006), voice/Internet/TV triple-play (October 2006), and will soon offer video recording and single telephone (UMA).
An increase in revenues from broadband traffic is a key strategic objective for stabilizing revenues from the fixed-line business. In 2001, TP Group launched broadband Internet access using the ADSL technology under the brand Neostrada TP. Broadband Internet access has expanded very rapidly to reach over 1.7 million customers as of December 31, 2006. The extended offer of Neostrada TP and a number of promotional offers are a means to compete in a highly competitive broadband market and increase TPs market share. At 31 December 2006, approximately 97% of the TP Groups lines were eligible for ADSL connection.
The current ADSL offers ranges from an initial access at 128 Kb/s to higher speeds up to 6144 Kb/s. The most distributed ADSL option is Neostrada TP at 128 Kb/s introduced in 2004. In order to accelerate migration to more advanced products and increase the unit revenues generated, TP Group launched a program to promote ADSL at 512 Kb/s with options for higher levels. The options at 512 kb/s as a percentage of total ADSL accesses represented 44.5% at the end of December 2006. The promotions conducted in 2006 for the 512 Kb/s options and above were focused on the offers Stay with Neostrada TP, Start promotion (summer promotion), Megainternet promotion, Start Promotion modification & continuance (only for the 512 kb/s option). In the coming years, TP plans to continue to stimulate migration of ADSL customers to the highest Neostrada TP options in order to provide them with new multimedia services that require more bandwidth.
In 2005, TP Group acquired the interests of the minority shareholders in Wirtualna Polska, which operates an Internet portal (wp.pl) that ranks second in Poland in terms of audience. TPs objective is to develop content services in collaboration with Wirtualna Polska. One illustration is the launch of the eVoucher in November 2006: Neostrada customers receive electronic vouchers valid with the online boutiques of TP and Wirtualna Polska.
18.104.22.168.2 Business services
TP Group improved its business service offer in 2006, from the standpoint of technology, rates and access policy.
In 2006, TP launched several promotional campaigns to make its offer more competitive. The principal components were the grouped access sale (essentially ISDN) and terminals, as well as the offer of additional services (DSL access, for example). The reduction in standard installation fees and attractive rates per second with a fixed service contract extension were highly successful.
Rate policy and service level contract
The main change in rates is in the fixed-line to mobile rates, which dropped 20% for businesses.
Demand from business customers for flat-rate call plans is high, as shown by the doubling of the profit profile plans on ISDN into primary accesses since November 1, 2006. At the same time, the monthly subscription cost for the profit profile plan was raised in order to take into account the significant increase in traffic volumes.
In order to ensure customer satisfaction, TP also pays attention to the quality of the technical services and has set up Service Level Agreements. These agreements include three levels of service, with each level corresponding to the time needed to repair incidents reported. The basic comfort level, which corresponds to a commitment to repair within 24 hours, is available to all business customers that have subscribed to a rate per second plan. The highest level is a repair time of four hours.
VoIP/ PABX/ Diatonis business solutions
As part of the extension of technological developments begun in 2005, the new service based on IP protocol: Business Talk IP, was launched in October 2006. It allows interconnection with business sites equipped with PABX IP by intermediary of IP-VPN service of TP. It offers free call transmission within the VPN network (on-net) and extremely competitive prices for calls transmitted outside to the public network from a centralized portal (off-net). Customers pay a monthly subscription fee for this service per voice channel and for the off-network traffic. TP will also provide complete and integrated management of the network (voice and data) and the support necessary during installation. The commercial launch is planned for the first quarter of 2007.
Another growth vector is through the PABX. In August 2006, TP launched its PABX IP offer based on call management technology from Cisco that allows free internal calling and includes advanced IP functionalities. This offer provides a global solution for the organization of the IP telephony of a major corporation as well as functions to supplement the IP-VPN network and the Business Talk IP offer. On payment of installation charges and a monthly fee, TP will supply customers with the Cisco call manager, IP telephone terminals, and network management for the PABX IP.
In May 2006, TP introduced a new complete line of PABX under the Diatonis tp and E-Diatonis tp brand, which includes a full line of on-site complementary services gives customers both a standard solution and custom solutions within the offer.
In 2005 and 2006, TPs portfolio of data transmission products was enhanced with innovative solutions (IP-VPN tp, DSL tp, new options Metro Ethernet, Intranet Business Everywhere, Internet and voice service offers, Ethernet VPN tp). IP-VPN tp, which is TPs central service offer for businesses, was expanded with new functionalities: IP-VPN customer management, quality criteria on the DSL access, customized offers.
In order to meet market needs, TP has developed new options for the DSL tp offer for small and medium businesses, including firewalls, hosting solution, and new speed options. Likewise, to meet customer demand, TP strengthened the attractiveness of the IDSL offer (broadband Internet access dedicated to businesses) with a number of promotions and added-value services (hosting solution, new type of modem).
Finally, TP developed within dense urban zones broadband data transmission networks like Ethernet VPN tp, which is a local network interconnection service capable of transmitting the full bandwidth of the connected customer networks and provide them with dedicated Internet access.
22.214.171.124 Rest of the world
Outside France and Poland, the France Telecom subsidiaries in the home communications services segment in Europe are France Telecom España, which is an alternative operator in Spain (formerly Uni2) and an Internet service provider, Orange UK, an Internet service provider in the United Kingdom, and Orange Nederland, an Internet service provider in the Netherlands. The rebranding under Orange of the operations previously performed under the Wanadoo brand occurred on June 1, 2006 in the United Kingdom, June 27, 2006 in the Netherlands, and October 3, 2006 in Spain.
In all these countries, priority is given to the deployment of unbundling, the development of the ADSL broadband offers and convergence offers made possible by France Telecoms positions as an integrated operator in each of these countries.
Orange UK in the United Kingdom focuses its efforts on deploying unbundling, which began in 2005, with 485 switches unbundled as of December 31, 2006 (154 at December 31, 2005). Orange UK builds on its dual position in wireless and the Internet to develop combined offers and a unified portal.
Orange UK offers its customers a line of broadband Internet access products, which was modernized in October 2006 and currently includes:
For the other customers who want low-speed Internet access, Orange UK offers a Pay as you go free access plan with monthly Anytime rates.
In June 2006, the first convergent offers between mobile and the Internet were launched with the broadband Free Starter when the customer subscribes to a mobile contract for 18 months at a minimum rate of £30 per month.
In Spain, France Telecom España continues to pursue unbundling and is focusing on the migration of existing customers to broadband and the development of convergence offers. 55% of its ADSL customer base was unbundled as of December 31, 2006 (29% at December 31, 2005). As of December 31, 2006, France Telecom España had approximately 640,000 ADSL customers (compared with about 563,000 at the end of 2005).
France Telecom España markets low-speed Internet offers and broadband offers on ADSL and is the leading competitor of Telefonica for Internet access in Spain.
Taking advantage of its position as a fixed-line operator and Internet service provider, France Telecom España proposes offers that combine Internet access and switched telephone access with selected plans:
A single ADSL offer is also proposed, with a rate of 4Mb/s.
The second half of 2006 was marked by the rebranding, the integration of wireless and Internet within a unified portal, and the launch of new convergence offers with the Livebox: launch of the IPTV offer in mid-September, coupled with ADSL (1Mb/s or 2Mb/s) and switched voice calling; launch of Unico, a telephone allowing unlimited calling over VoIP behind the Livebox at home and on the Orange mobile network outside the home.
In the Netherlands, Orange Nederlands top priority is to increase the number of customers on its unbundled network.
The ADSL offer includes:
Convergence is being implemented with the opening of the unified Orange portal for mobile and the Internet in June 2006, and with the October 2006 launch of Unique, the telephone that allows unlimited calling to fixed-line phones and Orange mobiles behind the Livebox at home and on the Orange mobile network outside the home.
In all the countries in which it is present, the Group distributes its access offer through multiple distribution channels compensated on the basis of their services:
In the United Kingdom, the commercial network has about 3,550 points of sale, including 320 for Orange.
The table below details the breakdown of the Internet customer base by type of offer (thousands of subscribers) for the European countries in which France Telecom is present (outside France and Poland):
126.96.36.199.2 Outside Europe
France Telecom indirectly holds a 25% interest in Intelig, the alternative fixed-line telephony operator for national and international long-distance calls in Brazil. This operator launched its operations in the first half of 2000. This equity interest is being held for sale.
Asia and Pacific
In July 1997, France Telecom signed a partnership agreement with VNPT, the Vietnamese fixed-telephony operator. Under the terms of this agreement, France Telecom provides financial, technical and management assistance in a project to install new lines east of Ho-Chi-Minh City.
In April 2002, France Telecom formed Tahiti Nui Telecom, in partnership with the Office of the Post Office and Telecommunications of French Polynesia (OPT), in which it held 34.0% which was sold to the OPT in March 2007. As of December 31, 2006, this company offered telephony services for international calls from French Polynesia to 53,000 fixed-line customers of the OPT.
Middle East and Africa
France Telecom holds a 51% interest (% of control) in Côte dIvoire Télécom, the incumbent telecommunications operator in Ivory Coast. CI Telcom provided fixed-line telephony services on 283,000 lines as of December 31, 2006 (compared with 250,000 lines at December 31, 2005 and 225,000 lines at December 31, 2004). CI Telcoms activity was impacted by current local events, which led to an impairment of the full value of this asset as of December 31, 2004.
France Telecom controls and holds a 42.3% interest in Sonatel, the incumbent telecommunications operator in Senegal. Sonatel provided its fixed-line telephony services on 311,000 lines as of December 31, 2006 (compared with 267,000 lines as of December 31, 2005, and 245,000 lines as of December 31, 2004).
France Telecom holds 51% of Jordan Telecommunications Company, which provided fixed-line telephony services on 648,000 lines as of December 31, 2006 (compared with 650,000 lines at December 31, 2005, and 638,000 at December 31, 2004). Jordan Telecommunications Company was offered on the Amman (Jordan) stock exchange in 2002.
France Telecom indirectly holds 40% of Mauritius Telecom, the incumbent operator in Mauritius. Mauritius Telecom had approximately 405,000 lines at December 31, 2006 (compared with 425,000 at December 31, 2005 and 354,000 at December 31, 2004).
4.3.4 ENTERPRISE COMMUNICATION SERVICES
The Enterprise Communication Services (ECS) segment includes the business solutions and communication services in France and the global business services of Equant, a subsidiary of France Telecom, marketed under the Orange Business Services brand. The ECS segment in 2006 generated revenues of 7.7 billion euros, compared with 7.8 in 2005 and 8.2 billion euros in 2004, before intra-group eliminations.
188.8.131.52 Fixed-line telephony and traditional data services
Fixed-line telephony services and traditional data include all services corresponding to the traditional activity of a fixed telecommunications network operator, including access offers and switched voice traffic as well as traditional data services (infrastructure and non-IP managed networks IP).
184.108.40.206.1 Traditional fixed-line telephony
Traditional fixed-line telephony services include access, telephone calls and customer relationship management (CRM).
Access to the telephone network in France is through the telephone line, which results in flat service fees for line installation and a monthly subscription fee for line maintenance and basic services (publication in the directory, access to quality customer service).
The line of subscriptions designed to meet the various needs of professional customers and businesses differs primarily in the level of service commitments (guarantee of re-establishment time) and the availability of line-related services (for example, caller ID or publication in professional directories).
In addition, professional customers and businesses have had access since 1987 to the ISDN service (Integrated Service Digital Network) under the Numéris brand, which provides voice, data and image transmission at speeds much higher than ordinary telephone lines, while providing the same support.
National and international calls
As for residential customers, telephone calls may be billed per unit based on time or at a flat rate. For flat-rate offers, new diversified rate plans, particularly unlimited flat-rate plans, have been developed to meet different user profiles and to retain customers.
The line of monthly plans for professionals includes: the Forfait Local Pro (local professional package) and the Forfait Local PME (local call package for small and medium sized businesses), a line of national monthly contracts with Forfait France Pro and Forfait France PME, plans covering calls to mobile telephones (since October 2003, with an extension of the line in January and September 2004) and the Forfaits Pros Europe et Amérique du Nord plans.
Illimité PME and Optimale PME Illimité are monthly contracts for unlimited voice calls to fixed-line phones in continental France or to fixed-line phones in the French Overseas Departments (local and inter-urban).
France Telecom also offers major companies a business telephony service based on a Virtual Private Network (Atout RPV). This plan offers:
Customer Relationship Management (CRM)
The Audiotel service consists of a kiosk service call numbers (e.g.: home banking and weather services), a portion of the revenues from which is repaid to the service provider company.
The Numéros Accueil services consists of providing dedicated numbers for business telephone answer centers. Three types of numbers are available for full, partial or no payment by the company: Green, Azur and Indigo numbers.
220.127.116.11.2 Traditional data services
Traditional data services consists of traditional infrastructure services and non-IP (historical) managed data service solutions.
Traditional infrastructure services
France Telecom provides leased lines to its professional and business customers that are either digital (Transfix digital lines) or analog. The leased lines are gradually being replaced by the DSL technologies. At the end of December 2006, the DSL accesses and leased lines represented 83% and 17% respectively of the accesses to data transmission services (compared with 67% and 33% respectively at December 31, 2005, and 51% and 49% at December 31, 2004).
Optical fiber services - historical solutions
France Telecom has been using fiber optic cable at the core of its national network for several years. It is also the medium that generally connects the strategic sites of businesses.
The optical fiber transmission offers available in all French departments provide standard speeds as high as several Gbit/s.
Short distance interconnection needs are covered in all cities with populations of more than 10,000 persons. France Telecom offers traditional plans such as SMHD, MultiLAN, InterLAN. The Intracity offer, intended for local communities, continues to evolve and adapt to the new technologies.
Non-IP managed data services
Various service plans have been offered in this context for several years, including Frame Relay, X.25 or Global Intranet. The customers using these services, in France and internationally, are, however, gradually migrating to solutions like IP-VPN or Oléane VPN.
18.104.22.168 Advanced network services
22.214.171.124.1 Advanced infrastructure services
DSL and Wi-Fi services
In France, the DSL Enterprise services allow the various sites of a company, such as regional agencies, maintenance sites and commercial branches, to be interconnected through DSL.
For areas that are not connected to ADSL, France Telecom has a broad range of access to broadband Internet via satellite and Wi-Fi and provides, in collaboration with the local authorities, broadband coverage to local districts located in rural areas. The Pack Surf Wi-Fi is, for example, an alternative broadband Internet access solution for local communities and businesses located in zones not served by ADSL. These solutions are now available throughout France and supplement DSL coverage.
Fiber optic services
France Telecom continues to develop in its new generation of very high speed services in France, and is deploying the Giga Ethernet technology on its lines to reach a speed of 10 Gbit/s.
In 2004, France Telecom launched a new plan for equipping the territory with broadband intended for businesses of all sizes. This plan involves the optical fiber high speed and very high speed connection of certain targeted economic development zones (ZAE). As part of the accelerated deployment of very high speed in 2000 economic development zones, France Telecom announced the launch in October 2005 of the symmetrical 2Mbits guaranteed broadband access offer for businesses at the same price throughout France, including the Enterprise Internet access plans and the virtual private IP network plans available since December 1, 2005.
The Ethernet LINK interconnection offer designed for major multi-site companies with data centers was launched in November 2005. This plan interconnects their strategic sites with their information center and transmits the data flows for all the companys applications. Based on the France Telecom optical network of 2 million kilometers of fiber optic cable, Ethernet LINK is available throughout metropolitan France.
The Ethernet backbone line was enhanced with the MAN Ethernet plan, which offers speeds ranging from 100 Mbit/s to 1 Gbit/s and is available in the first 15 French cities, and allows businesses to integrate new usages such as VoIP or critical applications.
126.96.36.199.2 IP network services
The IP Enterprise network is the platform for a broad range of services, including IP-VPN, Internet access services, possible packages with other services such as email, hosting and security.
France Telecom offers its customers Internet access services that include access to the backbone network dedicated to businesses, which is interconnected with the worldwide Internet via the France Telecom long-distance network core. This access can be through a variety of media, including DSL, leased lines or even optical fiber.
In 2005, France Telecom launched Business Internet, a set of high performance and secure Internet solutions, built à la carte. Launched in the first half of 2006, the Business Internet Centrex plan is an integrated business broadband and IP telephony Internet access solution. With Centrex, the customer eliminates the management and maintenance requirements of a telephone switchboard.
IP virtual private networks / convergence / VoIP
The Internet Protocol (IP) has become the technological base for all communication solutions. France Telecom is developing its convergence offers, particularly in telephony over IP, allowing its customers to make gains in productivity, to increase flexibility and adaptability, and to develop new uses such as collaborative work, and to converge their different communication media.
In 2003, France Telecom launched the unified VPN offer in France, the first fixed-line/mobile convergent telephony offer based on a Virtual Private Network.
In 2004, France Telecom continued to expand its line of Internet Protocol telephony solutions by introducing two new turnkey offers for the small sites of major corporations and small and medium businesses (the access e-telephony service and the e-telephony Internet pack) and customized plans for major corporations and multinationals.
In 2005, France Telecom continued to capitalize on its positioning as an integrated operator by marketing convergent offers such as the Business Talk line intended for small and medium businesses, the first offer of 2 in 1convergent services in the French market: integrated fixed-line and mobile. The Business Talk pack simplifies the management of fixed-line and mobile telecommunications and facilitates the use of landlines and mobile phones with simple and advantageous rates, analytic tools for all calls, and a single landline and mobile voice mailbox for users.
A broad range of IP communication solutions operates around the Business Livebox, the single platform for convergence services launched in France in June 2006. It allows businesses to make a simple and progressive migration toward voice over IP and integrate traditional Internet access services and the networking of the companies sites over an xDSL link.
France Telecom offers specific plans for small and medium businesses:
The offer for major multi-site corporations and multinationals has also been expanded with:
The Business Together plan launched at the end of 2006 and based on IP-VPN solutions, is a unified communications suite that gives the user easy access from his computer via IP telephony software (softphone) to the collaborative working tools vital to a business: audio and web conferencing.
Outside France, France Telecom also combined its expertise in network services with an expanded offer of added-value services to provide global, integrated and customized communications solutions. These solutions are based on network services that allow users/employees to access information systems, applications, and their mailboxes. France Telecoms network service offer includes IP-VPN MPLS, used at the end of 2006 by over 1,450 customer businesses (compared with 1,300 at the end of 2005 and end of 2004) and available in 146 countries and territories at the end of 2006 (compared with 146 at the end of 2005 and the end of 2004).
For smaller sites, France Telecom has offered a line of solutions known as Small Office Solutions since 2005. These solutions are based on three levels of DSL services to allow customers to enhance performance and optimize the level of support they needs on their different sites through their global virtual private network.
188.8.131.52.3 Mobility solutions
The Business Everywhere offer gives businesses of all sizes a solution, which gives their traveling employees remote access from their PCs to their applications (messages, business applications), via any network using a single user interface. This offer was expanded in 2005 to communicating PDA users.
As of December 31, 2006, the Business Everywhere plan had 486,000 users in France, an increase of 19% over December 31, 2005 (compared with 408,000 users at December 31, 2005, an increase of 27% over December 31, 2004).
184.108.40.206 Extended business services
France Telecom is developing in France and abroad innovative services with high added value in order to:
This level of services may include the outsourcing of communications infrastructures and the integration of complex networks for major corporations and multinationals that are anxious to reduce the total cost of their infrastructures and focus on their core business.
220.127.116.11.1 Integration services
France Telecom offers end-to-end integration services ranging from WAN to LAN to PBX up to the customers telephone station. To assist its customers in their transformation to IP and in the utilization of new usages, France Telecom is implementing solutions to allow companies to migrate progressively from traditional switched networks (PBX) to leading edge IP communication services, and including consistent and global service level agreements (SLA). France Telecom provides integration services through on-site teams and online support services.
18.104.22.168.2 Project consulting and management
In both France and abroad, France Telecom offers added-value services such as project consulting and management to assist businesses in defining their strategy from assistance with solution design up to and including installation.
France Telecom also assists businesses to deploy their telecommunications solutions. The deployment offer ensures the service of the business network and related services under the best conditions for customer satisfaction in terms of engineering, coordination and delivery times.
22.214.171.124.3 Extended business services
Management of customers critical applications.
In the context of the convergence of telecommunications and information systems, France Telecom offers services related to information systems by positioning itself on the critical application.
France Telecom hosts, manages and operates very critical communications service platforms on behalf of customers: messaging, security, customer relations management platforms, machine-to-machine, collaborative work tools. France Telecom offers applications in ASP mode (Application Service Provider) designed for small and medium businesses and local authorities. The ASP mode consists of pooling the information intelligence on servers outside the company for the purpose of controlling costs, facilitating the deployment of applications, and improving the reactivity of the companys information system.
In order to ensure the global security of the information system, France Telecom offers a line of solutions that are among the broadest in the market in order to secure access to the network, protect the companys resources, detect and anticipate attacks.
Backed by dedicated skills and expertise, France Telecom is also positioned in specialized integration, management, application and intermediation systems, particularly in the financial, health (Almerys subsidiary) and e-administration sectors.
France Telecom offers electronic payment, dynamic virtual card and secure flow management services via the hosting of interbank trading platforms performed by its subsidiary SETIB.
Because it allows remote equipment to communicate, without human intervention, Machine-To-Machine, or M2M, is open to all kinds of applications in all business sectors: remote management of equipment, urban property, a fleet of vehicles, anticipation of maintenance operations and supplies, remote security and alert systems, and management of environmental risks (floods, pollution peaks), patient telemonitoring. With its Business Machine-To-Machine offer, France Telecom is the first operator in Europe to launch a complete M2M offer, including connectivity solutions and platforms, and packaged and custom offers that meet complex integration needs.
Customer relationship management
France Telecom offers a broad range of services to businesses to manage incoming and outgoing contacts (colored numbers) and offers a line of custom, multi-channel contact solutions so that businesses can progressively manage all their customer contacts, whatever the communication method used (telephone, fax, e-mails, chat, SMS, call-back, virtual call centers, voice recognition services). France Telecom completes this line with a turnkey solution for small and medium businesses.
126.96.36.199.4 Added-value services related to the network or infrastructure
In France, France Telecom offers a number of services linked to its access offer (voice, data, mobility).
For access to the telephone network, there are services such as speed dialing, call management and telephone conferencing, invoice management, communication of the new number, number retention, and virtual private networks (voice) with speed dialing and network management services.
For data access, there are options such as web opening for VPN access, or response or re-establishment time guarantees.
In mobile solutions, France Telecom offers optimization solutions with a plan for flow concentration.
188.8.131.52.5 Other Business Services
Other Business services include broadcast services and equipment sales and leases.
France Telecom is present in the broadcast market through its subsidiary GlobeCast. GlobeCast is established worldwide through its 15 teleports and technical centers. GlobeCast transmits video and multimedia content on its satellite and optical fiber network on behalf of television and radio broadcasters, businesses, government institutions or point of sale networks. GlobeCast offers ingest services that digitize and distribute content on all types of networks or platforms, such a satellite television, cable networks, video on mobile, television on ADSL, or even work station streaming.
Equipment sales and leases
France Telecom installs and integrates network equipment for its customers, such as routers, PBXs and LANs (offered for sale or lease). As part of its overall assistance to the customer, France Telecom also offers PC fleet management services.
Through its subsidiary Etrali, France Telecom provides connectivity systems, services and solutions to the international financial community to manage its voice and data communications between trading rooms and their integration in the corporate information system. Etrali is the primary partner with more than 1,600 trading rooms in 48 countries.
4.5 ACQUISITIONS AND DIVESTITURES
The main acquisitions and divestitures of France Telecom are described in the Notes to the consolidated financial statements under Note 4 Main acquisitions and disposals of companies and changes in scope of consolidation, Note 35 Subsequent events and Note 37 Supplemental Disclosures.
In addition, in March and April, 2007, France Telecom acquired licences in three African countries to develop mobile telecommunications and internet activities under the Orange brand: a mobile and internet licence in the Central African Republic; a mobile license in Guinea Bissau, granted to Sonatel; and a mobile license in Guinea, formerly held by the operator Spacetel, purchased by Sonatel for a renewable term of 15 years. The commercial activities of the new Orange subsidiaries in these countries are scheduled to start before the end of 2007 (before mid-2007 in Guinea Bissau).
4.6.1 PERSONAL COMMUNICATION SERVICES
Orange faces significant competition from European or international wireless telecommunications providers such as Vodafone, T-Mobile, TIM (Telecom Italia Mobile), Telefónica Móviles, NTT DoCoMo and Hutchison Whampoa, all of which have international networks. In addition, Orange faces competition from national operators in each of the countries in which it operates. To the extent that use of mobile telephones is complementary to fixed line telephones, Orange also competes with fixed-line telecommunications providers.
Orange Frances main competitors are SFR and Bouygues Telecom. SFR, which is controlled by Vivendi and partially owned by Vodafone, started its GSM900 operations in 1992. Bouygues Telecom, which is controlled by Bouygues, has operated a GSM network since 1996. Orange, SFT and Bouygues Télécom are the three operators that hold UMTS licenses in the French market. A bid tender to award a fourth 3G license was launched in March 2007.
At December 31, 2006, the market in France included 25 mobile telephony brands. In addition to the three network operators, Orange, SFR and Bouygues Telecom, new MVNO agreements or licenses generated the commercial launching of the following 13 new brands in 2006:
The following table shows the market shares of each of the network operators in France (at December 31):
Source: Informa Telecoms & Media
184.108.40.206 United Kingdom
The principal competitors of Orange UK are the three other existing mobile telephony network GSM operators: Vodafone, O2 (a wholly-owned subsidiary of Telefónica) and T-Mobile (a wholly-owned subsidiary of Deutsche Telekom). All launched their operations before Orange UK.
In addition to these three operators, Orange UK also faces competition from the UMTS newcomer, Hutchison 3G UK Ltd, which launched its services in March 2003 under the brand 3. Hutchison 3G UK Ltd is held by a consortium, in which the majority is held by Hutchison Whampoa.
In November 1999, a joint venture between the Virgin Group and Deutsche Telekom became the first virtual wireless network operator in the United Kingdom, when it launched its service that operates by purchasing call time from One2One (now T-Mobile). Virgin completed its public offering in July 2004 and operates under a new supply agreement with T-Mobile. Other mobile network virtual operators are presently operating in the United Kingdom.
The following table shows the market share of each of the network operators in the United Kingdom:
Source: Informa Telecoms & Media
In 2006, France Telecom unified its Enterprise operations (represented by Equant) and its Internet activities (represented by Wanadoo) under the Orange brand. As a result, the Orange brand, now extended to non-mobile activities, builds on this diversity of services offered to customers. At the same time, it is evolving in a competitive environment expanded to these new activities, for example the broadband market with players like Talk Talk (operated by Carphone Warehouse), SKY and British Telecom.
Orange has been competing for several years with two other operators: Telefónica Moviles, a subsidiary of Telefónica, and the Spanish subsidiary of Vodafone. In November and December 2006, other players appeared, including Yoigo (previously Xfera, a subsidiary of TeliaSonera in Spain) and the MVNOs (Carrefour Mobile, Happy Móvil-The Phone House, and Euskaltel). Only Telefónica and Vodafone hold a GSM license and a UMTS license. Yoigo holds the fourth UMTS license and the other operators are MVNOs.
The following table shows the market share of each of the network operators in Spain:
Source: Informa Telecoms & Media
Although the market is still growing rapidly, 2006 was marked by intensified competition with a significant change in the environment: the shift of Amena under the Orange brand, the late arrival of the fourth UMTS operator (Yoigo), and an increase in MVNO services (Carrefour Mobile, Happy Móvil-The Phone House and Euskaltel).
Finally, a large number of MVNO licenses were also granted by the regulatory authority.
PTK, which has been operating since September 2005 under the Orange brand, initiated its GSM activity in 1998, two years after its competitors. In 2006, PTK became the leading mobile telephony network operator in Poland based on number of customers (Source: PTK). The other mobile telephony network operators are PTC (majority held by Deutsche Telekom) and Polkomtel (operating under the Plus brand and held by Vodafone, TDC and Polish companies).
The following table shows the market share of each of the network operators in Poland (as of December 31):
Source: Informa Telecoms & Media.
As of December 31, 2006, 125 companies had obtained authorization to conduct an MVNO activity, and three had effectively signed an MVNO contract.
The most significant events in 2006 in the Polish market were the signatures of the following agreements:
The mobile operator P4 announced the launch of its services on its UMTS network in March 2007.
220.127.116.11 Rest of the world
The following tables (at December 31) show the market share of the network operators in the principal countries in which France Telecom operates.
Belgium: Mobistar competes with two other operators: Belgacom Mobile (under the Proximus brand), wholly owned by Belgacom after the purchase of Vodafones stake in 2006, and BASE (formerly KPNO) wholly owned by KPN Mobile.
Source: Informa Telecoms & Media
The Netherlands: The Dutch market is one of the most competitive mobile telephone markets in Europe with four operators: KPN Mobile which purchased Telfort in October 2005; Vodafone; T-Mobile; and Orange.
Source: Informa Telecoms & Media
Romania: Orange Romania competes with three other operators. Vodafone Romania, wholly owned by Vodafone Group plc, Telemobil/Zapp owned by Inquam, which is itself held by Qualcomm, and Cosmote, 70% held by Cosmote Group and 30% by Rom Telecom, the Romanian national fixed-line operator.
Source: Informa Telecoms & Media.
Slovakia: Orange Slovensko currently competes with another operator T-Mobile (Eurotel), which is wholly-owned by Slovak Telecom, which is majority-owned by Deutsche Telekom.
Source: Informa Telecoms & Media.
Switzerland: Orange Communications S.A. competes with other wireless network operators, including Swisscom Mobile, which is owned by Swisscom, and Sunrise, owned by TeleDanmark.
Source: Informa Telecoms &Media
Egypt: ECMS (Mobinil) was the first wireless operator in Egypt. At December 31, 2006, ECMS held the largest market share, for both the prepaid and contract. The only competitor of ECMS is Vodafone Egypt. In 2006, two UMTS licenses were awarded to Etisalat and to Vodafone Egypt.
Source: Informa Telecoms & Media for 2004 and 2005. Egyptian regulatory authority (NTRA) for 2006.
In 2006, competition was focused on broadband and the year was marked by consolidation transactions and by convergence in the broadband services offered: rapid expansion of the triple play offers (Telephony, Internet, television) and the launch of convergent offers with wireless.
Consolidation in the fixed-line market
Neuf Cegetel completed a public offering in October 2006, after SFR and Louis Dreyfus raised their interest in the company, and it purchased the French subsidiary of AOL in September, strengthening its position in the Internet and ADSL market.
SFR intends to enter the ADSL market in 2007 and has signed a virtual fixed-line operator agreement with Neuf Cegetel for this purpose, and is now in exclusive talks to acquire Télé2 France.
In 2006, there is only one cable operator left in the French market after the purchase of Noos by Numericâble in the first half. Generally, cable has a weak presence in France, with a total of 650,000 broadband Internet customers at the end of the third quarter of 2006 (source ARCEP: Observatoire des marchés, Q3 2006).
At the end of 2006, France Telecoms leading competitors in the entire consumer fixed-line market were: Télé2, NeufCegetel, Free, Telecom Italia, Club Internet and Numéricâble.
Concentration of the competition in broadband
Broadband represented 80% of Internet subscriptions at the end of the third quarter of 2006 and DSL lines represented 94.4% of the broadband accesses (ARCEP: Observatoire des marchés, September 30, 2006).
The leading Internet service providers, as well as the network operators, made a choice to invest in their infrastructures in order to migrate toward unbundling.
At December 31, 2006, the unbundled zones covered 60% of the population (source: ARCEP: unbundling indicators, September 30, 2006).
(source: ARCEP: Tableau de bord du dégroupage at December 31, 2006)
Full unbundling allows alternative operators and Internet service providers using it to provide their customers with a single bill including telephone line subscription, telephone calls and broadband services (Internet access, television via ADSL and VoIP).
France Telecoms launch of a wholesale offer of telephone subscription service in April 2006 and a wholesale offer of bare ADSL in July 2006 will allow offering subscription offers to the included line.
VoIP grew substantially in 2006, as the percentage of Voice over IP communications rose from 11% in the last quarter of 2005 to 18.6% in the third quarter of 2006 (ARCEP: Observatoire des marchés).
Most of the operators have a triple play offer (Internet, telephony, television): Free, Neuf Cegetel, Telecom Italia (Alice), T-Online (Club internet), Noos-Numericâble. The Darty distributor introduced an ADSL offer, with the triple play option by using the Completel network.
The fixed-line and wireless convergence offers appeared in 2006 with: Unik, the GSM/Wi-Fi convergent telephone from France Telecom, the Wi-Fi modem from Free adapted to allow telephony over Wi-Fi with a hybrid telephone, and Twin, the hybrid telephone from Neuf Cegetel on GSM and Wi-Fi.
In 2006, France, Telecom, Iliad and Neuf Cegetel announced their intention to invest in optical fiber (FTTx), which will offer higher speed, and to deploy new added-value services.
In the traditional voice market, there was a decline in the number of subscriptions with carrier selection, both on a per-call basis and with pre-selection, which was tied to the growth in VoIP: -12% between September 2005 and September 2006, with 5.5 million customers for preselection and 1.7 million customers for call-by-call selection at September 30, 2006 (ARCEP: Observatoire des marchés).
Operator market share:
On switched voice, the leading competitors of France Telecom in the consumer market are Télé2 and Neuf Cégétel. France Telecoms market share, measured on traffic using its networks, continued steady at about 68%.
Source: France Telecom.
In broadband Internet, France Telecom confirmed its leadership with the success of the Livebox and its multi-service offers.
According to Idate, the market share for the various broadband operators at the end of June 2006 was as follows:
France Telecoms market share in ADSL was estimated at approximately 49.3% as of December 31, 2006 (source: France Telecom).
Orange Publicité, the Orange advertising division is a leader in the online advertising market in France in terms of audience, with a reach of 69% in December 2006 (66% in December 2005 for Wanadoo advertising, source: Nielsen Home & Work panel) and in terms of advertising revenues, with a 12.6% market share in online advertising over the period from January to December 2006 (source: TNS Média Intelligence, which extended the scope of the market measured to new sites in 2006).
The Group must face numerous providers of global or local portal services, all of which belong to one of the following three main categories:
As of December 31, 2006, TP Groups market share in terms of traffic in the consumer and business segment was as follows, based on estimates:
In the fixed-line telephony segment, the TP Groups main competitors are as follows:
The main competitors of TP Group with telecommunications infrastructures are Netia and Dialog, with market shares of 3.5% and 3.8% respectively (TP Group estimates). Netia and Energis traditionally focused on business customers, but the two companies have announced an upcoming change in their strategy to move toward the mass markets, the result of increased competitive pressure on the TP wholesale offer. In fixed-line telephony, TP also competes with Tele2, a virtual network operator that focuses on residential customers.
TP Group believes that it is the largest Internet service provider in Poland for both residential and business customers. TP Group is a leading player in low-speed Internet. As of December 30, 2006, TP Groups market share in terms of consumer traffic was approximately 95%, compared with 94% at December 31, 2005. TP also retained a significant market share in broadband communications with 70.2% at year-end 2006, up from 71.1% at the end of December 2005. However, the broadband market is becoming increasingly competitive. In May 2006, the Polish regulatory authority (UKE) signed a decision concerning TPs Bitstream base offer, forcing it to provide data transmission access to the other operators. As a result, operators like Netia and Dialog can offer broadband plans to TP customers with a substantial price reduction. However, the major competitors in the broadband market are still the cable network television operators (UPC Polska, Aster Group, Multimedia Polska), which have intensified their triple-play offers. Various micro services and local access network providers also have a strong presence in Poland, with a market share of about 32.5% in December 2006.
18.104.22.168 Rest of the world
In the United Kingdom in mid-2006, 67% of the Internet customers were broadband customers. DSL customers represented 75% of broadband. Unbundling lags behind with only 8% of the DSL lines unbundled or owned by third party operators, compared with 32% in France (source: Idate Digiworld 2006 edition - Telecoms in Europe).
Competition intensified enormously in the broadband segment in 2006. Cable is strongly represented by NTL following its merger with Telewest. Carphone Warehouse relaunched the price war with its Free broadband offer coupled with telephony in the second quarter of 2006. Sky has entered the ADSL market. Tiscali acquired HomeChoice. The principal telephone operators and Internet Service Providers (ISPs) have announced ambitious unbundling plans. The British operations of AOL were sold to Carphone Warehouse.
Double play offers have become the standard, combining broadband Internet and switched voice or voice over IP, sometimes with subscription to the telephone line. A few players are offering triple play (Internet/Voice/TV) and some are announcing quadruple play (NTL).
At the end of June 2006, the respective market shares held by the main players in the UK broadband market were as follows:
(source: : Idate 2006)
In Spain in mid-2006, 87% of the Internet customers were broadband, with DSL access representing 78% of the broadband service and only 15% of the DSL lines were unbundled (source: Idate mid-2006).
Competition is intensifying in the broadband market as most of the operators are now offering double play voice+ Internet, like France Telecom, which initiated this offer in 2004, and exerting strong pressures on prices. The voice/Internet/TV triple play offers have multiplied with the recent Orange and Jazztel launch of their IPTV offer to compete with the IPTV service from Telefónica (Imagenio). T-Online has also announced the roll-out of its IPTV, which is still, however, not yet being marketed.
In mid-2006, the respective market shares of the main players in the broadband Internet market in France were as follows:
(source: Idate 2006)
In the Netherlands in mid-2006, Internet penetration was very high, and broadband accounts for 87% of the Internet base. DSL accesses represented 62% of broadband customers, and unbundling is very rapidly expanding, with 30% of the DSL accesses unbundled (source: Idate mid-2006).
Competition is intense in the broadband segment with a strong presence by cable operators. All the major ISPs have an unbundling strategy: Orange, Telecom Italia/BBNED, Tele2/Versatel. In September 2006, KPN announced the purchase of Tiscali.
The double play (Internet+voice) and triple play offers are already present in the Dutch market, but IPTV had not yet established a strong presence in the Netherlands in 2006.
In mid-2006, the respective market shares held by the main players in the Dutch broadband Internet market were as follows:
(source: Idate 2006)
4.6.3 ENTERPRISE COMMUNICATION SERVICES
The business communications market in which France Telecom is evolving is rapidly transforming and is moving from providing traditional telecommunications toward all IP and toward an offer of network and IT convergence services (Information Technologies): integration services, managed services, IT infrastructure services, customer relationship management, machine to machine communications. This convergence toward IP tends to break down the borders between the world of telecommunications and the world of services related to information systems (IS), making the competitive environment increasingly complex.
In its approach to assisting businesses with these new convergence challenges, France Telecom is facing stiffer competition from telephony operators, but also from other players who are not part of the traditional competitive landscape for telecommunications operators. Information system companies are endeavoring to extend their skills to operating networks, whereas network operators are expanding their line of services to the integration of services. In addition, equipment suppliers, while continuing to serve as partners to network operators, are diversifying into other areas within the telecommunications sector.
In France, France Telecoms main fixed-line telephony competitors are:
These network operators (general and alternative national) can provide their customers with network access, either through unbundling of the local loop or through alternative local loops.
In addition, in the mobility market, partnerships among mobile operators and integrators are being formed and offer wireless data transmission solutions to businesses.
Outside France, France Telecom must compete with the following types of companies: