France Telecom S.A. 6-K 2012
Documents found in this filing:
Washington, DC 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
April 12, 2012
Commission File Number 1-14712
(Translation of registrants name into English)
6, place dAlleray
(Address of principal executive offices)
Indicate by check mark whether the Registrant files or will file
annual reports under cover Form 20-F or Form 40-F
Indicate by check mark if the Registrant is submitting the
Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the Registrant is submitting the
Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Indicate by check mark whether the Registrant, by furnishing the
information contained in this Form, is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(If Yes is marked, indicate below the file number assigned to the
Registrant in connection with Rule 12g3-2(b): 82- )
Société Anonyme (French Public Limited Company) with a share capital of 10,595,541,532 euros
2011 registration document
ANNUAL FINANCIAL REPORT
This Registration Document includes
Copies of the Registration Document are available from
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table of contents
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The present Registration Document serves as:
The Annual Financial Report prepared pursuant to Articles L. 451-1-2 of the French Monetary and Financial Code and 222-3 of the AMF General Regulations;
The Management Report prepared pursuant to Articles L. 225-100, L. 225-100-2, L. 225-100-3, L. 225-102, L. 225-102-1 (as well as R. 225-104 and R. 225-105), L. 225-211, L. 232-1, L. 233-6, L. 233-13 and L. 233-26 of the French Commercial Code, L. 621-18-2 of the French Monetary and Financial Code, 243 B of the French General Tax Code and 223-26 of the AMF General Regulations;
The Chairmans Report on corporate governance and internal control prepared pursuant to Article L. 225-37 of the French Commercial Code.
Correspondence tables between the information legally required in these reports and this Registration Document are displayed on pages 610 to 612.
Information Incorporated by Reference
Pursuant to Article 28 of Commission Regulation (EC) no. 809/2004, the following information is incorporated by reference into this document:
the consolidated financial statements and the corresponding Audit Report displayed on pages 360 to 500 of Registration Document D. 11-0227, as well as the Groups Management Report displayed on pages 194 to 274 of the same document;
the consolidated financial statements and the corresponding Audit Report displayed on pages 344 to 471 of Registration Document D. 10-0345 as well as the Groups Management Report displayed on pages 198 to 265 of the same document;
the non-consolidated financial statements and the corresponding Audit Report displayed on pages 501 to 548 of Registration Document D. 11-0227, as well as the France Telecom S.A. Management Report displayed on pages 275 to 281;
the non-consolidated financial statements and the corresponding Audit Report displayed on pages 472 to 517 of Registration Document D. 10-0345, as well as the France Telecom S.A. Management Report displayed on pages 265 to 272.
The references to websites contained in this document are provided for reference purposes only; the information contained on these websites is not incorporated by reference in this document.
In this Registration Document, unless otherwise indicated, the terms the Company and France Telecom S.A. refer to the parent company, France Telecom, a French société anonyme, and the terms France Telecom-Orange, France Telecom, Orange, the Group, the France Telecom-Orange Group and the France Telecom Group refer to France Telecom S.A. together with its consolidated subsidiaries.
This document contains forward-looking statements including, without limitation, in Section 6.2 France Telecom-Oranges Strategy, Section 9.1 Analysis of the Groups Financial Position and Earnings (in particular Section 9.1.1 Overview) and Chapter 12 Information on Trends. These statements are sometimes identified by the use of the future and conditional verb tenses and words such as should or could, or are introduced by conjugated or un-conjugated forms of expressions such as expect, estimate, believe, anticipate, propose, continue, foresee, benefit, carry out, meet, or by words such as strategy, objective, aim, development, intention, ambition, risk, potential, implementation, roll-out or commitment.
Although France Telecom believes these statements are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties, including risks not yet known to us or not currently considered material by us, and there can be no assurance 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 others:
fluctuations in general economic activity levels as well as the level of activity in each of the markets in which France Telecom operates;
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the effectiveness of the strategy reflected in the Conquests 2015 strategic plan as well as of the other strategic, operational, and financial initiatives of France Telecom and the level of Group investment necessary to pursue this strategy and to adapt its networks;
France Telecoms ability to face intense competition within its sector and to adapt to the ongoing transformation of the telecommunications industry, in particular in France with the arrival on the market of a fourth mobile operator;
fiscal and regulatory constraints, in particular in setting wholesale rates;
results of current litigations, in particular the litigation with the European Commission regarding changes to the system for financing the retirement pensions for civil servants working at France Telecom;
risks and uncertainties specifically related to international operations;
risks related to the impairment of assets;
exchange rate fluctuations;
conditions for accessing the capital market (in particular risks related to financial market liquidity and financial ratings) and counterparty risks.
Except to the extent required by law (in particular pursuant to Article 223-1 et seq. of the AMF General Regulations), France Telecom does not undertake any obligation to update forward-looking statements.
The most significant risks are described in Chapter 4, Risk factors.
A glossary of technical and financial terms is provided on pages 598 to 606 of the present document.
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1 person responsible
The Chairman and Chief Executive Officer
After having taken all reasonable measures in this regard, I hereby certify that the information in this Registration Document is, to the best of my knowledge, in accordance with the facts, with no omissions likely to affect its import.
I hereby certify that, to the best of my knowledge, the financial statements have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets and liabilities, financial position, and results of the Company and of all consolidated companies, and that the Management Report set out on pages 194 to 284 of this Registration Document presents a true image of the business performance, results, and financial position of the Company and of all consolidated companies as well as a description of the major risks and uncertainties facing them.
I have received a work completion letter from the Statutory Auditors, in which they state that they have verified the information regarding the financial position and financial statements presented in this document and have read the entire document.
The Statutory Auditors have issued reports on the historical financial information presented in this document. These reports contain the following observations:
Without qualifying their opinion on the financial statements, in their report on the consolidated financial statements for the year ending December 31, 2010 set out on page 495 of Registration Document D. 11-0227, the Statutory Auditors drew the readers attention to the matter set out in Notes 1.2 and 1.5 to the consolidated financial statements regarding changes in accounting options occurring on or after January 1, 2010, particularly with regard to the accounting treatment of interests in jointly controlled entities and the recognition of actuarial gains and losses related to defined benefit plans.
Without qualifying their opinion on the financial statements, in their report on the consolidated financial statements for the year ending December 31, 2009 set out on page 471 of Registration Document D. 10-0345, the Statutory Auditors drew the readers attention to Note 1.2, which sets out the changes in accounting methods resulting from the application, as of January 1, 2009, of new standards and interpretations, specifically IFRS 8, Operating Sectors, IAS 36, Depreciation of Assets, as amended by IFRS 8, and IAS 1, Presentation of financial statements, revised in 2007.
Paris, March 29, 2012
The Chairman and Chief Executive Officer
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2 statutory auditors
Ernst & Young Audit
Represented by Vincent de La Bachelerie
1/2, place des Saisons
92400 Courbevoie - Paris-La Défense 1
Ernst & Young Audit was appointed by Government decree dated September 18, 1991, and this appointment was renewed by Government decrees dated May 14, 1997 and May 27, 2003, then by a decision of the Ordinary Shareholders Meeting of May 26, 2009 for a period of six years.
Deloitte & Associés
Represented by Frédéric Moulin
185, avenue Charles de Gaulle
92524 Neuilly-sur-Seine Cedex
Deloitte Touche Tohmatsu (now Deloitte & Associés) was appointed by Government decree dated May 27, 2003, and this appointment was renewed by a decision of the Ordinary Shareholders Meeting of May 26, 2009, for a period of six years.
1/2, place des Saisons
92400 Courbevoie - Paris-La Défense 1
7-9, villa Houssay
92524 Neuilly-sur-Seine Cedex
Auditex and BEAS were appointed by Government decree of May 27, 2003, and these appointments were renewed by decisions of the Ordinary Shareholders Meeting of May 26, 2009, for a period of six years.
The terms of office of all Statutory Auditors will expire at the end of the Ordinary Shareholders Meeting convened to approve the financial statements for the year ended December 31, 2014.
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3 selected financial information
The selected financial information presented below relating to the years ending December 31, 2007, 2008, 2009, 2010, and 2011 is extracted from the consolidated financial statements audited by Ernst & Young Audit and Deloitte & Associés.
The selected financial information relating to the years ending December 31, 2011, 2010, and 2009 must be read together with the consolidated financial statements and the Groups Management Report covering these financial years.
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4 risk factors
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In addition to the information contained in this Registration Document, investors should carefully consider the risks described below before deciding whether to invest. Any or all of these risks could have a negative impact on France Telecoms business, financial position or profits. In addition, other risks that are not yet identified or currently considered to be immaterial by France Telecom could have a similarly negative impact and investors could lose all or part of their investment.
The risks described in this chapter concern:
risks relating to France Telecom-Oranges business activities (see Section 4.1);
risks of a legal nature (see Section 4.2);
financial risks (see Section 4.3).
In each Section, risk factors are presented in diminishing order of importance, as determined by the Company at the registration date of the current Registration Document. France Telecom-Orange may change its view of their relative importance at any time, particularly if new external or internal facts come to light.
Several other chapters also discuss risks in some detail:
for a discussion of regulatory risks and pressures see Sections 6.6 Regulations and Note 15 Litigation to the consolidated financial statements;
for risks arising from the vulnerability of technical infrastructure and environmental risks see Section 17.4 Environmental Information;
for financial risks see:
Note 11 to the consolidated financial statements Information on Market Risk and Fair Value of Financial Assets and Liabilities for a discussion of interest rate risk, currency risk, liquidity risk, covenants, credit risk, counterparty risk and equity market risk,
Note 10.10 to the consolidated financial statements on derivative instruments;
for risks arising from litigation involving the Group see Notes 15 Litigation and 16 Subsequent Events to the Consolidated Financial Statements, as well as Section 20.4 Litigation and Arbitration Proceedings;
policy for managing interest rate, currency and liquidity risks is set by the Treasury and Financing Committee. See Section 16.3.4 Group Governance Committees;
for insurance strategy see Section 6.8 Insurance;
more generally, policy for managing risk throughout the France Telecom-Orange Group is discussed in the Chairmans Report on governance and internal control. See Section 16.4 Internal Control and Risk Management;
for risks related to France Telecom-Oranges general strategy see Section 6.2 France Telecom-Oranges Strategy.
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Risks Related to the Sector, the Economic Environment and Strategy
1. The worsening economic and financial situation in Europe could have a major impact on France Telecom-Oranges businesses, especially on the Groups revenues and results.
After the economic rebound of 2010, developments in the euro zone in 2011 in terms of the debt crisis and the deterioration of public sector finances of numerous member states triggered a loss of confidence in the European economy as a whole. The risk of a renewed economic slowdown is still high. This situation could, if it were to continue, have a direct effect on consumer spending and increase fiscal pressure on households and companies. This could have a significant impact on France Telecom-Oranges revenues and results.
For further information on the impact of the situation in the euro zone in terms of companies debt and refinancing capacities, see also the financial risks set out in Section 4.3.
2. France Telecom-Orange generates much of its revenues from mature countries and business activities where intense competition in the telecommunications sector may erode its market share or profitability.
At constant exchange rates and scope of consolidation, the increase in France Telecom-Oranges revenues in recent years has been primarily due to the rapid growth in its mobile communications and Internet businesses, driven by the upswing in the corresponding markets. However, these markets are reaching maturity, notably in Europe, and in some cases are showing signs of saturation. France Telecom-Orange is also faced with tough competition, in particular on pricing and especially in the French mobile market, where competition has heightened following the award of the fourth 3G license to Free in December 2009 and the launch of its mobile plans in January 2012 (1).
In response to this competition, France Telecom-Orange strives to better answer customers needs in terms of the quality and simplicity of services. Thus France Telecom-Orange is developing an organization, procedures and systems aimed at offering the latest technological developments and improved products and services to its customers, while at the same time striving to make them accessible and easy to use. In France, this is reflected in particular by a drive to refocus its organization around the customer on a regional basis.
In the face of competition, France Telecom-Oranges ability to maintain its margins will also partly depend on a change in its cost structure with a reduction in fixed costs. France Telecom-Orange has thus launched two major transformation programs: Chrysalid, aimed at sharing best practices within the Group in order to control costs, including overhead costs, marketing, customer service management, real estate, networks and distribution costs, as well as a program to pool purchasing with Deutsche Telekom through the jointly-owned company Buyin.
Should France Telecom-Oranges ambitious and complex transformation programs be unsuccessful, or do not succeed in correctly managing the networks, technologies and procedures necessary to meet customers expectations, the Group could lose market share or be forced to reduce its margins which could have a negative effect on its financial position and results.
3. As part of its strategy, France Telecom-Orange is exploring sources of growth in new countries and businesses. This quest may prove difficult or fruitless, may be costly, or may lead to over paying for acquisitions. In addition, investments already made may fail to bring the expected returns, may become unforeseen liabilities, or may translate into increased country risk. In all cases, the Groups results and outlook could be impaired.
The Groups growth depends heavily on its activities in fast-growing regions of the world. France Telecom-Orange has invested in telecommunications operators in Eastern Europe, the Middle East and Africa and could make further investments in these or in other fast-growing regions. Political instability or changes in the economic, legal or social landscape in these regions may call into question the outlook on profits held when these investments were made, or may become unforeseen liabilities, and the Groups results could be impaired.
Moreover, these regions present challenges or specific risks in terms of internal control or non-compliance with laws and regulations in force, such as anti-corruption regulations (which could also be a source of risk in other regions where the Company is present, in particular due to the increase in its scope and its restricting nature).
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Group growth also depends on a strategy of developing new businesses to cope with the deep and rapid transformation now enveloping the electronic communications sector. This means developing convergent services and new businesses such as content, audience or e-health offerings, under the single Orange brand. The pursuit of these goals requires resources, in particular for service integration and content development, with no guarantee that usage of these services and content will grow and provide a return on the investment. Furthermore, the development of these new services could be hampered by regulatory changes or the economic environment.
If the expected growth in revenues from these new services was not achieved or if France Telecom-Orange was not able to render these new services profitable, the Groups financial position and results could be impaired.
4. The rapid growth in the popularity of audiovisual content streamed through the telecommunications network and insufficient innovation could lead to telecoms operators being supplanted by other content or service providers in customer-relations and to a saturation of the network, stripping operators like France Telecom-Orange of part of their revenues and margins while simultaneously requiring higher investment. This could affect the Groups financial position and outlook.
The development of network usage for added-value services benefits the emergence of new, networkless players (content and service providers, including aggregators, search engines, handset makers, etc.). Competition to control customer relations with these players is intensifying and could erode the operators market position. This direct relationship with customers is a source of value for the operators and to lose all or part of it to new entrants could affect the revenue, margins, financial position and outlook of telecoms operators such as France Telecom-Orange.
Also, as with the competition in voice traffic from VoIP, suppliers are competing with telecoms operators to offer integrated communications packages, notably by developing new applications compatible with fixed or mobile handsets (smartphone applications, etc.). This situation could affect the revenue, margins, financial position and outlook of telecoms operators such as France Telecom-Orange.
Lastly, the current expansion in permanent connections to the Internet via smartphones and broadband usages such as TV as part of triple-play offerings or fixed-line and mobile Internet streaming has already, on occasions, resulted in the saturation of existing collection and transport networks, for France Telecom-Orange and other operators in France and abroad. In response, France Telecom-Orange has adopted a medium-term strategy of investing heavily to boost capacity on its collection and transport networks and differentiating itself through the quality of its service. In addition France Telecom-Orange has reorganized its innovation chain as part of the Nova+ program. There is nonetheless no guarantee that such capital expenditure or the reorganization of its innovation efforts will be sufficient in the face of pressure from new entrants or regulatory bodies in the countries concerned. If it proved not possible to insure returns on such capital expenditure, France Telecom-Oranges financial position and outlook could be adversely affected.
Risks Relating to Human Resources
5. France Telecom-Orange faced a major social crisis in 2009. Since 2010, the Group has been implementing an ambitious human resources project as part of its Conquests 2015 strategic plan to respond to this crisis but this project might not deliver the expected results, which could have a significant impact on the Groups image, operations and results.
During 2009, the Group went through a significant crisis in relation to psycho-social risks and anxiety at work, the effects of which were still felt in 2010. This crisis, which generated widespread coverage in the French and international media after a number of employee suicides, had a big impact on the Groups image. In response, the Group launched an ambitious social contract project aimed at clarifying the Companys professional practice and management culture and to provide long-term solutions to the identified risk factors. This project led in particular to the signature, in March 2011, of the Strategic Workforce Planning agreement (accord sur la Gestion Prévisionnelle des Emplois et des Compétences) and the clarification of measures promoting the enhancement of professional careers and better employment flexibility.
Although the Group believes that the cost of implementing such a project should be more than offset by the benefits to the Company and its employees, this project may delay certain cost-cutting programs. Moreover, in the event that the project does not achieve the expected results, this crisis may persist, affecting the Groups image, its operations and its results for a long time.
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6. Should France Telecom-Orange not be sufficiently attractive compared with its competitors, in order to recruit or renew, when needed, the skilled personnel necessary across all countries to develop its business and ensure the Group retains expertise and maintains sufficient continuity with regard to the management of ongoing projects, its commercial activities and operating income could be adversely affected.
Wherever it operates, France Telecom-Orange is exposed to risks relating to its ability to attract and retain skilled personnel in its strategic professions, and to replace expertise in key fields by taking advantage, in France, of the increased pace of retirements, in particular as a result of the implementation of part-time schemes for older employees.
France Telecom-Oranges success depends in part on its ability to attract highly-skilled personnel in all the countries in which it operates, and in particular in France in recent times, and to retain and motivate its best employees.
Should France Telecom-Orange fail to present itself as a sufficiently attractive employer, its commercial activities and operating income could be adversely affected.
Other Operational Risks
7. Technical failures or saturation of the telecoms networks, technical infrastructure or IT system may reduce traffic, lower revenues and harm the reputation of operators or the sector as a whole.
Damage or interruptions to services provided to customers may occur following outages (hardware or software), human error or sabotage to critical hardware or software, or a failure or refusal to provide services by a key supplier or a lack of capacity on the network in question. As a result of the rationalization of the network based on the implementation of all-IP technologies, the increase in the size of the service platforms and the relocation of equipment into fewer buildings, such service interruptions may in the future affect a greater number of customers and more than one country simultaneously. While impossible to quantify, the impact of such events occurring in one or more countries could result in customer dissatisfaction, a decrease in France Telecom-Oranges traffic and revenues and government intervention in the country or countries affected.
Finally, during the current period, the risk of failure of the internal France Telecom-Orange IT system has increased due to the accelerated implementation of new services and applications relating notably to billing and customer relationship management. More specifically, incidents (including the possible loss of control over personal data) could occur during the implementation of new applications or software.
8. The technical infrastructure of telecommunications operators is vulnerable to damage or interruptions caused by floods, storms, fires, war, acts of terrorism, intentional damage, malicious acts and other similar events.
A natural disaster, such as the storms Klaus and Xynthia which struck in early 2009 and late February 2010, Hurricane Dean in Martinique in August 2007 and the storms in December 1999, which disrupted service in France in early 2000, and other unexpected occurrences affecting France Telecom-Oranges facilities or any other incident or failure of its networks may result in serious damage with a high repair cost. In most cases, France Telecom-Orange has no insurance for damage to its aerial lines and must assume the full cost of the repairs itself. Furthermore, the damage caused by such major disasters may have more long-term consequences resulting in significant expense for France Telecom-Orange and which would harm its image. Moreover, international, community and national laws now recognize the existence of climate change. Weather phenomena associated with this climate change may increase the seriousness of disasters and of the damage caused.
9. The scope of France Telecom-Oranges activities and the openness of networks mean that the Group is at all times exposed to the danger of falling victim to a range of frauds, which could impact its revenues and margin and damage its image.
Like any telecommunications operator, France Telecom-Orange runs the risk of falling victim to fraud designed, by the fraudsters, either to use the operators services without paying (possibly with subsequent resale), or to defraud the operators customers via the communications services offered by the operator. By virtue notably of the current weakened economic climate, the cases of fraud to which the Group is exposed could increase. With the increased complexity of technologies and networks, new types of fraud that are more difficult to detect or combat may also develop. In any event, France Telecom-Oranges revenues, margin, service quality and reputation could be adversely affected.
10. Exposure to the electromagnetic fields of telecommunications equipment raises concerns regarding possible health risks. This situation could result in a decrease in the usage of mobile telecommunications services, additional difficulties rolling out cell phone antennae and wireless networks or an increased number of lawsuits, which could negatively impact France Telecom-Oranges results.
In certain countries in which France Telecom-Orange carries out its mobile telephony business, concerns have been raised regarding the possible health risks to humans of exposure to electromagnetic fields emitted by telecommunications equipment (such as mobile handsets, cell phone antennae, Wifi, etc.).
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On the basis of the findings of research into the use of mobile handsets, the International Agency for Research on Cancer (IARC), a specialist arm of the World Health Organization (WHO), classified electromagnetic fields from radio frequency emissions as possibly carcinogenic to humans (category 2B) in May 2011. Nonetheless, the WHO reiterated in its June 2011 Fact sheet on mobiles that to date, no adverse health effects have been established as being caused by mobile phone use. In the absence of complete scientific certainty, some health or public authorities have issued various usage precautions designed to cut user exposure to electromagnetic fields from mobile phones.
Certain countries have adopted regulations which limit public exposure to base stations and wireless networks to levels below the limits recommended by the International Commission on Non-Ionizing Radiation Protection (ICNIRP). Other countries may consider taking similar measures. In certain cases, jurisdictions have ordered telephone operators to take down cell phone antennae and to compensate local residents. Similar decisions in the future cannot be ruled out.
These regulatory and case law developments could result in a reduction in geographic coverage, a deterioration in service quality and customer dissatisfaction as well as a slowdown in the roll-out of transmitter sites and an increase in network roll-out costs, which could seriously tarnish the Orange brand image and significantly impact the Groups results and financial position.
The potential risks or perception of risks by the public or employees could also result in a decrease in the number of customers and lower usage per customer, as well as an increase in lawsuits or other consequences including acts contrary to the building of or even the existence of transmitter sites.
Finally, France Telecom-Orange cannot predict the conclusions of future scientific research or future studies carried out by international organizations and scientific committees called upon to examine these questions. The conclusions of these studies could have a significant adverse impact on France Telecom-Oranges business activities and results.
For further information, see Section 220.127.116.11 The regulatory Environment and Section 17.4 Environmental information.
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11. France Telecom-Orange continues to operate in highly regulated markets, where its flexibility to manage its business is limited.
In most countries in which it operates, France Telecom-Orange must comply with various regulatory obligations governing the provision of its products and services, primarily relating to obtaining and renewing licenses, as well as to oversight by authorities seeking to maintain effective competition in the electronic communications markets. Furthermore, in certain countries France Telecom-Orange faces a number of regulatory constraints as a result of its historically dominant position in the fixed-line telecommunications market, in particular in France and Poland.
France Telecom-Orange believes that, in general and in all countries in which it is present, it complies with all specifically applicable regulations as well as the terms of its operator licenses, but it cannot predict how oversight authorities or courts that may be asked or have already been asked to resolve a certain number of claims will decide on the issues.
Should France Telecom-Orange be ordered to pay damages or a fine due to the non-respect of a given regulation in force by the relevant authorities in a country in which it is present, the Groups financial position and results could be adversely affected.
For further information on regulations, see Section 6.6 Regulation and the parts regarding the regulatory environment in Sections 6.3.1 to 6.3.6.
12. France Telecom-Orange is continually 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 material impact on its results or financial position.
France Telecom-Oranges position as the main operator and provider of network and telecommunications services, particularly in France and Poland, and one of the leading telecommunications operators worldwide, attracts the attention of competitors and competition authorities. Thus, France Telecom-Orange is involved in lawsuits or European Commission investigations regarding large amounts of state aid it is alleged to have received in France. In particular, the European Commission ruled that France Telecom-Orange should reimburse the French state some one billion euros that it received in state aid thanks to the special French business tax regime which it benefited from until 2003. This decision was ratified by both the General Court of the European Union and the European Court of Justice. In a second proceedings, the European Commission recently ruled against France Telecom-Orange on the system for financing retirement pensions for civil servants working at France Telecom-Orange, implemented by the Act of July 26, 1996 which turned France Telecom-Orange into a société anonyme. In addition, France Telecom-Orange in particular in France and Poland is frequently involved in legal proceedings with its competitors and with the regulatory authorities due to its preeminent position in certain markets, and the complaints filed against France Telecom-Orange may be very substantial. Finally, the Group may be the object of substantial commercial lawsuits, worth tens of millions of euros, or, in extreme cases, hundreds of millions of euros, such as the one that gave rise to an amicable settlement between its Polish subsidiary (Telekomunikacja Polska or TP) and Danish company DPTG in January 2012 where TP paid compensation amounting to 550 million euros.
The outcome of lawsuits is by definition unpredictable.
In the case of proceedings involving European competition authorities, the maximum fine provided for by law is 10% of the consolidated revenues of the company at fault (or the group to which it belongs, as the case may be).
The main proceedings in which France Telecom-Orange is involved are described in Notes 15 Litigation and 16 Subsequent Events to the consolidated financial statements, as well as Section 20.4 Litigation and Arbitration Proceedings. Developments in or the results of some or all of the ongoing proceedings could have a material adverse impact on France Telecoms results or financial position.
13. France Telecom-Oranges business activities and results could be materially affected by legislative, regulatory or government policy changes.
France Telecom-Oranges business activities and operating income may be materially adversely affected by legislative, regulatory or government policy changes, and in particular by decisions taken by regulatory or competition authorities in connection with:
amendment or renewal on unfavorable conditions, or even withdrawal, of licenses to use broadcasting frequencies which are essential to the mobile business;
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conditions governing network access;
the introduction of new taxes or increases to existing taxes for telecommunications companies;
regulations governing data security.
Such decisions could materially affect the Groups revenues and results.
14. The profitability of certain investments and France Telecom-Oranges strategy in certain countries could be affected by disagreements with its partners in companies that it does not control or where, despite being the majority shareholder, some major aspects of the business are outside its control.
France Telecom-Orange operates some of its businesses through companies that it does not control (or where, despite being the majority shareholder, some major aspects of the business are outside its control). Articles of incorporation or agreements for some of these activities require that some major decisions, such as the approval of business plans or timing and size of dividends, need approval from France Telecom-Oranges partners. Should France Telecom-Orange and its partners disagree regarding these decisions, the profitability of these investments, their contribution to France Telecom-Oranges results and the strategy pursued by France Telecom-Orange in the countries in which these companies are located, could be adversely affected.
15. France Telecom-Oranges liability may be triggered by its Internet access and hosting services and it will also need to invest to meet recently expanded obligations as part of the struggle against illegal or illicit uses of the Internet. In addition, like all electronic communications service providers, France Telecom-Orange may be held liable for the loss, release or inappropriate modification of customer data stored on its servers or carried by its networks.
In most of the countries in which France Telecom-Orange operates, the provision of its Internet access, means of payment and hosting services (including the operation of websites with self-generated content) is regulated under a limited liability regime applicable to the content that it makes available to the public as a technical service provider, particularly content protected by copyright or similar laws. However, regulatory changes have been introduced imposing additional obligations on access providers (such as blocking access to websites) as part of the struggle against some illegal or illicit uses of the Internet, notably in France, Spain and the UK. Furthermore, the implementation in France of the Law of June 12, 2009 establishing Hadopi (Haute Autorité pour la Diffusion des Oeuvres et la Protection des Droits sur Internet High Authority for the Dissemination of Works and the Protection of Rights on the Internet) has resulted in additional costs for France Telecom-Orange and has increased its exposure to liability. In December 2011, the cinema and video distribution unions brought proceedings before the Paris Civil Court against access providers and search engines located in France, including France Telecom-Orange, in order to block access to certain streaming and illegal film downloading sites.
France Telecom-Oranges activities may also trigger the loss, release or inappropriate modification of the data of its customers or the wider general public, which is stored on its infrastructures or carried by its networks. This risk may also affect Group activities related to the mobile payment solution Orange Money (see Section 18.104.22.168 Middle East and Africa in Section 6 Overview of the Groups business). The repercussions of such an incident could involve numerous persons and have a considerable impact on France Telecom-Oranges reputation, as well as a strong impact in terms of its liability, including its criminal liability. Moreover, recourse to liability proceedings is facilitated in a number of countries, in particular in Europe, by the implementation of European Directives adopted in 2009. This legislation increases operators obligations, requiring that they notify authorities of security breaches that violate personal data or of weaknesses in their networks and services. In France, these obligations are a result of the Government Order adopted on August 24, 2011.
16. The French Public Sector, directly or indirectly, owns nearly 27% of France Telecoms share capital, which could, in practice, allow it to determine the outcome of votes at Annual Shareholders Meetings.
At December 31, 2011 the French Government directly owned 13.4% of the shares and 13.5% of the voting rights in France Telecom, and the Fonds Stratégique dInvestissement (FSI) held 13.5% of the shares and 13.6% of the voting rights. On November 25, 2009, the French Government and the FSI concluded a shareholders agreement constituting an action in concert (joint action). The public sector has the right to appoint three of the 15 board members. The French public sector could, in practice, given the absence of other major shareholder blocks, determine the outcome of votes on issues requiring a simple majority at Shareholders Meetings. Nevertheless, the French Government does not have a golden share or any other special advantage other than the right to have representatives on the Board of Directors in proportion to its shareholding (see Section 18 Major Shareholders).
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17. France Telecom-Oranges results and outlook may be adversely affected if access to capital markets remains difficult or worsens.
France Telecom-Orange raises most of its finance from capital markets (particularly the bond market). For four years, financial markets have been extremely volatile and have shown signs of malfunctioning, materially reducing their liquidity. During the last quarter of 2008, and again since August 2011, the liquidity crisis has reached unprecedented levels, markedly affecting the access of both borrowers and issuers to the financial markets. To save the financial sector and mitigate the impact of the economic crisis, most developed countries drastically increased their spending. In certain countries the extent of this increase triggered a loss of confidence in public debt and led certain ratings agencies to downgrade sovereign debt in the US and numerous euro zone countries, including France. Although at this time it seems the corporate bond markets have been less directly affected, as matters stand, it is impossible to rule out contamination by the sovereign debt crisis or another major market event.
Moreover, market fears are growing over the consequences of the new Basel III and Solvency II directives -which look to boost banks and insurance companies capital respectively- as regards the ability of companies to continue funding their activities through the banking and bond markets in a normal manner.
As a result, and in these circumstances, companies having recourse to the bond market or to bank loans can have no assurance that they will obtain the financing or refinancing necessary to their businesses at prices and on terms considered reasonable, even for first-rate borrowers or issuers, such as France Telecom-Orange.
Any inability to access the markets and/or obtain financing on reasonable terms could have a material adverse effect on France Telecom-Orange. The Company could, in particular, be required to allocate a significant portion of its available cash to pay off debt, in particular for the purposes of repaying loans that cannot be refinanced. In any event, France Telecom-Oranges results, cash flows and, more generally, financial position and flexibility could be adversely affected.
Finally, even though the consequences of the sovereign debt crisis and of numerous countries ratings being downgraded, including France, on the margins applied to corporate issuers have, until now, been limited in time, a deepening of the sovereign debt crisis or further downgrades in country ratings could have an adverse impact (sharp increase) on the margins applied to corporate issuers.
See Note 11.3 Liquidity Risk Management to the consolidated financial statements, which notably sets out the various sources of financing available to France Telecom-Orange, the maturity on its debt and changes to its rating, as well as Note 11.4 Management of Covenants which contains information on the limited commitments of the France Telecom-Orange Group as regards financial ratios and in the event of bankruptcy or a material adverse development.
Interest Rate Risk
18. France Telecom-Oranges business activities could be adversely affected by interest rate fluctuations.
In the normal course of its business, France Telecom-Orange draws most of its funding from capital markets (particularly the bond market) and a small share from bank loans. Part of France Telecom-Oranges debt is at floating rates but the great majority is at a fixed rate. As a result, France Telecom-Orange is exposed to interest rate increases, first on the variable component of its debt, and second, when refinancing. The consequences of entering into a financing arrangement during a period when the available rates are high may be long-lasting, depending on the maturity of the loan or bonds.
To limit exposure to interest rate fluctuations, France Telecom-Orange from time to time makes use of financial instruments (derivatives) but cannot guarantee that these transactions will effectively or completely limit its exposure or that suitable financial instruments will be available at reasonable prices. In addition, hedging costs stemming from interest rate fluctuations could increase, generally, in line with market liquidity and banks circumstances.
In the event that France Telecom-Orange cannot use financial instruments or if its financial instrument strategy proves ineffective, cash flow and earnings may be adversely affected.
The management of interest rate risks and an analysis of the sensitivity of the Groups position to changes in interest rates are set out in Note 11.1 to the consolidated financial statements.
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Risks to Credit Rating
19. If France Telecom-Oranges debt rating is downgraded, placed under surveillance or revised by rating agencies, its borrowing costs could increase and in certain circumstances limit the Companys access to the capital it needs (and thus have a material adverse effect on its results and financial position).
France Telecom-Oranges financial rating is partly based on factors over which it has no control, namely conditions affecting the electronic communications industry in general or conditions affecting certain countries or regions in which it operates, and can be changed at any time by the rating agencies.
The Companys financial rating has already been downgraded in the past (in 2001 and 2002) as a result of concerns raised by the agencies regarding the Companys ability to implement its debt reduction policy. Even though its debt has fallen considerably since 2001 and 2002, and even though the Companys rating has improved, it could be reviewed at any time, in light of changing economic conditions, or following a deterioration in the Companys results or performance, or simply due to the ratings agencies perception of these various factors.
Credit Risk and/or Counterparty Risk on Financial Transactions
20. The insolvency or deterioration in the financial position of a bank or other institution with which France Telecom-Orange has contractual relations may have a material adverse effect on the Company.
In the course of its business activities, France Telecom-Orange engages in relations with financial institutions, particularly in order to manage currency and interest rate risks. Although cash collateral accounts are in place with most derivative banking counterparties, the failure of these counterparties to meet any of these commitments, or significant differences with the last values retained for securities used as collateral, could have adverse consequences on France Telecom-Orange. In this regard, the Group is exposed to counterparty risk with respect to these transactions.
Equally, France Telecom-Oranges position as a result of its financing agreements (and in particular with regard to the undrawn 6 billion euros syndicated loan facility, even if the facility includes a very large number of lenders) could be compromised if one or more of the financial institutions with which the Company has contractual relations experiences liquidity problems or is no longer able to meet its obligations.
Investments can also expose France Telecom-Orange to counterparty risk since the Company is exposed to the collapse of the financial entities with which it has made investments. See Note 11.5 Credit Risk and Counterparty Risk Management to the consolidated financial statements.
The international banking system is such that financial institutions are interdependent. As a result, the collapse of a single institution (or even rumors regarding the financial position of one of them) may increase the risk for the other institutions, which would increase the counterparty risk for France Telecom-Orange.
For customer-related credit risk and counterparty risk see Note 11.5 and Note 3.3 Trade Receivables to the consolidated financial statements.
Foreign Exchange Risk
21. France Telecom-Oranges results and cash position are exposed to exchange rate fluctuations.
In general, foreign exchange markets have recently experienced heightened volatility as a result of the global economic and financial crisis, which could increase the currency risks and hedging costs for France Telecom-Orange, as a result of unfavorable exchange rate movements.
A significant portion of France Telecom-Oranges revenues and expenses is recognized in currencies other than the euro. The main currencies in which France Telecom-Orange is exposed to a material foreign exchange risk are the pound sterling, the Polish zloty and the Egyptian pound. Fluctuations from one period to the next in the average exchange rate for a given currency could have a material effect on the revenues and expenses in this currency, which would in turn have a material effect on France Telecom-Oranges results. In addition to the main currencies, France Telecom-Orange carries out its business in other monetary zones, including in certain emerging markets (such as those in the CFA franc zone), which are incidentally considered to be drivers of future growth for France Telecom-Orange. A fall in the currencies of these markets would adversely affect France Telecom-Oranges revenues and gross operating margin as well as its growth potential. In regard to 2011 data, the theoretical impact of a 10% fall against the euro in the main currencies in which the Groups subsidiaries operate would have cut consolidated revenues by 2.1% and Reported EBITDA by 1.8%.
Finally, as a result of focusing its development strategy on emerging markets, the share of Group business exposed to currency risk is likely to rise in the future.
When preparing the Groups consolidated financial statements, the assets and liabilities of foreign subsidiaries are translated into euros at the closing rate. This translation, which does not affect the income statement, could have an adverse effect on the assets and liabilities in the consolidated balance sheet, with a corresponding translation adjustment in equity, for potentially
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significant amounts. See Note 11.2 Foreign Exchange Risk Management, Note 7.2 Other Intangible Assets and Note 13 Shareholders Equity to the consolidated financial statements.
France Telecom-Orange manages the foreign exchange risk on commercial transactions (stemming from operations) and financial transactions (stemming from financial debt) in the manner set out in Note 11.2 to the consolidated financial statements.
Notably, France Telecom-Orange makes use of derivatives to hedge its exposure to exchange rate risk but cannot guarantee that these hedging transactions will effectively or completely limit its exposure or that suitable hedging instruments will be available at reasonable prices. In addition, hedging costs stemming from exchange rate fluctuations could increase generally depending on market liquidity and banks financial positions.
To the extent that France Telecom-Orange had not used any hedging instruments to hedge part of this risk, or if its strategy for using such instruments is ineffective, France Telecom-Oranges cash flows and results could be adversely affected.
See Note 10.10 Derivative Instruments to the consolidated financial statements.
Risk of Asset Impairment
22. France Telecom-Orange has recognized substantial amounts of goodwill as a result of acquisitions made since 1999. Impairment losses on this goodwill, likely to have a material adverse effect on France Telecom-Oranges balance sheet and results, could thus be recognized in accordance with IFRS.
France Telecom-Orange has recognized substantial amounts of goodwill in connection with its acquisitions since 1999, in particular the acquisitions of Orange, Equant, Amena and the equity interest in TP S.A. As of December 31, 2011, the gross value goodwill of continuing operations amounted to 30.6 billion euros.
Recoverable amounts of the businesses which support the book values of long term assets (including goodwill) are sensitive to the valuation method and to the assumptions used in the models. They are also sensitive to any change in the business environment that is different to the assumptions used. Thus, when events or circumstances indicate that an impairment loss may occur, France Telecom-Orange recognizes an impairment loss on this goodwill, particularly in the case of events or circumstances that involve material adverse changes of a permanent nature affecting the economic climate or the assumptions and targets used at the time of the acquisition.
In accordance with IFRS, the present value of goodwill is subject to annual assessment. Over the past five years, France Telecom-Orange recognized significant impairment losses in respect of its interests in Poland and Egypt, in particular. At December 31, 2011, the cumulative amount of impairment losses on continuing operations was 3.3 billion euros.
New events or adverse circumstances could conduct France Telecom-Orange to review the present value of this goodwill and to recognize further substantial impairment losses that could have an adverse effect on its results. In this regard, at December 31, 2011, the specific random factors that may affect the estimate of recoverable amounts were as follows:
in Europe, potential developments resulting from the financial and economic crisis and the impact on consumer behavior and direct or indirect taxation levels; the operators reactions to this environment, through changes in offers and pricing (particularly in Spain), or in response to new entrants; and ability to adjust costs and capital expenditure in keeping with potential changes in revenues;
in emerging countries: changes in the political situation and the ensuing economic and regulatory impacts.
For further information on the impairment of goodwill and the recoverable amounts (notably key assumptions and sensitivity), see Note 6 Impairment Losses and Goodwill to the consolidated financial statements and Section 22.214.171.124 From Group Reported EBITDA to Operating Income.
23. France Telecom-Oranges results and financial position could be adversely affected by a downturn in the equity markets.
Volatility in the equity markets, and especially a downward trend in such markets, could have an adverse impact on France Telecom-Oranges results, in the event of a fall in the stock prices of France Telecom-Oranges listed subsidiaries, in particular TP S.A. (Poland), Mobistar (Belgium) and ECMS (Egypt), if it subsequently becomes necessary to recognize impairment losses on the corresponding assets.
24. Future sales by the Public Sector of shares in France Telecom may negatively impact France Telecoms share price.
At December 31, 2011, the French Government directly owned 13.4% of the shares, and the Fonds Stratégique dInvestissement owned 13.5% of the shares of France Telecom (see Section 18 Major Shareholders). Should the Public Sector decide to reduce their interest in France Telecom, such a sale, or even the belief that such a sale is imminent, could have an adverse effect on France Telecoms share price.
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5 information about the issuer
5.1.1 Company Name
5.1.2 Place of Registration and Registration Number
Paris trade and companies register (Registre du commerce et des sociétés RCS)
RCS number: 380 129 866
APE (Activité Principale Exercée - Principal Activity) Code: 642C
5.1.3 Date of Incorporation and Term
France Telecom was incorporated as a French société anonyme on December 31, 1996 for a 99 year term. Barring early liquidation or extension, the Company will expire on December 31, 2095.
5.1.4 Registered Office, Legal Form and Applicable Law
6, place dAlleray, in Paris (15th arrondissement), France.
Telephone: +33 (0)1 44 44 22 22
At its meeting on March 21, 2012, the Board of Directors decided to transfer the Companys registered office to 78, rue Olivier de Serres, Paris (15th arrondissement), effective at the end of the Shareholders Meeting of June 5, 2012, which will be called upon to ratify this decision.
France Telecom S.A. is governed by French corporate law, subject to specific laws governing the Company, notably Act 90-568 of July 2, 1990 on the organization of public postal and telecommunications services, as amended by Act 96-660 of July 26, 1996 and Act 2003-1365 of December 31, 2003.
The regulations applicable to France Telecom S.A. as an operator are described in Section 6.6 Regulation.
5.1.5 Important Events in the Development of the Companys Business
Since the 1990s, France Telecoms area of activity and its regulatory and competitive environment have undergone significant changes which have affected the composition of its revenues, its activities and its internal organization. In France, all telecommunications services have been open to competition since January 1, 1998 (apart from local communications, which became open to competition on January 1, 2002).
In a context of increased deregulation and competition, France Telecom, between 1999 and 2002, pursued a strategy of developing new services and accelerated its international development by making many strategic investments (acquisitions, equity investments, UMTS licenses). During that period it acquired, in particular, Orange Plc., and therefore the Orange brand, as well as Global One and Equant, and made equity investments in Polish operator TP S.A., NTL in the United Kingdom (which has since been sold) and MobilCom in Germany (now called Freenet, of which France Telecom holds less than 1%). Mostly, these strategic investments could not be financed by issuing shares, which has led to a significant increase in the Groups debt.
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At the end of 2002, France Telecom started a large-scale refinancing plan for its debt to reinforce its balance sheet, as well as an operational improvements program, the success of which has allowed the Group to develop a global integrated-operator strategy by anticipating changes in the telecommunications industry.
This strategy was carried out at the end of 2003 through the acquisition of the minority interests in Orange S.A., Wanadoo and Equant, the implementation of a new Group organization consistent with this strategy and the launch of new offers at a sustained pace.
In 2005, France Telecom acquired 80% of the capital of Spanish mobile operator Amena, whose activities were then regrouped with the fixed and Internet activities of France Telecom in Spain into a single entity operating under the Orange brand. In 2008 and 2009, France Telecom acquired almost all of the remaining capital of France Telecom España.
In parallel, France Telecom has streamlined its asset portfolio by selling non-strategic subsidiaries or holdings such as Casema, Eutelsat, Wind, Compañia de Telecomunicaciones de El Salvador, Telecom Argentina, Noos, Bitco (Thailand), Orange Denmark, ST Microelectronics, Télédiffusion de France (TDF), Intelsat, as well as its mobile and Internet activities in the Netherlands.
Furthermore, PagesJaunes, the Groups directories subsidiary, was floated on the Paris stock exchange in 2004, and the balance of the France Telecom stake was sold in 2006.
In 2006, Orange became the single brand of the Group for Internet, television and mobile services in most countries where the Group operates, and Orange Business Services the brand for services offered to businesses throughout the world.
As of 2007, France Telecom-Orange has pursued a selective acquisition policy mainly focused on emerging markets (in particular Africa and the Middle East), while also attempting to grasp opportunities for consolidation in markets where the Group was already present. Thus, in December 2010 France Telecom acquired a 40% stake in Moroccan operator Méditel, then, in July 2011, an indirect stake of 20% in Iraqi mobile operator Korek and in October 2011 100% of mobile operator Congo Chine Telecom in the Democratic Republic of Congo. France Telecom also signed an agreement with Deutsche Telekom which led to the creation of the joint venture Everything Everywhere in the United Kingdom on April 1, 2010, and disposed of TP Emitel, a subsidiary of TP S.A. in Poland, in June 2011, and in February 2012 of Orange Suisse as well as its stake in Orange Austria.
In July 2010, the Group launched a new strategic plan, Conquest 2015. This initiative is aimed at its employees, customers and shareholders as well as, on a larger scale, at the society in which the Company operates. For more information on France Telecom-Oranges strategy, see Section 6.2 France Telecom-Oranges Strategy.
The introduction to Section 6.3 Overview of Business provides information on France Telecom-Oranges competitive position in its various markets.
The Companys stock has been listed since October 1997 on both Euronext Paris and the New York Stock Exchange. The listing was part of the French States disposal of 25% of its shares to the general public and France Telecom employees. The French States interest was subsequently reduced in steps to 53.1% prior to the Act of December 31, 2003 on telecommunications public service obligations and on France Telecom, which authorized the Companys privatization, eventually taking place on September 7, 2004 when the French State sold an additional 10.85%. As of December 31, 2011, the French State held, directly or together with the FSI (Fonds Stratégique dInvestissement), 26.94% of France Telecom S.A.s share capital.
See Section 126.96.36.199 Group Capital Expenditures.
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6 overview of the groups business
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This chapter contains forward-looking information about France Telecom-Orange. By its nature, the achievement of these targets is subject to numerous risks and uncertainties that may give rise to differences between the stated objectives and actual results. The most significant risks are described in Section 4 Risk factors. Please also consult information under the heading Forward-looking information at the start of this document.
Overall background of the Digital Market
FIGURE 1: GEOGRAPHICAL BREAKDOWN OF TOTAL TELECOMMUNICATIONS MARKET REVENUES, IN BILLIONS OF EUROS
Source: Idate, IMF
In 2011 the telecommunications sector was relatively resilient to the global financial crisis. Growth over the medium term is being driven by two main segments: mobile data services and Internet services.
In terms of usage, customers are increasingly interested in speed, triple play and quadruple play offerings, and simplicity, as well as expecting customer assistance and trustworthiness from their carriers.
2010 was marked in particular by:
the expansion of social networks, which keep attracting users: Facebook customers amounted to 845 million at end-December 2011 (source: Facebook);
the impact of economic uncertainty on telecommunications industry and market in developed countries despite of sustaining growth in the sector.
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Telecommunications Sector Developments
The global market for telecommunications services maintained its growth in 2011, up 3.2%, confirming the moderate recovery started in 2010, when it was up 2.3% (source: Idate). This growth approximated the evolution of GDP, which was 4% in 2011, down one point from 2010 (source: IMF).
Overall, the sector resisted the deterioration in the general economic environment fairly well in 2011, but nevertheless did not recover its prior levels of growth, given the still challenging economic situation and the maturity level of some of its markets.
Mobile services remain the main driver of total growth, showing a significant upturn in 2011 of 6.2%. This market was up 13.1% (source: Idate), with almost 6 billion mobile customers at the end of 2011, due primarily to high growth in mobile communications in the worlds emerging countries. With total revenues for 2011 estimated at around 640 billion euros, mobile devices accounted for over half of all telecommunications services revenues worldwide and represent twice those of fixed telephony (source: Idate). On the strength of an explosion in mobile data usage, mobile broadband gave huge impetus to the sector. The new forms of communication, especially via social networks like Facebook or Twitter, have made it possible to expand mobile data usage.
The increasing demand for broadband mobile services, the appearance on the market of new mobile devices and the development of mobile applications and services are expected to offset the loss of revenues associated with declining voice services.
Fixed-line telephony now accounts for only 21.4% of total telecommunications services, compared with 50% in 2001, mostly due to the migration from fixed line to mobile telephony and a move to IP-based telephony. The decline in fixed telephony continued worldwide: the 2011 revenues from fixed telephony of 236 billion euros are down nearly 18% from 2008.
Internet services have continued to increase, reaching over 228 billion euros in value, and today represent 20.6% of total telecommunications services, nearly the percentage for fixed-line services. But they still do not make up for the fall in value of fixed-line services, where we find a decrease for voice of 22.5 billion dollars versus an increase for data of 13.7 billion dollars, according to Idate (The Global Market for Telecom ServicesMarkets & DataJuly 2011).
Telecommunication sector generally stood up well to the economic slowdown of the past few years, but in order to better serve their customers, operators have had to adapt, under difficult circumstances, to customers expectations and new uses. The strategic partnerships forged between telecommunications operators and media companies, such as between France Telecom-Orange and Dailymotion or Skyrock.com, have improved the customer experience with a wealth of service offerings enabling people to exchange, discover and share media.
When looking at development by geographic regions, growth in telecommunications remains very uneven. The sectors 1,105 billion euros worldwide are split nearly equally between the advanced countries of North America and Europe and the emerging countries of Latin America, Africa, the Middle East and Asia-Pacific.
Asia-Pacific today represents the biggest telecommunications market in the world, with revenues of 333 billion euros in 2011. China makes up nearly a third of this market (29.1%) and is catching up with Japan, which at 32% has started a slow decline.
Growth of services in Europe stayed negative at -0.8% as compared with -0.4% and -1.6% in 2010 and 2009 respectively. Russia is the growth leader in Europe with very strong positive rates (+6.4%) versus the negative ones of the European Union which saw a fall of -1.9%.
The region of Africa and the Middle East has experienced the worlds fastest growth (+10.4%), but its revenues, about 80 billion euros (Figure 1), are among the lowest.
The large emerging countries are still providing the growth in the market globally, while the gap between them and the advanced countries is getting wider.
In terms of mobile services, the differences between the various markets were more pronounced in 2011, owing to the different maturity levels. The saturated European market posted meager value growth of 0.9% while the Latin American market grew at 8.9% and the Indian and Chinese markets made leaps of 21.1% and 12.5% respectively. Africa and the Middle East also showed double digit growth at 11.6%.
Regarding to mobile phone penetration rates (number of subscribers per 100 inhabitants), it has reached very high levels in the advanced countries, especially wherever there is a strong trend toward prepaid subscriptions (Figure 2). This is particularly true in Italy, where the penetration rate is over 150%, or Germany, where it is 139% (source: Idate). By contrast, emerging economies in Asia and Africa, where SIM card penetration rate is still very low (e.g. 74.4% in China and 74% in Africa and the Middle East), offer significant potential for growth (source: Idate).
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FIGURE 2: PENETRATION OF MOBILE PHONES AND BROADBAND IN 2011 (AS A % OF THE POPULATION)
In terms of revenues, migration to the Internet has sparked a substantial decline in traditional fixed-line telephony, especially in Europe and Asia-Pacific, where the penetration of traditional telephony is higher and the migration to broadband more advanced. The substitution of mobile for fixed telephony, combined with a switch to IP, is also a reason for this broad decline in revenues. Africa and the Middle East is the only region to maintain a positive growth rate, of 2.6% (Figure 3).
In 2011, the worldwide growth of the Internet market is higher than in mobile market for the first time in most geographic areas, the exceptions being North America and Asia Pacific (Figure 3). Eventhough broadband internet is a newer service and far from achieving its saturation level, the penetration rate is already very high in Europe: According to the ITU (International Telecommunication Union), of the 1.8 billion households in the world, 700 million had a PC in 2011. One third, or 600 million, has Internet accessin comparison with one in five only five years ago. This level of hardware equipment blends two very different penetration rates: 74% in the developed world and 25% in the developing world.
FIGURE 3: ANNUAL GROWTH IN TELECOM REVENUES IN 2011
Dynamics of the ICT sector and new uses
The telecommunications industry, where information and communication technologies (ICT) come together, has a potential for high growth and value creation.
The major ICT players are moving away from their traditional core businesses and diversifying into related sectors such as information technology and broadcasting. The addition of these new areas is creating an ecosystem in which several sub-sectors and different players interact, both in partnership and in competition. The new players can be sorted into four categories: network equipment and handset manufacturers (like Apple, Cisco and Ericsson); network operators (like Orange and Vodafone); suppliers of services via the Internet (like Google and eBay); and content producers (like Canal+ and Sky).
This movement increases competition among the players because it challenges the classic service provider model. However, the reorganization of the ecosystem also generates synergies, because the innovations brought to the market by one player circulate and benefit all strata of the ecosystem. Apples entry into the telecommunications market, after initially causing apprehension among telecom operators, has radically changed the way in which mobile phones are used, and led to considerable expansion in the use of the mobile Internet.
2011 was a boom year for mobile Internet. The wide range of services offered and a lowering of prices saw it come into everyday use. Mobile handsets are now being used for much more than simply making calls and sending messages. They are used to read emails, access information, watch television and take photos and videos and share them on the Internet. Mobile handsets have thus become veritable multimedia platforms able to provide access to a multitude of services.
Over the next few years, the handset market should continue to grow rapidly and gain more ground in the ITC sector, according to Cisco research (VNI Global Mobile Data Traffic Forecast 2011-2016, February 2012). While the annual rate of growth in Internet traffic on PCs is expected to be 33% from now till 2015, the rates for televisions, tablets, smartphones and Machine-to-Machine (M2M) could be, respectively, 100%, 216%, 144% and 258%.
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The trend towards smartphones, which favors the penetration of new uses such as 3G, Wifi and GPS, is not without consequences for operators. In 2011 smartphones accounted for only 12% of all handsets but over 82% of total handset traffic. A basic smartphone generates 35 times more mobile data traffic than a traditional handset, according to that same Cisco report. In addition, in certain countries, mobile Internet may come to substitute completely for fixed Internet. This growth will need to be supported by a network able to provide reliable, good quality access and increasingly powerful handsets. Operators will therefore need to reinvest heavily, particularly in the new generation of LTE (Long Term Evolution) mobile networks.
FIGURE 4: ESTIMATED GROWTH IN IP TRAFFIC BETWEEN 2010 AND 2015
The robust expansion in IP traffic (Figure 4) is based largely on the increasingly large number of handsets connected to IP networks. The number of such handsets is expected to become twice as great as the total population by 2015. Video Internet traffic is also a major component in the growth of IP traffic. It should account for over 50% of consumer Internet traffic in 2012.
Enterprise Internet traffic will grow faster than the extended IP network (WAN). Overall IP traffic will grow at 18% versus 79% for enterprise mobile Internet and 19% for enterprise fixed Internet (source: Cisco VNI Forecast and Methodology 2010-2015.)
Fixed-line Internet services also shared in this rapid expansion. Pay television, Video On Demand, Internet content and catch-up TV are driving the market forward in the developed countries. Idate estimates that in 2010 there was one television per household in 1.35 billion households in the world, over half of which were located in the Asia Pacific region (source: Idate, Worldwide Television Market - January 2012.)
These new uses, combined with the growing number of users, have also led to an explosion in traffic, requiring large investments of capital to increase network capacities, and to a surge in costs for telecommunications operators. Service quality and network management accordingly remain a priority and a strategic driver for these operators.
On July 1, 2010 Stéphane Richard launched Conquests 2015, the France Telecom-Orange Group strategic project. It is the product of a broad collaboration among the Groups various units and countries and is organized around four themes: people, networks, customers and internationaldevelopment. The Groups ambition is to make Orange the preferred choice of all its stakeholders: its customers, its employees, its shareholders and society as a whole.
The year 2011 ended in the context of a difficult global environment for France Telecom-Orange, marked by major uncertainties and accelerating transformations, particularly in the telecommunications sector. More than ever, France Telecom-Orange must adapt to changes in the environment and seize new opportunities that will enable us to realize our strategic objectives.
Oranges men and women, at the heart of our priorities
The Group has an ongoing goal: to base our priorities on our people. The quality of social relations within the Company remains the basis of our performance in every other way.
In France, the new social contract project was launched in 2010, including measures to recruit 10,000 new employees over three years, an employee survey and a new mediation process.
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A new organization structure was also put in place to enhance the latitude of operating managers and local management teams.
The launch of Orange Campus sparked a change in managerial culture in France and internationally, with sites iin Poland and Spain.
Lastly, in November 2011 the Group introduced the Orange People Charter, (Charte Orange in French-speaking countries in the AMEA region), based on six commitments the Group has made towards developing its people.
Networks, the foundations of growth
Networks, the spinal column of the digital world, make up the Groups core business line and area of expertise. They are, more than ever, our key source of growth.
In 2011 the Group spent 12.7% of revenues on capital improvements, of which 55% was on the networks, as can already be seen in:
fixed-line, high capacity broadband networkswith the launch of a fiber optic rollout calling for two billion euros by 2015;
mobile high capacity broadbandfor which the Group has purchased 4G licenses in France, Spain and Belgium;
Mobile High Definition Voice, introduced in 14 countries, while 3G was launched in 13 countries of Africa and the Middle East, and 2,065 solar sites are up and running in 18 countries.
The french regulator (Arcep) has ranked the Group at the top of mobile networks in France, with speeds measured at two- to five-times faster than its competitors (source: Arcep - 2011 Results of the Quality Report on Voice and Data Services of 2G and 3G Mobile Networks in Continental France).
It is the objective of the France Telecom-Orange Group to be for its customers a comprehensive, popular, trustworthy carrier and to become their preferred partner for all their digital experiences. In a highly competitive sector, service quality improvements, awareness of user needs and customer satisfaction are critical issues for the Group.
The Customer experience 2015 program was launched in 2011 in all the European and AMEA countries, involving these areas: service quality, simplification and segmentation of product offerings, simplified relationships in all sales channels and recognition of customer loyalty.
The Group has positioned itself in Europe with such new offerings as contactless services (NFC), machine-to-machine communications and cloud computing.
In the AMEA region, the Group continues to develop products and services tailored to local markets, such as Orange Money.
The Groups international development is based on several objectives being met over the next three years:
reaching 300 million customers worldwide (vs. 226 million at the end of 2011);
in the emerging markets: doubling revenues to 7 billion euros and achieving 1 billion euros of revenue in the B2B market.
In terms of this development strategy, significant events of 2011 included:
new acquisitions or equity investments in telecommunications operators: Meditel in Morocco (end 2010), Korek Telecom in Iraq, and CCT in the Democratic Republic of Congo;
continuation of the policy of partnerships and collaboration with the signing of a strategic partnership framework between Orange and China Telecom, and the creation of a purchasing joint-venture with Deutsche Telekom, Buyin, for the purpose of reducing costs through economies of scale (price, volume) and increasing standardization in purchasing.
2012 Priorities: adaptation to achieve Group objectives
The Group strategic plan, adapt to conquer, is the quantified and operational expression of conquests 2015. It makes it possible to quantify the effect of the project on the Group and to determine the resources necessary for implementing it. The plan makes use of specific operating programs that will help us attain our objectives.
Innovation, the centerpiece of the Groups plan
Innovation is a key factor for the Group in seizing new opportunities and developing its fundamentals.
The Group has defined five fields of innovation for its products and services and two fields to develop and transform its assets and strength. Our research and innovation will focus on these issues:
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existing activities, in order to protect and grow revenues from monetizing traditional businesses: communication services and monetization of data;
new activities, such as secured transactions and data protection (safety, identity and privacy), cloud services and the Internet of things (integrated solutions for particular sectors like energy or water distribution and transportation);
the convergence of access, screens and services as a differentiating and loyalty-building feature in the market (Orange universe); networks face major challenges in the coming years better quality of service, data explosion, deployment of very high broadband as a key differenciator - and we need to strengthen them and monetize their intelligence towards third parties (other operators or services and content providers) (smart network).
The Group has one valuable advantage in meeting the innovation challenge: more than 5,000 research scientists, engineers and technicians around the world. The goal is to make the best use possible of their skills.
This is the purpose of the nova+ program, which lays out three principles for the Groups innovation chain: joint responsibility of the countries and the markets, involved from the very start in the choice of the innovations to be developed, fully integrated projects, with a single leader to orchestrate resources in research, development and marketing, a clear distinction within the organisation between research, forward planning and conception/rollout.
Among our strategy priorities, six programs were identified as needing sharp acceleration and calling for special attention from the organization: Orange user interface, content aggregation, seamless wireless access, payment and contactless (NFC), smart cities and smart networks for wholesale intelligence.
New management processes were established for these six programs, which will be managed directly by the Groups Executive Committee, in order to allow all the relevant teams to work across organizational boundaries and in perfect alignment on their shared objective. The other strategic priorities (e.g. cloud, social communication, M2M ) will remain managed under the existing traditional organization.
Other operational programs
These programs aim to ensure the development of the men and women who work at Orange through the Orange people charter and its French version, the Social Contract.
They are also intended to base Group development on more efficient and more better shared operating models, through these programs:
customer Experience 2015, introduced to make Orange the leader in customer service by 2015 in all its markets, by involving all Group business lines in improving service quality, simplification and segmentation of products, better sales service and after-sales service in all channels, the right customer support throughout their Orange experience and loyalty recognition;
Chrysalid, set up to identify and encourage operating efficiencies initiatives throughout all operations, business lines and regions, in order to control costs increase especially in networks, customer relations, marketing and sales with savings targets of 2.5 billion euros in 2015, including 1.5 billion euros by 2013. The purpose is to improve our current processes while adopting the approaches and business models that will make us the operator of the future. Steps taken in 2011 have enabled savings of 470 million euros including 250 million euros in networks. In 2012, the main savings areas are expected to be networks, customer service and marketing.
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(1) The Everything Everywhere customer base in the UK is 50% consolidated in the France Telecom-Orange customer base.
At the end of 2011, the France Telecom-Orange group had 226.3 million customers in the world, an 8% increase over 2010. These customers included 167.4 million mobile phone customers excluding MVNOs (11.3% increase) and 14.4 million broadband customers (5% increase).
The increase in the number of customers is related mainly to mobile services growth in Africa and the Middle East, these areas representing 74.6 million customers on December 31, 2011, an increase of 26.4% (+15.6 million additional customers). Orange Money is being marketed in eight African countries and covered 3.2 million customers at the end of 2011.
In Europe, smartphone use had increased 57% to 16.2 million customers at December 31, 2011. Digital television (IPTV and satellite) was up 24.8% with 5.1 million subscribers at December 31, 2011, located mainly in France and Poland. Lastly, subscriptions to the Deezer service (online music) as part of Oranges mobile and ADSL offerings reached 1.2 million customers at December 31, 2011. Similarly, the MVNO customer base for the Group in Europe has expanded 21.3% (5.6 million customers at December 31, 2011).
In 2011, the Group generated 45.3 billion euros in revenue.
The Groups activities are detailed in the Registration Document, broken down by the following operating sectors: France, Poland, Spain, Rest of the World, Business Communication Services, International Carriers and Shared Services. The financial indicators mentioned in this chapter, such as Ebitda and Capex, are financial aggregates that are not defined by IFRS. For more information, see Chapter 9, Section 188.8.131.52 and the Financial glossary appendix. Unless otherwise indicated, the market shares indicated in this chapter correspond to market shares in terms of volume.
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184.108.40.206 The Telecom Services Market
KEY MACROECONOMIC INDICATORS
TELECOM SERVICES RETAIL MARKET REVENUES
Source: Arcep (Year 2011: year-on-year cumulative to 3rd quarter 2011)
NUMBER OF CUSTOMERS (IN MILLIONS)
Source: Arcep (Q3 2011)
Since the second half of 2011, France has seen a slowdown in economic activity in most business segments, fueled by the sovereign debt crisis. This downward trend was apparent at the Company level through a decline in capital expenditures, exports and job creation. Nevertheless, GDP growth for 2011, estimated at 1.7%, turned out slightly higher than the 1.4% seen in 2010 (source: Insee, October 2011). At the same time household consumption slowed down, by 0.7 points.
The telecommunications market followed the same trend and shows signs of flattening out. The total market for electronic communications services fell 3.1% for the year (source: Arcep, January 11, 2012).
The revenue decrease in fixed-line services continued at an annual pace of 2.6%. For the first time, mobile services revenue declined, down 1.4% on the year (source: Arcep, January 12, 2012, calculated year-on-year), while the mobile penetration rate grew by 2.5 points in 2011 to 103.2% as of September 30 (source: Arcep, November 2011).
According to a Médiamétrie study, the penetration rate of household multimedia equipment continued to rise in 2011, with an especially sharp increase in netbooks (up 55%) and touch-screen tablets, which became hugely popular. Thus 73.2% of households had computers at the end of the third quarter of 2011, which was a yearly increase of 2.1 points. The omnipresence of the Internet in all business segments as well in the private sphere constituted a true engine of growth, promoting digital convergence in content and in devices. Televisions, computers, audio systems and mobile phones are all interconnected at this point.
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Fixed-line telephony market
At end September 2011 the number of fixed telephone subscribers had fallen 1.6% from the prior year, owing to the decline in the switched telephone network, partly offset by the 6.3% increase in Internet telephony. This trend has been growing stronger since early 2010 with the reduction in the number of double telephone subscriptions (PSTN and VoIP) in favor of single VoIP subscriptions (dual play, triple play and quadruple play offers).
Revenues from fixed-line services (fixed-line telephony and Internet) continued to decrease (down 2.6% yearly as of end September 2011) owing to the decline in subscriptions (down 8.5% yearly as of end September 2011) and in message volume (down 11.5%). The expansion of ADSL offers proposed by a lot of providers that include unlimited calling to mobile phones from modem/routers also hurt revenues from out-of-bundle VoIP traffic.
BROADBAND AND HIGH CAPACITY BROADBAND
The total number of broadband and high capacity broadband Internet subscriptions continues to increase, at an annual rate of 5% as of end September 2011. ADSL represents 92.5% of these customers, while high capacity broadband (fiber optic access) grew by 29.3% over the first nine months, to 600,000 customers at end September 2011.
The growth in revenues from broadband and high capacity broadband continued, linked to the greater number of customers, but was negatively impacted by a decrease in revenues from broadband voice communications, once these became included in certain single-price packages for calls to mobile phones.
ISP revenues from multiplay packages as well as subscriptions and communications on VoIP services, which accounted for 89.3% of total revenues from broadband and high capacity broadband, were up 2.6%.
The increase in usage was buoyed by the growth in social networks, television, and downloading music and video. Television over ADSL has experienced strong growth, with the proportion of ADSL subscribers taking a television service up 2.7 points, to 56.5%.
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Mobile telephony market
The number of subscribers to mobile telephone services (number of SIM cards in use) was 67 million at the end of the third quarter of 2011, or a yearly increase of 3%. This growth is attributable both to our ongoing work on improved network quality, accommodating expanded use of mobile multimedia (Internet and email) and to our greater use of unlimited offers.
The mobile penetration rate is 105.5% of the population at end December 2011 (source: Arcep fourth quarter 2011), up nearly 5 points on the year.
The growth in subscriptions started to slow down (to 3.7% versus 8.6% the year before), largely due to slower growth in cards for non-telephone uses (Internet-only cards and cards for communications equipment). Nonetheless, the proportion of customers with single-price packages has not stopped growing and represents seven out of ten customers (source: Arcep January 2012). Blocked contracts have grown, letting customers control their usage in tight economic times. Prepaid cards grew nearly six points as operators appeared with inexpensively priced international calling plans, in particular to emerging countries.
The rate of growth in customers using the 3G network remained high, in line with the growth both of higher performing mobile handsets and of unlimited mobile Internet plans. At end September 2011 this annual growth rate was 13.7%, though this was slower than at the end of 2010.
While the volume of mobile telephone usage remained stable, SMS volume grew by 32.6% on the year as unlimited offers proliferated.
Revenues from mobile telephony saw a slight deceleration (down 1.4% annually at end September 2011 versus up 2.5% in 2010) due to the elimination of the reduced VAT on broadcast access as of February 1, 2011 and also to the price decline and stagnation in the volume of communications. On the other hand, revenues from data transfer (SMS and MMS messages, and Internet access) grew by 13.3%, although at a lesser pace than in 2010 (+19%).
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220.127.116.11 The Competitive Environment
Fixed-line telephony and Internet
BROADBAND MARKET SHARE
Source: Orange (2011 data as of end September 2011)
In 2011, France Telecom-Oranges main competitors in the consumer fixed-line telephone market were SFR-Neuf Cegetel, Free, Bouygues and Numericable.
Despite heightened competition, Orange remained the broadband Internet market leader, with a market share at end September 2011 of 42.3%, down by 0.9 point compared with 2010. SFR lost 0.5 point while Bouygues picked up 1.2 points, cable operators 0.3 point and Free 0.1 point, virtually unchanged. The arrival of Iliad group on the mobile market could make Free more attractive on the Internet broadband market in 2012.
Internet offerings increased during 2011, with a proliferation of unlimited calling plans from a modem/router to a nations mobile phones. SFR and Free marketed offers for their new modem/routers with enhanced functionality and content. In April 2011 Orange simplified its product line and introduced two new, customizable, enhanced-content offers (Livebox Zen and Livebox Star). All the major ISPs employed the same strategy, which was to enhance their triple play offers and upgrade their hardware, together with a pricing increase. Quadruple play offers were highly successful. Introduced at Orange and Bouygues in 2010, these group fixed-line telephony, mobile, Internet and television into one package. They now also include unlimited calling to mobile phones plus added services. SFR does not offer quadruple play, strictly speaking, but a Multipack offer which allows the customer to build up discounts from his or her fixed and mobile subscriptions.
In contrast, we see new virtual operators appearing on the ADSL market, such as Prixtel, who offer cut-rate plans with Internet access and full unbundling, with no commitments and no cancellation charges.
High capacity broadband
In December 2008, the major operators rolling out fiber optic (Orange, SFR, Free and Numericable) had undertaken to work together to standardize technical solutions for pooling the terminating segment of fiber optic networks (see the Section below on the regulatory environment).
The number of high capacity broadband subscriptions was estimated at 600,000 at end September 2011, of which 175,000 were fiber-to-the-home (FTTH) or bottom-floor connections, and 425,000 fiber optic connections with coaxial termination (source: Arcep third quarter 2011). At the same date, the total number of households open to FTTH was 1,350,000, an increase of 11.6% from June 30, 2011.
Numericable already has a substantial high capacity broadband network of over 8.2 million terminal connections, built on ultra high speed cable and fiber.
In July 2011, Orange introduced a wholesale scheme for expanding fiber optic networks to subscribers outside very densely populated areas. This arrangement, offered to all other operators, will pool capital spending made in these less profitable areas while maintaining competition on the retail market. After it was introduced, Free and Orange entered into a co-financing arrangement to install fiber optic networks to the end-user throughout some 60 communities totaling five million households.
MOBILE MARKET SHARE
Source: Orange (2011 data as of end September 2011)
The slower growth in revenues, despite growth in the number of mobile phones in use, reflects heightened competition. Creating value in data communications has become essential to offsetting the drop in voice revenues that has occurred as unlimited calling offers have become commonplace. Differentiation in the market is no longer largely a matter of offering numbers of hours but volumes of data, plus content included in the package price.
The elimination in January 2011 of the tax law allowing telecommunications operators to apply a reduced rate of VAT forced operators to make up that loss via revenue.
Additionally, new virtual operators appeared on the market such as Numericable, Prixtel and la Poste Mobile, while those already there, such as Virgin and NRJ, strengthened their position with completely unlimited, low-price offers for voice, data and texting as well as packages with no commitment and no handset fees. In this way, virtual operators picked up market share in 2011 at the expense of traditional operators 12.7% in December 2011 versus 8% a year earlier (source: Arcep: 4th quarter 2011).
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The reaction from the three operatorsOrange, SFR and Bouygueswas to modify their offers (such as SFRs Square Deals or Oranges Origami) and leverage their Internet subscriber base by offering low-priced quadruple play plans. They also expanded their no-handset, single-price plans, which carry a monthly discount on the basic rate, and introduced new, no-commitment offers sold only on line. Orange offered Sosh, Bouygues Telecom B&You, followed by SFRs line of low-priced packages, RED. These new plans are similar to the no commitment, no handset fee plans offered by the MVNOs.
Finally, in anticipation of Free Mobiles (Iliad group) arrival in the market in early 2012, Orange and Free Mobile signed a national 2G and 3G roaming contract in March 2011 (see Section 18.104.22.168 Key events). In early 2012, Free encountered a number of problems in its mobile network. Despite the presence of roaming between the Free Mobile and Orange France networks, these difficulties did not impact Group infrastructures or Orange customers.
22.214.171.124 The Regulatory Environment
French legal and regulatory framework
The electronic communications sector is primarily governed by the French Postal and Electronic Communications Code (CPCE) as well as Bylaws relating to e-commerce, the information society, consumer protection and data protection. The audiovisual communication services produced or distributed by the France Telecom-Orange Group come under the specific regulations governing this sector and are managed by the law of September 30, 1986.
For information concerning risks linked to regulation, see Section 4.2 Legal Risks.
The Arcep (Autorité de Régulation des Communications Electroniques et des Postes) is the body responsible for regulating the electronic communications sector in France.
The French Competition Authority, established in January 2009 following the restructuring of the French Competition Council, is an independent government authority responsible for ensuring open market competition and compliance with government economic policy. It has jurisdiction over all business segments, including the electronic communications sector. This Authority has its own investigations department and sanction powers for anti-competitive practices.
The ANFR (Agence Nationale des Fréquences - French national agency for frequencies) is responsible for planning, managing and controlling the usage of radio frequencies and for coordinating the establishment of certain radio transmission facilities. The frequency spectrum is the domain of 11 controlling authorities: government ministries, the Arcep and the French Broadcasting Authority (CSA). The Arcep and the CSA are in turn responsible for allotting to users the frequencies they control.
The CSA is an independent government authority established by the law of January 17, 1989 responsible for ensuring the freedom of audiovisual communication in France, i.e., radio and television, by any electronic communication process, under the terms and conditions defined by the law of September 30, 1986.
Transposition of the new EU regulatory framework for electronic communications known as the telecoms package
In 2009 the European Parliament and Council passed a reform of the electronic communications regulatory framework for the purpose of fostering competition and supporting the rights of consumers. It consisted of two directives: 2009/140/EC and 2009/136/EC. This new telecoms package aims to increase the autonomy of national regulators while ensuring improved regulatory consistency. To that end, it established the Body of European Regulators for Electronic Communications (BEREC) and provides for a functional separation as a possible, extraordinary remedy if other remedies fail to ensure effective competition and if serious competitive problems persist.
Moreover, these specific provisions are intended to maintain and foster competition primarily in the following respects:
improved information available to consumers;
reducing to one day the portability time for fixed and mobile numbers;
objectives for promoting user access to electronic communications services, as well as arbitration authority granted to the Arcep to settle disputes between operators and content providers regarding Internet neutrality. In this area, however, the European Commission acknowledges that operators shall have the discretion to set different quality levels service by service. Customers must also be given personal data protection guarantees.
The French government transposed the telecoms package into French law by Ordinance no. 2011-1012 on electronic communications, dated August 24, 2011, following the adoption of the Enabling Act no. 2011-302 of March 22, 2011. The process of approving the law ratifying the Ordinance and the texts constituting the regulatory aspect of the transposition is currently underway.
Controversy over mobile phone masts
In 2009 the Government set up an Operational Committee (Comop) to perform a rigorous scientific assessment of the possibility of reducing human exposure to radio waves and to do so by calling on all interested parties. This technical work, the complexity of which was seriously underestimated when begun, continued through 2011. The first assessments of the exposure to radio waves emitted by mobile phone masts in the towns that volunteered for the study showed that it is very weak. The outliers, where exposure was significantly greater than the observed average, need to be inventoried so that they can be reduced.
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In parallel with the technical work, a methodology to inform and consult with residents on plans to install new towers was devised and needs to be tried out. In the summer of 2011 the Comop became known as the Copic and was tasked with studying the recommendations that came out of the 2 years of work, principally the field testing.
Decision of the French Administrative Supreme Court (Conseil dEtat) on the powers of Mayors
Basing its decision on the legal framework provided by the French Postal and Electronic Communications Code, which thoroughly lays out the special policy on electronic communications that is administered by the Minister of Electronic Communications, the Postal and Electronic Communications Regulatory Authority (Arcep) and the National Frequencies Agency (ANFR), the French Administrative Supreme Court ruled that town and city mayors could not use their police powers to regulate the installation of mobile phone masts.
IARC classification of radio waves
The International Center for Cancer Research, a division of the World Health Organization, has classified electro-magnetic fields from radio frequencies in Group 2B of its schema, i.e. possibly carcinogenic for humans. This classification reflects the fact that the link between cancer and radio waves has not been demonstrated by current scientific data. This is a reason for further research and preserving the precautionary measures that operators have been taking for several years, including earbud kits that come with the phone. No special measures have been adopted by WHO or by the French Government as a consequence to these findings.
Amended Finance Law 2011 and Finance Law 2012
The French Amended Finance Law of 2011 and Finance Law of 2012 provides the following tax reforms:
modification of the taxable basis for the tax paid by distributors of television services and allocated to the French national center of cinematography and the moving image (CNC). The CNC is the beneficiary of this tax, calculated as a percentage of revenues but not to exceed 229 million euros, with any surplus beyond that going towards a reduction of the deficit in the State budget;
for 2012 and 2013, a special 5% increase in the income tax applicable to large corporations;
a new tax benefiting ANFR to cover the costs incurred in gathering and processing claims by users of DTTV concerning interference from the operation of 4G radio transmission facilities.
Law on private copying fees
The law adopted by the Parliament on December 19, 2011 changes the national rules on private copying fees, thereby inserting into the Intellectual Property Code the case rulings made by the Administrative Supreme Court on the matter.
The legitimate acquirer of a work has the option of reproducing that work without the prior consent of the author, if it is for his own personal use. But against that he is subject to the private copying fee, levied on the available memory capacity of media devices. Orange is liable for this fee on certain devices that it markets.
The private copying fee law stipulates that only copies made from lawful sources can create a right to compensation. The mechanism for payment or exemption through conventional means, moreover, is broadened to include purchasers of recording devices for purposes other than private copying, and these are primarily professionals. When recording devices are offered for sale, the fee must be brought to the attention of the purchaser, together with a notice explaining the fee and how it is used.
Finally, this law allows the ad hoc Commission, charged with determining which devices are covered and the amount of fees, one year to bring such fees into line with new legal requirements based on usage studies.
Law on guidelines and programming for the conduct of internal security (LOPPSI 2)
The law on guidelines and programming for the conduct of internal security (LOPPSI 2), passed by Parliament on March 14, 2011 and mainly concerning duties of police and military concerned with civil order for the period 2009-2013, contains a number of provisions affecting the electronics sector.
In Article 6 of Law no. 2004-575 of June 21, 2004 for confidence in the digital economy, LOPPSI 2 puts a duty on Internet service providers to block pedophilic pornographic sites simply on demand of the Office Against Information and Communications Technology Crime (OCLCTIC), without prior court order.
In addition, this law amends Article L. 34-3 of the Postal and Electronic Communications Code to now require mobile operators to block mobile devices for four business days from the time they receive an official declaration of theft from the police or gendarmerie.
The Hadopi 1 and 2 Laws their implementing decree
The set of rules provided by the laws of June 12, 2009 to promote the dissemination and protection of created works on the Internet (known as the Hadopi law) and of October 28, 2009 concerning the criminal protection of literary and artistic property on the Internet (called Hadopi 2) were supplemented by the Decree of March 11, 2011 concerning automated processing of personal data authorized by Article L. 331-29 of the Intellectual Property Code titled A system for applying measures for the protection of works on the Internet.
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This decree amends the procedure originally contemplated in the System for applying measures for the protection of works on the Internet of March 5, 2010, whose purpose was to authorize under certain conditions the automated processing of personal data of subscribers covered by the graduated response process. The new clauses modify the last phase of the graduated response by calling for the automated forwarding of case files to the public prosecutor so that the latter may decide whether to start criminal proceedings against subscribers flagged for gross negligence.
Low-income mobile rates
During the round table of March 7, 2011 under the auspices of the Minister for the Digital Economy, Eric Besson, and the Secretary of State for Consumers, Frédéric Lefebvre, Orange, together with other mobile telecommunications operators, signed an agreement binding them to offer a low-income mobile phone plan for people receiving public aid. This offer was to meet specifications set by the government so as to qualify as a certified low-income rate.
This certification was awarded to Orange in September 2011 for its RSA Blocked Plan, which met the required criteria, in particular a package including 40 minutes of calling and 40 text messages for a limited price, as well as no time commitment and no cancellation charges.
Infrastructure and networks
Fiber installations in new buildings starting April 1, 2012
A new implementing decree for the Anti-Digital Divide law of December 17, 2009 was adopted on December 14, 2011 amending Article R. 111-14 of the Construction and Dwellings Code, which deals with optical fiber in new buildings. The decree provides that in high-density areas and under conditions defined by a ministerial order, the number of fiber cables per dwelling shall be as many as four. Moreover, the decree is broadened to include all buildings for which a building permit is requested from April 1, 2012 onward.
New regulation for a census of underground, aerial and underwater networks.
Following Grenelle 2, the government decided to establish a new regulation effective as of July 1, 2012 to prevent damage to pipelines and underground networks whenever construction requires digging. This reform of the decree of October 14, 1991 concerning requests for information and declarations of intent to build, puts new obligations on all companies that manage infrastructure and all network operators. Henceforth a single office for network mapping, under the aegis of Inéris, will identify operating companies and make a survey of their networks.
The office is opened from April 1, 2012, free of charge to project owners and builders, who applies there for their building permits. Companies doing underground work are also required to furnish geo-coded maps with their permit applications. These new provisions call for user fees to finance the single office where applications shall be submitted for electronic communications installations, which are projects considered to be economically critical. The size of the fees will be determined by order of the Minister of Transport and Distribution Network Security and are expected to be published at some point in 2012.
Completion of the transposition of the regulatory component of the new European electronic communications framework known as the telecom package: regulatory component.
Ordinance no. 2011-1012 dated August 24, 2011 concerning electronic communications constitutes the legislative component of the telecom reform package. This set of rules will be supplemented by a regulatory component that includes:
an Administrative Supreme Court decree pursuant to the Data Privacy Law concerning the prevention and notification of personal data violations;
an Administrative Supreme Court decree transposing the new European regulatory framework into the French Postal and Electronic Communications Code (CPCE) and providing heightened security against interceptions of electronic communications;
a decree amending the duties of operators contemplated in the CPCE in accordance with the new European framework.
Drafts of all these decrees have been submitted for comment to the Consultative Commission for Electronic Communications (CCCE), the Superior Commission of Postal and Electronic Communications Public Services (CSSPPCE) and the National Digital Council (CNN). The National Data Privacy Commission must also issue an opinion on these drafts. Then the Administrative Supreme Court is to rule on the decrees that fall within its jurisdiction.
Controversy over mobile phone masts
Copic will continue its work, including measures to check the coverage impact of lowered power in mobile phone masts.
Bill strengthening consumer rights, protection and information
On June 1, 2011 the Council of Ministers adopted a bill to strengthen consumer rights, protection and information in the main aspects of everyday living, and specifically in the area of electronic communications. The bill was reviewed and passed on first reading by the National Assembly and then the Senate, in December 2012. The text was not then included in the parliamentary agenda, in preparation for its second reading in the National Assembly. Parlementary Cession has been suspended on March 7, 2012.
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Low-income Internet pricing
As part of the continuing low-income mobile tariffs, in September 2011, Orange made a commitment to the French government to offer a low-income Internet rate. This offer, available from February 2012, enables low-income households to access broadband Internet at up to 20 Mbits/s as well as unlimited telephone calls to fixed lines in metropolitan France and French overseas departments. It meets the requirements laid down by the government, being available throughout metropolitan France at a monthly rate of 23 euros (incl. VAT), including Livebox rental, and having no deposit, prepayment for usage, or activation costs, and no obligation to commit for a specific time period.
Regulation of mobile telephony
Frequency spectrum management
The frequency spectrum management required for personal mobile television (PMT) comes under the responsibility of the CSA as does the whole spectrum allocated to broadcasting (DTTV, TDR, FM radio).
Allocation of 800 MHz and 2.6 GHz frequencies for high capacity broadband
After the allocation in January 2010 of the fourth 3G license to Free Mobile followed by the allocation in June 2010 of two residual channels in the 2.1 GHz band to Orange and SFR, a significant event of 2011 was the start, on June 15, of the process for allocating so-called 4G frequencies in the 800 MHz and 2.6 GHz band for new high capacity broadband.
The process took place in two stages, with candidates applying for 2.6 GHz on September 15 and for 800 MHz on December 15, 2011. In the 2.6 GHz band, Orange France and Free Mobile each obtained one 20 MHz channel for 287 million euros and 271 million euros, respectively. Bouygues Telecom and SFR each obtained one 15 MHz channel for 228 million euros and 150 million euros, respectively. The Arcep granted its authorization to Orange France on October 11, 2011 for a period of 20 years.
The 800 MHz band, also called the digital dividend, refers to the 790-862 MHz band, that is, the portion of frequencies freed up with the analogue television switch-off on November 30, 2011 in keeping with the planned schedule and now allotted exclusively to use by electronic communications.
In this band, four blocks were offered in the call for candidates, with varying reserve prices. Block A of 10 MHz, the nearest to DTTV frequencies, had a minimum price of 400 million euros; blocks B and C of 5 MHz, 300 million euros each; and block D of 10 MHz, 800 million euros minimum. Orange France won Block D for about 891 million euros; SFR won Blocks B and C together for about 1,065 million euros, and Bouygues Telecom won Block A for about 683 million euros. The Iliad Group (Free Mobile) was a candidate, but won no frequencies. Free Mobile does have roaming access rights, however, on the SFR network. The Arcep granted its authorization to Orange France on January 17, 2012 for a period of 20 years.
The authorizations carry with them certain coverage requirements. In particular, 99.6% of the population must be covered by high capacity broadband mobile within 15 years and there is a special, 800 MHz-only rollout scheduled for rural areas, with closer deadlines of between five and ten years.
Each operator agreed to allow Full MVNOs (1) on its high capacity broadband network, and the three companies awarded 800 MHz frequencies committed to provide increased coverage.
The following table summarizes the principal frequency allocations made in the bands used for mobile services:
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3G coverage commitments
The commitments made at the time UMTS licenses were awarded in 2001 called for coverage of 98% of the population by August 2009. Following an audit of these commitments by the Arcep in 2009, the Authority put Orange on notice to honor its obligation to cover 98% of the population by the end of 2011, with an intermediate milestone of 91% by the end of 2010. Orange honored this commitment.
On February 12, 2010 the three mobile carriersBouygues Telecom, Orange France and SFRsigned an agreement to share 3G network infrastructures, anticipating coverage by the end of 2013 of approximately 2,500 sites in the countrys least populated areas. Added to this agreement was an agreement signed on July 23, 2010 with Free Mobile outlining how that operator would fit into the plan in the future.
3G COVERAGE OBLIGATIONS AND ACTUAL COVERAGE OF THE THREE OPERATORS
REGULATION OF MOBILE CALL TERMINATION BY THE ARCEP
Mobile termination rate
In May 2011, the Arcep adopted a pricing framework for mobile voice call termination services in continental France by Orange France, SFR and Bouygues Telecom for the period July 1, 2011 to December 31, 2013. In this regard, the Arcep set symmetric mobile termination rates for the three operators as of July 1, 2011. On the other hand, in its draft ruling issued on December 13, 2011, the Authority proposes to introduce asymmetric Mobile Call Termination Rates for Free Mobile, Lycamobile and Oméa Télécom, so as to offset the temporary extra costs arising from their status as new entrants. On March 13, 2012, Arcep notified its draft decision on the regulation of the mobile voice call terminations of Free Mobile, and Lycamobile and Oméa Télécom to the European Commission and European regulators. The Authority deemed it appropriate to apply the following rate framework: a maximum of 2.4 euro cents per minute until June 30, 2012; an initial reduction to 1.6 euro cents per minute for a six-month period starting July 1, 2012; followed by a second reduction to 1.1 euro cents per minute for a 12-month period starting January 1, 2013.
Even if the impact on wholesale revenues is negative, a uniform drop in MTRs is largely neutral on the wholesale business profitability of an operator such as the Orange group which has both fixed-line and mobile operations. The asymmetries granted to the new entrants have been incorporated into the Groups forecasts.
SMS termination rate
On July 22, 2010, the Arcep took a decision based on the review of the wholesale market for SMS terminations on mobile networks in France. It sets the maximum rates for SMS terminations invoiced between mobile operators that will reach one euro cent per SMS as of July 2012.
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On February 17, 2012, as part of the regulation of new entrants to the mobile telephony market (Free Mobile, Lycamobile and Oméa Telecom), the Arcep announced its decision to conduct an analysis of the wholesale SMS call termination market. Following preparatory work, a public consultation will be launched during 2012.
Regulation of fixed telephony and broadband Internet
Since July 2008, excluding retail offerings for fixed telephony under Universal Service, all of France Telecom-Oranges regulatory obligations concerning fixed telephony retail (access and communication) on the consumer and business markets have been lifted. There is no ex ante regulation over France Telecom-Orange retail broadband offers in the residential and business markets. Accordingly, the regulation of fixed-line services in France involves retail offers falling within the scope of the universal service and wholesale offers so as to ensure effective competition in the retail markets (call origination, call termination, wholesale line rental, unbundling, bitstream).
France Telecom-Orange applied for and was designated Universal Service operator for telephone services for the period 2009 to 2012. A new call for candidates was tendered for the public phone component, which had also been awarded to France Telecom-Orange for two years in November 2009. France Telecom-Orange once again was a candidate and was designated universal operator in charge of public phones in February 2012 for a new two-year term.
Principles governing the price capping of Universal Service fixed-line communications
Universal Service rates are subject to price caps for the duration of the allocation for two rate service batches, one representing subscribers located in mainland France, the other representing subscribers in French overseas departments. The average annual price of each batch is set so as to reflect changes in the consumer price index (excluding tobacco products), less reductions in mobile and fixed-line call termination rates, and less 3% productivity gains representing the minimum level that France Telecom-Orange is expected to pass on to its customers. The price cap for the 2009-2012 period set in January 2011 by the regulatory authority was reflected in April 2011 by lower communication prices from Frances overseas departments and from continental France to the overseas departments. The rate on fixed-line communications to mobile phones in the continental batch also decreased as of December 1, 2011.
Low income plans under Universal Service
As part of the Universal Service, France Telecom-Orange offers a low income plan for PSTN access at a price of 5.43 euros (ex-VAT) (representing a reduction of 60% of the regular price). As a result of the public consultation of the Ministry of the Economy and under an agreement with the State, Orange offered a low-income Internet plan of 20 euros per month (incl. VAT), plus 3 euros (incl. VAT) for monthly Livebox rental. This offer, introduced in February 2012, is not part of Universal Service.
Regulation of fixed-line services wholesale offers
Cut in fixed-line call termination rates (FTRs)
In July 2011 the Arcep published its latest analysis of the fixed-line telephone markets (third analysis cycle) for the period 2011-2014, according to which France Telecom-Orange will have to apply call termination rates that reflect the incremental long-term costs of a generic efficient operator who has installed a new generation network (NGN). As part of this new analysis, the asymmetry of Mobile Call Termination Rates enjoyed by France Telecom-Oranges competitors has been eliminated.
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Rate changes for wholesale offerings subject to cost orientation (unbundling, analog and digital wholesale line rental, and call origination)
In 2011 France Telecom-Orange published new, lower rates for the regulated wholesale offers (mainly partial unbundling, services related to unbundling, and wholesale line rental). The rate for full unbundling was not changed, however. It should be noted that France Telecom-Orange is still ranked below the European average for wholesale rates related to fixed-line service offers (see Section 6.6 Regulations).
Rate changes on the bitstream offers
France Telecom-Orange is required to provide third-party operators with a DSL access and aggregation service (called bitstream) enabling them to offer their own broadband service throughout France. This wholesale offer is purchased from France Telecom-Orange by third-party operators in areas where they generally do not use an unbundling offer, and represented under 20% of broadband lines purchased by such third-party operators. The Arceps market analysis decision no. 2011-0669 of June 14, 2011 withdraw the regulated rate in areas where there is a third-party operator offering a bitstream product (i.e., about 80% of lines) and requires that rates be based on costs in the remaining area. This led to a new pricing scheme, taking effect in September 2011.
France Telecom-Oranges obligations regarding cost accounting and accounting separation in the fixed-line business
The Arceps decision no. 06-1007 of December 7, 2006 sets forth France Telecom-Oranges obligations as to cost accounting and accounting separation in the wholesale and retail businesses. When the retail activities use network resources that correspond to wholesale services subject to a separate accounting obligation, these resources are valued in the separate accounts at wholesale rates and not at cost. These obligations were first implemented in 2007 in respect of FY2006. The fiscal year was deemed compliant by the Arcep and has been extended to every year since.
Regulation of high capacity broadband Internet (FTTH) and increased speed on copper (FTTC)
Regulatory framework governing high capacity broadband offers at end 2011
Summary of principles defined since 2008 applicable at national level:
no ex ante regulation on retail prices;
same obligations regarding access to the terminal portion of FTTH networks, applying to all operators equipping buildings with optical fiber;
non-discriminatory access to France Telecom-Orange underground civil works systems, at a rate that reflects the costs. Decision no. 2010-1211 of November 9, 2010 specifying the rule for allocation of costs between copper and fiber and the method of determining rates.
These principles were confirmed in the conclusion to market analysis 4 and 5 completed in June 2011.
Regulatory framework for sharing in high-density areas
On January 17, 2010, the Arcep published a decision and a recommendation on the sharing of the terminating segment of FTTH networks that bears on:
the definition of high-density areas including 148 communes representing 5.5 million households;
the option to place the distribution point at street level for buildings with 12 or more apartments or hooked up to walk-through sewer ducts;
the obligation to agree to requests from operators made prior to the fitting out of the building to have one dedicated fiber per apartment;
the principles governing cost sharing enabling in-building operators having elected to go with a single fiber not to have to bear any additional cost incurred by the laying of additional fibers;
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several versions of the wholesale offer have been published by France Telecom-Orange since February 2010.
A recommendation published in June 2011 specifies the terms of network rollouts when the distribution points are not located on private property.
Regulatory framework for sharing outside high-density areas
A decision adopted by the Arcep on December 14, 2010 and approved by the Minister in charge of electronic communications on January 18, 2011 specifies the provisions applying outside high-density areas:
the size of sharing points (1,000 apartments in general with the possibility of going down to 300 apartments subject to an offer to connect these network points to the networks of upstream operators);
consultation, before the rollout, of other operators and local authorities concerned;
co-financing from the beginning and afterwards, and the requirement of a per-line offer from the sharing point.
France Telecom-Orange published a first wholesale offer outside of high-density areas in July 2011.
National high capacity broadband program
This program aims for, outside high-density areas, a system for labeling and public co-financing of private operator projects for the densest segments within these areas, completed by public initiative projects beyond these sectors.
The national program is organized into three parts:
the first part provisioned at 1 billion euros (window A) consists of support for development of FTTH networks from investors (public and private) via the granting of long-term loans or capital contributions;
the second part provisioned at 750 million euros (window B) consists of additional government grants for public initiative FTTH network projects outside of areas for which investors have communicated their intention to roll out under part A;
the third part provisioned at 250 million euros (window C) consists of supporting additional projects to cover the least dense areas (modernization of existing networks, rollout of terrestrial or satellite wireless networks).
Finally, on December 14, 2010 the Arcep adopted a decision on the terms and conditions for the use of the regional digital rollout fund (FANT) provided for by the Pintat Law and destined to finance high capacity broadband in the least dense areas.
Higher speed on copper
The objective of higher speed on copper is to offer greater ease of use and access to a larger range of services to subscribers already eligible for ADSL but whose line is located far from the switch. The decision based on market analysis 4 requires France Telecom-Orange to respond affirmatively to any request to reconfigure its local loop in that it allows France Telecom-Orange to offer wholesale packages to operators on economic terms that bring the new subscriber access node closer to the unbundle-able customer despite his small size.
A recommendation published by the Arcep on June 14, 2011 lays out the framework in which requests for reconfiguration must be made, including its technical, legal and economic conditions. Pursuant to obligations arising from the market analysis, France Telecom-Orange published a wholesale offer for reconfiguring operators (located outside of areas where the installation of a high capacity broadband network has been planned in the medium term by a private operator) and placed into its offer of access to the local copper loop the specific services associated with unbundling as part of increased speeds on copper.
Regulation of broadcasting and content
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Online TV task force
The debate begun by the colloquium of the French Broadcasting Authority (CSA) in April 2011 about on-line television was extended by the formation of a task force mandated by the Ministers of Culture and Industry and in which Orange participated. The report published in December 2011 suggests regulatory changes in this area.
Personal mobile television (PMT)
The terms and conditions devised in laws and regulations have thus far been unable to generate an economically viable solution to deploying a dedicated television network on mobile terminals via a wireless link. The CSA should withdraw the authorizations extended to all the mobile television developers selected in the call for candidates (including Orange Sport Infos) and so close the book on DVB-H standard PMT.
On-demand audiovisual media services (SMAD)
In July 2011 the CSA partially repealed its mandatory application decision on ODMP dating from December 2010 and in December 2011 published a new version in the Official Journal, after notifying the European Commission. This version is less burdensome to implement and less restrictive on distributors, while still providing a high level of security in terms of the protection of minors in particular.
Sound intensity of television programs
The CSA decision regarding the sound intensity of television programs, published in the Official Journal on October 11, 2011, takes into account the latest measurement standards devised by standard-setting organizations and establishes an implementation schedule for these standards by broadcasters and distributors.
126.96.36.199 Orange Frances activities
France Telecom-Orange provides the following additional financial indicators for its Internet and fixed-line and mobile telephony activities in order to compare them with the domestic data of its peers. These additional indicators do not replace the indicators in Chapter 9.1 Analysis of the financial position and earnings, which reflect the monitoring per operation which took place at Group level.
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Fixed telephony and Internet activities
The range of services in the Home segment in France is made up of:
traditional fixed-line telephony services;
other consumer services;
online, Internet access, and multimedia services;
advertising-management and Internet portal business;
Traditional Fixed-Line telephony services and other consumer services
France Telecom-Oranges traditional fixed-line telephony services provide access to the network, local and long-distance telephone communication services throughout France, and international calls. In addition, France Telecom-Orange offers its fixed-line telephony subscribers a broad range of value-added services.
The price of telephone communications services is subject to regulation.
Further to the rapid growth in full unbundling, wholesale subscriptions, and wholesale naked ADSL access to third-party Internet service providers, traditional telephone service business is on the decline. Other consumer services (public phones, cards, information services) have also been in decline for several years. France Telecom-Orange, while gradually reducing the number of public telephones, does maintain existing public telephones under Universal Service. Competition for phone cards is very strong, particularly for international destinations. In the context of information market deregulation, France Telecom-Orange, backed by its experience, offers a full range of telephone information services, organized into multi-channel voice and Web formats (118712.fr and orange.fr, directories section).
Online Internet access, and Multimedia services
Along with mobile, Internet and Multimedia is one of the Groups growth engines. The Internet market, however, is reaching maturity, reflected in high customer volatility. To build customer loyalty, Orange has been continuously improving its quality of service by simplifying its Internet offerings while enhancing them with value added services, such as content, fixed-line communications to mobile devices, VOD and TV recording, and replacing ADSL equipment in the customers home.
At the end of December 2011, the total number of Internet customers was 9.8 million, an annual increase of 3.4%. There were 8 million Liveboxes rented at end December 2011, up 1.2% compared with end December 2010. Sales were given a significant boost in 2011 by the success of the Open quadruple play offers, with over one million customers in November 2011, and by the simplification of our triple play offers, available for ADSL or fiber and in only two forms, with and without classic phone service: Livebox Zen and Livebox Star. With the new Livebox Zen and Livebox Star plans, Orange offers unlimited calling to fixed-lines in continental France and to over 100 destinations, unlimited calling to mobile phones, VOD catalogs and a TV recorder. These ADSL plans are also available on fiber, where, for five euros more, one can enjoy faster speeds and additional services such as 17 stations of high-definition, 3D and multi-screen television.
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The Orange share of the new subscriber market increased by 2.3 points on the year, reaching 38.3% at year end. IP telephony continued to grow (up 7.6% on a yearly basis) and represents 8 million customers. Television on ADSL and by satellite continued its strong annual growthup 24.8% with 4.4 million customers at year end.
In addition, the value of broadband ARPU remained nearly level (36.5 euros at end December 2011 versus 37 euros at end December 2010). The decrease in IP telephony revenues, due primarily to the geographic spread of unlimited use and to the inclusion in new offers of unlimited calling to mobile devices from a modem, was offset by the increase in revenues from television and from content.
Revenues from the Internet and on-line services grew 2.2% over the year on a comparable basis but lost 4.6 points compared with 2010. This is equivalent to 31.6% of all Consumer revenues. This decrease is due to lower prices, the inclusion of unlimited calling from fixed-line to mobile in the triple play and quadruple play offers and to the impact of higher VAT.
For business customers, Orange introduced a new offer, Fibre pro, in December. As compared with the traditional ADSL offers, this solution makes it possible to have faster access to the Internet and to messaging services and to download more quickly; to transfer very large files; to take part in video conferences with a very high image quality; to synchronize data rapidly with remote servers and to take advantage of cloud computing services.
This formula has been coupled with other services like call waiting, Internet, pro messaging, e-faxing and technical support.
Since August 2008, Orange has been offering a range of laptop computers available with an optional broadband subscription or the Internet Everywhere package.
Internet portals and advertising management business
The France Telecom-Orange Group has several portals:
Orange.fr is the third largest Internet portal in France in terms of audience, behind the search engine Google and Microsoft with its MSN/Windows Live instant messaging feature, and the sixth busiest website in France (source: Nielsen/NetRatings, France panel, December 2011). In December 2011, its audience reached 21.4 million unique visitors and 50.8% of Internet users have consulted the portal at least once (source: Nielsen/NetRatings, France panel, December 2011);
Voila.fr (8.3 million unique visitors in December 2011) and Cityvox (entertainment and leisure listing site in France) in its different formats: Cityvox.fr, Cinefil.com, Spectacles.fr, Concert.fr and WebCity.fr;
in the mobile market, the Orange group is in third place in terms of audience with 10.2 million unique visitors, after Google/YouTube and Facebook, but ahead of SFR and Bouygues Telecom. Orange is thus ranked first among portals of telecommunications operators (source: Médiamétrie/Nielsen official panel for the 4th quarter of 2011).
The primary revenue source is on-line advertising sold by the Orange Advertising Network. This advertising management department sells advertising space for about 20 third-party sites, both web and mobile. For the second year in a row, there was growth in revenues from advertising sales in 2011. On the other hand, due to the intense competition from Google, Voila search engine revenues declined in 2011.
The development of the Groups range of content services on all of its networks (fixed-line, mobile, Internet), in France and abroad, relies on partnership agreements or equity investments, as well as on rights acquisition relating to cinema, music, games, sports and information.
France Telecom-Orange works to offer the most attractive and richest content possible as a result of various partnerships, such as those signed with Arte, France Télévisions, Warner and Sony. In addition, Oranges equity investment in Deezer in August 2010 has enabled us to market Internet and mobile plans that include music.
To deliver its content services, the Group has implemented a set of service platforms that include technical protection measures as well as tools for digital rights management, which ensure the integrity of the works and compensation for the copyright holders. France Telecom-Orange also participates actively in content security through its subsidiary, Viaccess.
For more information on offers and content, see the Content paragraph of Section 188.8.131.52 Shared Services.
Carrier services include interconnection services for competing operators (regulated by the Arcep) and unbundling and wholesale market services. The growth in business on the wholesale market partially offsets the decline in interconnection service revenues.
The first wholesale offers available to alternative operators (national IP offer, regional bitstream offer, and partial unbundling offer) required that the end customer also have a telephone subscription with France Telecom-Orange. In 2004, with the growth in full unbundling, operators were able to start offering broadband access with no subscription for traditional telephone services. Since the introduction by France Telecom-Orange in 2006 of a wholesale sales offer for subscriptions to telephone service and a wholesale offer for naked ADSL, the other operators have been able to propose offers which include line subscriptions. Nonetheless, the full unbundling offer remained France Telecom-Oranges most-subscribed offer in 2010.
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Since 2006, naked bitstream has been added to full unbundling outside unbundled areas to allow alternative operators to extend their non-subscription broadband offers to the entire territory. Since then, this type of access has steadily increased.
In March 2011, Orange and Free signed a six-year national roaming agreement for 2G and 3G, giving Free access to Oranges France-wide network of cell towers (see Section 184.108.40.206 Key events).
Mobile telephony activities
The total number of Orange mobile customers increased by 0.6% year-on-year in the fourth quarter of 2011, down 1.7 points compared with the previous year. This trend reflects a decline of 3.3 points versus 2010 in the growth of contract customers (+2.5% year-on-year at end-December 2011), while the number of prepaid customers also continued to decline. The customer mix continued to improve in 2011, with subscription contracts accounting for 71.8% of total customers at end-December 2011, up from 70.5% a year earlier. This increase mainly reflects the success of the Origami segmented offers and Open offers.
Moreover, the MVNO customer base hosted on the Orange network expanded by 20% over the year.
Average revenue per user (ARPU) was down 3.1% year-on-year in the fourth quarter of 2011. This decrease reflects both an average fall of 33% in voice interconnection charges between French mobile operators, and the impact of tariff adjustments to the quadruple play Open packages. Stripping out inter-operator revenues, ARPU rose, boosted by rapid growth in data transfer revenues on the back of expanding mobile multimedia usage and the sale of smartphones and 3G USB dongles.
In 2011, Orange continued to develop multimedia content offers in order to benefit from the growth of non-voice usage and mobile Internet access.
Orange Frances offers
Orange provides subscription and prepaid offers, with or without a handset.
The line of subscription offers is geared toward unlimited contracts and the inclusion of multimedia uses (Internet, television, and messaging). It is structured around:
Smart offers and M6 mobile offers, particularly targeted at young customers with all-inclusive contracts, which can be capped or uncapped, allowing for control of consumption while including unlimited SMS and MMS (avantage ZAP) to all operators;
Origami uncapped contract offers. These offers respond to the growth in smartphone sales and multimedia usage, as well as the increased demand from customers for unlimited voice and SMS deals. They include unlimited sharing between four persons for all contracts in the range, access to a premium music service, and plans tailored to young customers. With Origami style, Orange includes mobile Internet use for smartphones starting at the one hour subscription level. In November 2011, an Origami service was launched that enables customers to review their package every six months and alter it depending on their needs and usage patterns.
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Orange provides two prepaid options, with calls charged by the second from the first second, or an entry-level offer marketed under the Sosh brand:
the Mobicarte includes a range of top ups from 5 to 100 euros, and allows customers to receive free credit and rewards in the form of calls, SMS or access to social networks. In November 2011, Orange launched two new 5 euro top ups, valid for one week, providing either unlimited texts or mobile Internet (reduced speed after 100 MB);
Orange Initial, representing the simplest form of mobile telephony access, whereby the customer is billed monthly for actual usage, at a preferential rate;
Sosh is mainly intended for the high-usage 18-35 age group, for which good value is important. There are three prepaid choices available, which include the option to buy a handset and pay for it in installments.
Finally, responding to a government directive, Orange offers a prepaid, capped usage plan, reserved for people receiving the RSA (Revenu de Solidarité Active) low-income allowance, which provides 40 minutes worth of calls and 40 texts for 10 euros per month.
Fixed-Line and Internet offers
In fixed telephony, Orange offers three prepaid packages including line rental under the les Optimales name. New services for people in need of assistance now enhance these contracts thanks to a partnership with Mondial Assistance.
In Internet services, Orange simplified its offers in 2011, and now offers two contract types, with or without TV:
Optimale Internet, which includes Internet access and unlimited phone calls;
Livebox Zen or Livebox Star, which includes Internet access, unlimited phone calls and TV.
The enhanced services provide access, depending on the offer, to 140 TV channels and a selection of 150 movies on demand, and include an 80 GB TV recorder. These two offers are available for ADSL or fiber access.
Orange also has various offers that pair mobile use and mobile Internet access with all-in-one offers including both the hardware (3G+ USB dongle) and an Internet access contract. The new range of Lets go contracts launched in June 2011 allow up to five devices, such as a laptop computer, multimedia cell phone, or a tablet PC to connect to the Internet via the mobile broadband network or the Orange public Wifi network, using the Domino 3G USB dongle.
The quadruple play Open offer, which was launched in September 2010, continues to be a great success with customers. At the end of November 2011, it crossed the threshold of 1 million subscribers. This offer was enhanced in 2011, and is also available in a fiber version in the Paris area. It has a single contract and a single invoice that includes:
Internet access (up to 20 Mbits/s, or 100 Mbits/s in the fiber version);
Orange TV (with 140 channels);
unlimited telephone by Internet to cell phones (all operators in metropolitan France) since February 2011 and to all fixed lines (in metropolitan France and to more than 100 destinations);
cell phone with the opportunity to choose between four types of mobile contracts including unlimited calls, SMSs, MMSs, emails, and unlimited 24-hour Internet and TV (20 channels) access.
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The main offers as of the date of this document are:
FIXED TELEPHONY AND INTERNET OFFERS
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MOBILE TELEPHONY OFFERS
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BREAKDOWN OF DISTRIBUTION CHANNELS (AS A % OF SALES)
The Retail Sales and Services department of the Orange France Division is responsible for customer relations for all Group products and services intended for the general public. The Operators division in France distributes France Telecom-Orange products and services to other telecommunication service providers and operators.
Consumer products are sold through a variety of channels:
a physical distribution network spread across the whole of France and consisting of: 618 Orange stores at the end of 2011 (630 at end-2010, 641 at end-2009), 562 exclusive partners (of which 386 are Orange franchisees) and 4,100 points of sale in the competitive network. At the end of 2011, 100% of the points of sale had been rebranded (compared to 99% at the end of 2010);
customer telephone contact centers, specialized in distance selling and customer relationships, and in charge of customer accounts management;
a unified customer service around the call number 3900, which provides after-sales service and remote assistance for fixed-line, Internet, fiber and mobile products since December 2010. Call number 1014 is used to access all sales services and 1013 is the number reserved for calls relating to universal service. Customers can also benefit from on site technical services and an offer to assist them in their use of France Telecom-Orange products and services (installation, assistance);
self-service channels via a voice portal (the 3000 call number) and the Orange.fr Internet portal. This portal allows customers to discover the Internet, broadband multimedia and mobile offers provided by France Telecom-Orange, to order them directly online and to track their Internet and mobile bills.
FIXED-LINE UNBUNDLING IN FRANCE (IN MILLIONS)
Source: Arcep Q3 2011
FIXED-LINE BROADBAND COVERAGE
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2011 was marked by:
a program of ADSL access migration to the more economic Gigabit Ethernet (GE) technology, enabling television offers and GE offers intended for businesses to be developed;
the continuation of coverage of ADSL shadow zones by forming partnerships with public authorities;
the continuation of the FTTH rollout and the increase in customer connection capacity;
the growth in the VoIP network, with the continuation of the H323 migration to SIP and preparation for the opening of the VoIP interconnection between operators;
a modernization program of the copper local loop and technical environment in order to improve network quality.
Orange anticipates the continuation of these programs in 2012, with notably an acceleration of the FTTH rollout and a resumption of copper wire connections. Orange also plans to launch a rationalization program for television and Video On Demand (VOD) broadcast infrastructure, with a new convergent architecture between TV, ADSL, and FTTH.
2011 was marked by:
the extension of 3G coverage, notably with the rollout of UMTS 900 in rural areas to attain 98% 3G coverage of the population at the end of 2011, in accordance with license commitments;
the start-up of 3G coverage in no coverage areas by using shared infrastructure with other operators (RAN sharing);
the extension of 14.4 Mbits/s coverage to 75% of the population at the end of 2011;
the expansion of core network capacity to support the growth in data traffic;
the generalization of new generation HLR equipment.
In 2012 Orange forecasts:
the continuation of the rollout of 3G coverage in no coverage areas (RAN sharing);
the expansion of the 2G and 3G networks to improve service quality, particularly as regards indoor coverage, and the start-up of the 3G program for TGV train lines;
the continuation of the increase in speeds on the 3G+ network, with the rollout of improvements to HSPA+ (21 Mbits/s and 42 Mbits/s);
the continuation of a multi-year program of rationalization of the 2G and 3G access networks in North-East and South-West France, and research on this subject in the Paris area.
Cluster, Transmission, and Transport Network
In 2011, Orange continued the gradual migration of data traffic collection on the ATM network to Gigabit Ethernet technology, and started a program for simplification of the data collection network as well as gradual migration to the IP V6 protocol.
Finally, Orange has continued to increase the capacity of the transport network, both at the network backbone for data gathering as well as at the network transmission level (fiber optic and WDM equipment).
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2011 was marked by an increase in competition in line with the increasing maturity of the Internet and mobile markets. In this context, Orange continues to put the customer at the core of its strategy by simplifying its offers and enhancing its value-added services by improving its service quality.
2011 was marked by a step-up in competition in a difficult macroeconomic environment, while 2012 will see a peak in investment spending aimed at accelerating the rollout of the fiber network and increasing the coverage and capacity of the mobile network.
With the arrival of a fourth mobile operator, Free, in early 2012, in a market with penetration rates already in excess of 100%, the margins of most operators could be squeezed. Orange will therefore strive to rein in its costs, thanks to a partnership with Deutsche Telekom, to improve service quality and customer experience, and to monetize its network capacity via roaming agreements signed with Free and various MVNOs. A rationalization of capital expenditure was embarked on at the end of 2011, with a reformulation of customer loyalty programs and the launch of SIM-only plans and the Sosh brand.
Orange will thus:
continue to strengthen its loyalty building actions as well as the customer experience by developing new help services and TV/VOD uses;
segment its offers in line with customer requirements and the competitive environment;
prioritize innovation both at the technical and marketing level by:
enriching its Open offers,
developing the monetization of data offers,
fostering the penetration rates of smartphones;
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enrich content offers through new partnerships with publishers such as those previously entered into with Deezer and Dailymotion;
continue the transformation of its infrastructures with the objective of ever larger bandwidth;
finally, on the business side, Orange will continue its development in the integration market with, among other targets, cloud computing, enabling data to be stored on a virtual network.
220.127.116.11 The Telecom Services Market
KEY MACROECONOMIC INDICATORS
REVENUES FROM TELECOM SERVICES
Source: TP Group
NUMBER OF CUSTOMERS (IN MILLIONS)
Source: TP Group
The Polish economy continued its recovery in 2011:
growth was boosted by robust household consumption, while investment levels were maintained over the year;
the rise in commodity prices had a negative impact on the consumer price index, which stood at 4.3% in 2011, compared with 2.6% in 2010;
the unemployment rate was broadly flat in 2011, at 12.5%.
Against this backdrop, the value of Polands telecommunication services market declined by just 0.4% in 2011 compared with a 1.9% decrease in 2010 (source: TP Group). The main factors that impacted on market value in 2011 were related to the mobile telephony market: (i) a decrease in call termination costs, from 0.1677 to 0.1520 zloty per minute on July 1, 2011, which accompanied a reduction in the asymmetry that benefits Play and other small operators and (ii) the decrease in SMS termination costs from 0.15 to 0.07 zloty. Although competition was less fierce on the mobile market than in 2010, the price erosion that resulted was only partly offset by an increase in usage, leading to a further fall in ARPU and operators business performance. The broadband market continued to show signs of stagnation in terms of volumes in 2011, mainly due to the ongoing migration from fixed to mobile.
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Fixed-line telephony market
The fixed-line penetration rate continued to fall in 2011, reaching 25.8% of the population at the end of December 2011 (compared to 26.6% at the end of December 2010).
The growth in the penetration rate and popularity of cell phones led customers to migrate from the fixed to the mobile networks. In Central and Eastern European countries, such as Poland, where fixed-line penetration was low at the time of the introduction of mobile technology, mobile telephony is more of a direct substitute for fixed-line telephony than a complementary service.
Throughout 2011, cable television operators further expanded the range of fixed-line voice and Internet access services, while mobile operators promoted joint fixed-mobile offers of the Home Zone type, and reduced their voice tariffs in an attempt to attract fixed-line customers. The number of WLR lines had increased and was accompanied by growth in services based on local loop unbundling (LLU).
Regulatory decisions had a negative impact on operators revenues, mainly due to reductions in interconnection rates and mobile termination rates.
Internet on the fixed network market
In 2011, fixed-access broadband lines in Poland increased by 5.5% compared with 2010 (source: TP Group), which is a significant slowdown compared with the 7% growth seen in 2010 and 9.3% in 2009. The broadband market increased in value terms by around 4.2% in 2011, compared with 6.1% in 2010.
Mobile telephony market
The mobile telephony market is in the saturation phase. The number of mobile users increased in 2011 by 7% and reached 50.7 million at the end of December 2011. As a result, the mobile penetration rate (among population) reached 132.7% (up from 124.3% at the end of December 2010).
Mobile broadband, which is the fastest growing telecommunication market in Poland, continued its dynamic development in 2011. Market players offer access services for increasingly lower prices and at higher speeds, building on the success of portable computers and smartphones both for business and consumer markets.
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18.104.22.168 The Competitive Environment
Fixed-line telephony and Internet
FIXED LINES SEGMENTATION
BROADBAND INTERNET MARKET SHARE
Source: TP Group
On the broadband market, TP Group is still under strong competitive pressure from cable television operators in terms of both offering and infrastructure investments. However, the market share of these operators, estimated at 28% in volume terms and 27% in value terms, stabilized in 2011. The gradual strengthening of the position of cable operators on the market is due to the popularity of the bundles they can offer, thanks to their advantageous position on the television market. Moreover, these operators are able to increase the speeds offered for the same price, or even at slightly lower prices.
Consolidation is a major trend on the broadband market, with the acquisition of small Internet providers by the major players. In 2011, Netia finalized the acquisition of Dialogue, while Crowley and UPC completed the acquisition of Aster. Alternative telecommunication operators, including Netia, continued to offer service through the use of the wholesale BSA and LLU based services, and to a more limited extent, by developing their own networks. In 2011, BSA continued to fall, while the number of unbundled lines had increased to 186,000 by the end of the year, from 130,000 at the end of 2010.
New technologies, including radio access, are aiding the development of small local Internet providers, which, though very fragmented, represent together a significant force in the broadband market.
A marked increase in Internet penetration rates is expected in the near future. Cable operators have been very active in this area, investing in the DOCSIS 3.0 standard, which enhances network capacity and Internet service parameters and facilitates implementation of new applications and value-added services.
TP Groups broadband market share fell from 35.2% in 2010 to 34.2% in 2011. In May 2011, it launched a number of broadband offers based on VDSL technology. TP Group also provides broadband services based on the CDMA radio technology.
MOBILE MARKET SHARE
Source: TP Group
Poland has four main mobile operators: PTK Centertel (owned by TP Group, and which operates under the Orange brand), PTC (wholly owned by Deutsche Telekom), Polkomtel (acquired in 2011 by Spartan Capital Holdings, owned by Polish entrepreneur Zygmunt Solorz-ak, which operates under the Plus brand) and P4 (owned by two investment funds, Tollerton Investments Ltd and Iceland, which operates under the Play brand).
The three biggest mobile operators have lost market share to Play and the MVNOs. The combined market share for these operators fell from 87.8% to 84.3% between the end of 2010 and the end of 2011. The market share of PTK Centertel was estimated at 29% at the end of December 2011 in volume terms and 30.2% in value terms.
In an increasingly saturated mobile market, Plays main objective has been to win customers over from other operators. As a result of aggressive marketing and pricing policies and intensive advertising campaigns, Play has become the leader in the mobile number portability market. The operator has grown its revenues on the back of an increase in customer numbers and the benefits of MTR asymmetry.
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22.214.171.124 The Regulatory Environment
Polish legal and regulatory framework
The TP Groups businesses are governed by the stipulations of the law of July 16, 2004 on telecommunications, which transposes the 2002 European Telecom Package concerning electronic communications into Polish law, and by the law of February 16, 2007 concerning competition and consumer protection.
The law of July 18, 2002 that governs provision of electronic services transposes European Directive 2000/31/EC concerning electronic commerce and it defines electronic service supplier obligations. The applicable framework concerning personal data protection is defined by the law of August 29, 1997 concerning personal data protection, as amended in 2002. The 2004 Telecommunications Act also defines certain rules applicable to data protection and storage.
A law concerning broadband network development came into effect in 2010. This law provides a framework for intervention by local authorities in investment in telecommunications infrastructures and civil works.
In 2011, the Telecommunications Act was amended to introduce regulation of premium services in accordance with European law.
In November 2011 the European Commission sent to the Polish government a reasoned opinion regarding the transposition of directives in 2009 and about the lack of implementation of new directives in Polish law.
For information concerning risks linked to regulation, see Section 4.2 Legal Risks.
The Ministry of Administration and Digitization, created in November 2011, took over the missions of the Ministry of Infrastructure regarding telecommunications.
The Office of Electronic Communications (UKE) is specifically responsible for telecommunications regulation and frequency management, as well as certain functions of the National Broadcasting Council (KRRiT).
The Office of Competition and Consumer Protection (UOKiK) is responsible for the application of competition law, merger control and consumer protection.
Memorandum of understanding between TP Group and the UKE
Implementation of the Agreement signed between the UKE and TP Group on October 22, 2009 is verified by an external auditor. The eight quarterly audits performed to date confirm the proper execution of the Agreement. TP also delivers to the UKE a monthly report describing the progress made in implementing the Agreement, published on the UKE website.
The MoU includes in particular the following:
if TP applies the provisions of the Agreement, the Chairman of the UKE will abandon functional separation remedee intentions;
TP would implement technical and organizational solutions, instead of the physical separation of information systems, to ensure compliance with the additional principles in the supply of non-discriminatory access to information for alternative operators and protection against the unauthorized flow of illegal information as defined in the Agreement (Chinese walls);
TP Group has agreed to make significant investments in broadband access over the next three years (1.2 million lines, including 0.5 million new lines and 0.7 million existing lines upgraded). It is expected that some 1 million lines will offer speeds of at least 6 Mbps;
wholesale rates will be frozen until the end of 2012 at current reference offers. Bitstream access prices will be determined using the cost+ methodology instead of the current retail minus method.
According to the UKE decision of May 8, 2006, TP Group was responsible for universal service obligations until May 9, 2011. In July 2011, the UKE made decisions concerning termination of the universal service obligations imposed on TP. The UKE has not initiated the procedure for appointment of a new universal service provider, which it will appoint when the amendment to the Telecommunications Act comes into force. In accordance with the draft amendments to the Telecommunications Act, the main universal service obligations are as follows: the scope of universal service remains the same; universal service will be provided in accordance with the principle of technological neutrality, with the appointment of the universal service provider(s) being preceded by market analysis of the availability of services.
Concerning compensation for the universal service deliverables, in May 2011 the UKE issued its decisions on the net cost of the universal service for the periods 2006 to 2009. The UKE decided that the total net cost is 67 million zlotys, whereas TP was asking for 803 million zlotys. In June 2011, TP appealed the UKE decisions in order to have these decisions on the net cost reviewed. Following the dismissal of its initial appeal, TP petitioned the courts in October 2011 to challenge these decisions.
In June 2011, TP filed with the UKE a request for compensation for the net cost in 2010 for a value of 269 million zlotys. In January 2012, the UKE issued a decision on the net deficit in 2010 and granted a rebate of 55.1 million zlotys. TP has appealed the UKE decision in order to have it reviewed.
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Regulation of mobile telephony
Mobile voice termination rates
In March 2011, the UKE published for comment a draft decision to be imposed on the three largest mobile operators which defined, for an application in July 2011, a change of voice termination rates to 0.0966 zloty/min. On the same date, the mobile network operators requested application of the mechanism introduced by Article 43a of the Telecommunications Act, in order to benefit from lower mobile voice termination rates, agreed in exchange for investments in 2G and 3G networks. In April 2011, the European Commission indicated that this approach was compliant neither with European directives nor with its recommendation on termination rates.
In May 2011, the UKE issued a decision applying to PTK lower mobile voice termination rates for the period from July 2011 to December 31, 2012, in exchange for investment commitments. Investment commitments were also taken by Polkomtel and PTC, as well as by P4. The reduction in mobile voice termination rates for P4 is expressed as percentages of the reduction applied to other operators until 2012. The mobile voice termination rate for PTK, PTC, Polkomtel and P4 will become symmetrical in January 2013.
Reductions in mobile voice termination rates can be summarized as follows:
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In August 2011, the UKE initiated consultation proceedings on the revision of the wholesale market for call termination on mobile networks (7/2007 - third round). The UKEs proposed decision stipulates that PTK Centertel keeps its significant market power position. Mobile voice termination rates should be based on costs incurred up to the end of 2012. After December 2012, the UKE does not intend to adopt legally binding decisions based on the LRIC bottom-up model, but to publish on its website the recommended mobile voice termination rates, based on the results of the model.
In November 2011 the European Commission commented that the UKEs proposed decisions could create barriers to the Single Market and expressed serious doubts about the compatibility of the proposed measures with EU law. Following the opening of phase II of the European Commission procedure, the UKE has withdrawn its draft decisions and should issue new proposals in early 2012.
In March 2011, the UOKIK approved the mobile network sharing agreement between PTK and PTC and the creation of a joint venture responsible for optimizing and managing shared networks.
Call access and origination market
In July 2011, the UKE adopted a decision on the mobile market for access and call origination, confirming that this market is effectively competitive and will not be ex ante regulated, as had already been decided in 2008.
In May 2011, the UKE issued a decision amending all previous CDMA coverage obligations. In particular, PTK is now required to cover 87.47% of Polish territory from 796 base stations, instead of 946.
The current 1800 MHz license was issued in August 1997 for a period of 15 years and expires in August 2012. In October 2011, PTK Centertel applied for renewal of its license in the 1800 MHz band for a further period of 15 years. The UKEs decision is expected in 2012.
In 2011, the UKE also adopted decisions that introduce technological neutrality in the 900, 1800 and 2100 MHz frequency bands.
Regulation of fixed telephony and broadband Internet
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Integrated reference offer for interconnection, unbundling and wholesale broadband offers
In April 2011, the UKE issued a decision amending the integrated reference offer for interconnection, unbundling and wholesale broadband offers, following requests for review filed by TP and KIGEIT. In October 2011, the UKE further amended the integrated reference offer to include the VDSL service, in order to enable provision of the new Neostrada fiber offer (40 Mb/s and 80 Mb/s). Following adoption in August of the decision on the market for call origination on the fixed telephone network (market 2), in November 2011 TP proposed the introduction of a new modification to adapt retail offers in relation to wholesale line rental.
Wholesale broadband access market (market 5/2007)
In April 2011, the UKE adopted its final decision for the wholesale broadband access market (second round). This decision designates TP as a dominant operator in the domestic market, with the exception of eleven municipalities (including Warsaw). These municipalities, which are no longer regulated ex ante, account for approximately 8% of the Polish population. The relevant market includes xDSL and FTTx access technologies. TP must provide new bitstream access levels, including Ethernet.
TPs Neostrada retail broadband offer
The European Court of Justice issued a decision in May 2010 on the compatibility with European law of the Neostrada retail broadband offer, in which it stated that the UKE should not regulate this retail offer since the Telecommunications Act does not allow it and no legal provision had been introduced for this purpose in the market analyses. On the basis of the decision of the European Court of Justice, the Polish courts have ruled in favor of TP in the cases of fines on retail broadband offers.
In May 2011, the UKE issued a decision on the cost calculation for 2012 and accounting separation for 2010, based on the pure LRIC (Long Run Incremental Costs) methodology for the calculation of access and interconnection rates. In August 2011, Ernst & Young presented its audit report on the cost calculation results for 2012 and its report on accounting separation for 2010. The audit report states that the costing of wholesale access services ignores the approach of avoidable costs in the LRIC methodology imposed by the UKE.
Decision by the European Commission on the broadband wholesale market
Following the statement of objections sent in March 2010 to TP by the European Commission, in June 2011 the latter issued a decision imposing a fine of 127.5 million euros on TP for abuse of dominant position, taking the form of a denial of access to its wholesale broadband services. The European Commission ruled that TP, between August 2005 and October 2009, committed a single and continuous breach of Article 102 of the Treaty by refusing access to its wholesale broadband products. In September 2011, TP appealed the decision of the European Commission.
Reference offer on infrastructures
In July 2011, the UKE changed the reference offer on infrastructures following a request from TP for a review of the July 2010 decision. In November 2011, the UKE launched a public invitation to tender for the reference offer, proposing some important changes, such as the establishment of a dedicated web mechanism with which alternative operators could place orders and the introduction of rules covering joint ownership of the wiring.
Call origination on the fixed-line telephony network
In August 2011, the UKE made its final decision on call origination on the public telephone network from a landline (2/2007 market - 2nd round). TP is designated as the dominant operator in this market. TP is now required to set wholesale rates based on costs incurred. For equal treatment, the UKE imposed obligations on TP comparable to the obligations imposed on the 4/2007 and 5/2007 markets under the TP-UKE agreement.
Leased lines reference offer
In July 2011, TP filed an application to change the leased lines reference offer, approved by the UKE in October 2010. In December 2011, the UKE launched a public invitation to tender to change the leased lines reference offer. The draft reference offer contains changes concerning the placing of orders by alternative operators via a dedicated web mechanism, as well as the applicable rates.
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126.96.36.199 TP Groups activities
TP Group also publishes the following financial indicators for its Internet and fixed-line and mobile telephony activities. These indicators do not replace the indicators in Chapter 9.1 Analysis of the financial position and earnings, which reflect the monitoring per operation which took place at Group level.
Fixed telephony and Internet activities
The total number of lines served by TP Group decreased in 2011 by 604,000, a 7.8% decline compared with 2010. This erosion was the result of a fall of 723,000 in retail lines (-11.4% year-on-year), partly offset by an increase in wholesale lines and unbundled lines (+8.8%).
TP is trying to limit further erosion of its fixed subscriber base, mainly through customer loyalty programs and promotions relating to fixed- line subscription periods. In April 2011, TP launched new doMowy tariff plans, at lower prices than the standard plans, with 12-month or 24-month loyalty agreements. The new plans are aimed at meeting customer requirements by combining international and fixed-to-mobile calls in the subscription.
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In September 2011, TP increased the access costs of its tp socjalny plan for disadvantaged households, at the same time renaming it tp podstawowy. The reason for this change was the need to adapt the offering to meet regulatory obligations imposed by the regulator (UKE) and designating TP as an operator with significant market power on the retail market. In order to mitigate the impact of this increase on customer satisfaction, TP included broadband services in its new tariff plan and reduced the price of calls.
To address customer expectations, TP began to sell bundled services in the fourth quarter of 2011. The FunPack HD offer includes a VoIP service with unlimited calls to fixed lines in Poland.
In the area of voice services for the business market, TP continues to develop a service portfolio based on call plans and other benefits included in the subscription fee. These offers are mainly intended for SMEs.
Despite the fierce competition, mainly from cable operators, TP Groups number of retail broadband lines increased by 2.6% in 2011 (including PTK Centertels CDMA and BSA lines). At the same time, broadband ARPU fell from 56.70 zlotys in 2010 to 53.40 zlotys in 2011. Following the implementation of sales and marketing campaigns, the retail customer base expanded in the third quarter of 2010, a trend that continued throughout 2011.
The new Neostrada plans launched on October 1, 2010 and based on a cost plus price structure increased the appeal of the pricing applied to TPs range of services and boosted customer numbers. The increase in demand for higher speeds is an established market trend, fuelled by lower prices. Owing to a promotional offer for the Neostrada versions introduced in October 2010, the plans offering more than 6 Mbits/s accounted for approximately 50% of new subscriptions, compared to 36% in 2010.
The rapid growth in IP VPN services continued throughout 2011. Customers are looking to these services to streamline their operations and reduce sales and marketing costs.
Services offered on the Internet are also on the rise, for example the e-Store options available from March 2011.
The Business Package offering has also attracted keen interest from corporate customers. The package combines broadband access with an attractive tariff plan for voice calls, security tools, web space, and email addresses.
The development of IT services continued in 2011, with the introduction of a new offering called IT for Business in November. This package includes hardware, software, and IT support.
Lastly, the implementation of local area networks (LANs) at customer sites is becoming increasingly popular.
Mobile telephony activities
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Orange (the brand under which TP Group subsidiary, PTK Centertel trades) had a total of 14.7 million customers at the end of 2011, up 2.3% year-on-year after a 4.5% increase in 2010, compared with an average market growth rate estimated at 7%. The number of subscription customers was flat, and their proportion of the total customer base was maintained at 47.6% at the end of 2011. The growth in customer numbers can be considered satisfactory, given the high levels of activity of new market players, notably P4 (Play), which benefit from significant asymmetry in MTR costs, as well as MVNOs.
ARPU was 40 zlotys in 2011, down 5.2% on 2010. This fall in ARPU was chiefly due to the reduction in MTR and SMS costs, in addition to downward pressure on the price of voice calls. The subscriber acquisition cost was 128 zlotys in 2011, down 2.5% year-on-year. This improvement was mainly due to the significant increase in the proportion of smartphones sold.
In April 2010, Orange modified its subscription offers to meet customer needs more effectively. The range included Panther offers for users of mobile data services (Internet, email, etc.), Dolphin tariffs for frequent users of voice services, and Pelican for customers focused on text and community services.
For corporate customers, the Discount Optimum offering was introduced in April 2011. This promotional offer is based on the Optimum and Optimum with Internet plans, with a reduced subscription fee for a period to be chosen by the customer. In the high-end segments, the Negotiate Plan and Business Package were updated.
Mobile data services
The new HSPA+ DC technology was launched by PTK Centertel in the first quarter of 2011 in five cities, and was then extended during the year.
The Combo offer was launched by Orange in May 2011. It offers a discount to customers on bundled packages including mobile and fixed broadband, mobile and fixed telephony.
In 2011, a mobile broadband plan for tablets and netbooks was launched (Orange Free Set) at a promotional price.
At the same time, Orange modified its basic mobile Internet package (Orange Free), adding a modem at a promotional price. The new package includes data transfer speeds of 14 to 20 Gbits/s. Lastly, the SIM-only mobile Internet plan was modified, with a promotional discount of 10% on access charges.
In May 2011, Orange introduced the Business Everywhere Everyday plan for corporate customers, with an option for reduced or zero subscription fees. This is the first plan where the subscription fee is charged only in proportion to the number of days on which the data transfer service is used. This no‑monthly fee option is also available to consumers.
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TP Group offers
The main offers as of the date of this document are:
FIXED TELEPHONY AND INTERNET OFFERS
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MOBILE TELEPHONY OFFERS
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TP Group uses different types of distribution channels to address its various customer needs and deliver the right offer for individual, business, and corporate customers. Three types of sales network are used. These serve:
individual and business customers;
Sales to individuals and business customers comprise both active and passive sales channels. The passive distribution network consists of PTK Centertel and TP branded stores, with almost 1,100 sales outlets that are either owned or operated under franchise. The active distribution network involves a door-to-door sales force that operates out of direct sales centers located all over Poland. The direct sales centers operate via two different channels (telesales and online). All distribution channels offer a wide range of mobile services, mobile and fixed subscriptions, television contracts, value-added services, and fixed-line voice services.
Sales to business customers and companies are carried out via diverse distribution channels, including: TPs own sales force, brokers, telesales, and online. This distribution network provides sales and support services to business customers for the sale of mobile services, mobile and fixed-line Internet subscriptions, fixed telephony, value-added services, and customized telecommunications solutions.
The prepaid sales network comprises sales outlets under the Orange name, as well as those of partners specializing in the sale of mobiles. Basic prepaid kits are widely available in around 66,000 sales outlets, while top ups can be obtained from some 119,000 stores.
In 2011, TP Group continued to enhance the infrastructure of its data networks, in particular, the IP VPN and broadband networks. This involved an increase in the capacity of global Internet links, IP backbone network expansion, enhancement of a network for aggregation of data traffic to and from customers, and an increase in the capacity of DSLAM (Digital Subscriber Line Access Multiplexer) access equipment. A significant portion of investment in backbone, aggregate, and access networks has been carried out pursuant to the Memorandum of Understanding with UKE dated October 22, 2009.
TP has also developed a new generation of ADSL access switches compatible with VDSL2 technology, which provides speeds of up to 80 Mbits/s.
In addition, the infrastructure supporting multimedia services, (TP Videostrada, Video-on-Demand and Digital-to-Home satellite television), was expanded.
As part of the expansion of the IP network infrastructure, TP has put in place new generation routers with switching capacity of more than 1 Tbit/s. In 2011, the capacity of the IP network was increased by more than 20% year-on-year, exceeding 340 Gbits/s.
Under a program to develop access nodes, TP increased the availability of very-high bandwidth services with more than 1,000 DSLAM nodes covering around 25% of xDSL users. A total of more than 2.3 million homes are now in the VDSL coverage area.
Lastly, at the end of 2011, TPs IPTV services covered more than 70% of its broadband client base.
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In 2011, TP Group continued to develop its core network capacity to keep step with the growth in traffic, by installing new generation network infrastructure entirely based on IP technology. Base station controllers (BSC and RNC) have been gradually migrated to this new generation network (R4), which covered more than 90% of GSM and UMTS/HSPA network users at the end of 2011.
PTK Centertel also extended coverage of its UMTS/HSPA services and increased its GSM capacity, while at the same time continuing to invest in the CDMA network. At the end of 2011, the UMTS/HSPA network was available to 62% of Polands population and the CDMA network covered more than 88% of the country. Moreover, the Company continued to roll out a new HSPA DC technology for mobile data, which covered 58% of the population at the end of 2011.
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TP Group’s objective for the next few years is to take full advantage of the opportunities brought by the Memorandum of Understanding with UKE. The Group will still focus on its core activity, where it will strengthen its position as leader and ensure healthy revenues and a solid financial position. Finally, the Group will respond to changing customer needs, developing an attractive range of services.
These objectives will be achieved by focusing on the following priorities:
attaining a leading position on TP Groups core markets:
in fixed telephony, by increasing customer loyalty and reducing revenue erosion,
in mobile telephony, by achieving excellence on the subscription market, continuing to strengthen the Orange brand, growing ARPU, and improving customer satisfaction through the introduction of new services,
in Internet access, by expanding the broadband customer base and further improving service quality through increases in speed and extension of service coverage,
in TV, by pursuing cooperation with TVN, with the aim of providing TP Group customers with the highest service quality, based on rich content and the best technology solutions,
in innovation capacity, by offering attractive, integrated packages that meet the needs of TPs customers;
expanding essential network infrastructure on a systematic basis in order to offer customers the latest technologies;
developing a new offering for corporate customers on the ICT market, mainly through a newly-created dedicated company (Integrated Solutions);
improving customer services;
developing a robust sales network, chiefly through direct sales channels that increase the availability of offers for customers;
pursuing transformation and savings programs, to reduce the cost base and improve operational efficiency;
taking advantage of the opportunities arising in relation to Euro 2012, for which TP and Orange are technology partners.
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188.8.131.52 The Telecom Services Market
KEY MACROECONOMIC INDICATORS
TELECOM SERVICES REVENUES (IN BILLIONS OF EUROS)
Source: CMT, Orange for 2011
NUMBER OF CUSTOMERS (IN MILLIONS)
Source: CMT, Orange for 2011
The year 2011 was marked by the weaker-than-expected recovery of the Spanish economy. Carried by exports, GDP once again experienced slight positive growth of 0.7% in 2011; however, this fell short of expectations. The 23% unemployment rate remained at historically high levels while household consumption dropped 2.2% from last year.
In this context, total revenues within the telecommunications industry fell by 4%, versus a 3% drop in 2010, even though the number of customers increased. The fixed-line and mobile markets continued to be characterized by intense price competition, leading to a 3.5% drop in mobile revenues and a 1.5% drop in fixed Internet revenues.
The number of mobile customers increased 3.4% to 58.7 million, while Internet and fixed-line subscribers increased by 4.8% to 11.1 million.
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Fixed-line telephony revenues dropped 9.4% as customers moved from fixed lines toward less expensive voice and Internet packages and as mobile phones took the place of fixed lines. The number of telephone lines remained more or less stable in 2011.
Internet on the fixed network
Revenues from fixed Internet dropped by 1.5% across the board as a result of the 6.0% decrease in average revenue per customer (ARPU) related to long-term promotions and permanent discounts on fixed-line and mobile services purchased from the same operator.
The number of Internet customers grew to 11.1 million in 2011, an increase of 4.8%. Growth was slower than in previous yearsan indicator of the maturity level of this market. High capacity broadband services, however, took off: ONO rolled out its VHBB solution for cable (DOCSIS 3.0) in 7 million households and now serves more than 350,000 customers, while Telefónica is stepping up its selective deployment of fiber-to-the-home services (FTTH) and serves more than 160,000 customers.
Plans that include television have not yet reached expected levels. The number of customers having selected an IPTV add-on increased by 4.8% in 2011 to 0.9 million (i.e., 10.3% of broadband subscribers).
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Total revenues decreased by 3.5%, due primarily to the drop in telephony revenues, which was not completely offset by the increase in data revenues (+24% excluding SMS messaging). Total ARPU decreased 6.6% as a result of the decline in voice services related to the drop in price per minute and decreased usage (AUPU). Average revenue per user for data increased 20.3%, driven by the rise in the number of smartphones.
The number of subscribers increased 3.4% to 58.7 million customers, which corresponds to a penetration rate of 127%. Customers with a subscription increased 6% to 38.4 million, representing 65.4% of the total customer base. The number of customers with prepaid plans fell by -1.2% to 20.3 million.
184.108.40.206 The Competitive Environment
Fixed-line telephony and Internet
FIXED LINES SEGMENTATION
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BROADBAND INTERNET MARKET SHARE
The Internet market is dominated by five main players representing over 90% of the market, with respective market shares of 48.2% for Telefónica, 14.5% for Ono, 11.5% for Orange, 9.9% for Jazztel and 7.7% for Vodafone (source: CMT, Orange estimates for Q4 2011). 79% of the subscriber base is connected by ADSL and 19% by cable. Bundled dual play offerings (telephone and Internet services) continue to be standard in the Spanish market.
The market is characterized by tight competition, resulting in long-term promotions (up to 50% of the price of ADSL for one year) launched by all operators and convergence offers launched by Orange, Vodafone and Telefónica. Under these circumstances, Jazztels market share grew by 0.8 point, Oranges grew by 0.9 point and Vodafones grew by 0.6 point, at the expense of Telefónica, whose market share dropped by 5.3 points, while Ono remained stable.
MOBILE MARKET SHARE
The market was dominated by three main operators that, together, represented 89% of the market: Telefónica (41.3%), Vodafone (27.5%) and Orange (20%). Yoigos (Telia Sonera) market share was 5.1%, while the MVNOs held a 6.1% share (source: CMT, Orange estimates for 2011). There are 30 different MVNOs, focusing mainly on low value segments, prepaid customers and ethnic segments.
In 2011 the market was characterized by tight competition between the mobile telecommunications operators, with a price war breaking out among the MVNOs over the low value segments and with sizable subsidies for smartphones in the premium segments. These factors led to a 15% increase in churn rate (5.6 million customers changed operators in 2011). In this context, the MVNOs and Yoigo increased their market share by 1.8 and 1.3 points, respectively, while Telefónica lost 1.5 point and VOD lost 1.7 points. Oranges market share remained stable in terms of volume but increased in value by two points to reach 20.0% (source: CMT, Orange estimates for 2011).
220.127.116.11 The Regulatory Environment
Spanish legislative and regulatory system
The 2002 European Telecom Package was transposed into Spanish law by the general Telecommunications Act (law 32/2003 of November 3, 2003), as well as by royal decree 2296/2004 of December 10, 2004 on electronic communications markets, network access and numbering, and royal decree 424/2005 of April 15, 2005 on the supply of electronic communications services, universal service obligations and user rights. The latter was amended by royal decree 726/2011 relating to the supply of the universal service in May 2011. The telecommunications sector is also covered by the law 15/2007 of July 3, 2007 on the implementation of competition rules.
Law 34/2002 of July 11, 2002 relating to the information society and electronic commerce specifies the obligations and limits of responsibility applicable to service providers in the information society. The regulatory framework applicable to data protection in Spain is based around law 15/1999 relating to personal data protection and order 999/1999 relating to security measures. In the field of intellectual property rights protection, law 23/2006 of July 7, 2006 amends law 1/1996 of April 12, 1996 and transposes European directive 2001/29 relating to the harmonization of certain aspects of copyright and related rights in the information society.
The 2009 European guidelines are being transposed into national legislation.
The Ministry for Telecommunications and the information society (Secretaría de Estado de Telecomunicaciones y para la Sociedad de la Información, SETSI) that is part of the Ministry of Industry, Tourism and Commerce, is responsible for activities relating to telecommunications and the information society.
The Telecommunications Market Commission (Comisión del Mercado de las Telecomunicaciones, CMT) is the regulatory authority responsible for the telecommunications and audiovisual sectors (excluding content);
The National Competition Commission (Comisión nacional de la Competencia, CNC) is responsible for the implementation of competition law in coordination with industry authorities.
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Regulation of mobile telephony
The law on a sustainable economy approved in February 2011 stipulates that functional access to the Internet includes a 1 MB broadband connection. The Ministry for Industry gave details of the implementation in a Royal Decree on the provision of the universal service, published in May 2011.
In September 2011, the Spanish government launched the selection process for designated operators to run the various components of the universal service (voice telephony, connection to the 1 MB network, public payphones, directories) for a period of five years. In December 2011, Telefónica was designated as the universal service provider beginning in January 2012.
The net cost of the universal service for 2009 was set at a final amount of 46.78 million euros.
In May 2011, the Spanish authorities allocated a duplex block of 5 MHz in the 900 MHz band to Orange Spain, which made an initial lump sum payment of 126 million euros and committed invest 433 million euros in the Spanish telecom infrastructure (integrated into the 2011-15 investment plan). The license, granted under the principle of technological neutrality, is valid until December 2030.
In July 2011, the Spanish authorities auctioned the 800 MHz, 900 MHz and 2.6 GHz frequency bands. Orange Spain purchased 10 MHz duplex in the 800 MHz band and 20 MHz duplex in the 2.6 GHz band. 11 operators bought 270 MHz duplex (51 blocks of the spectrum) out of the 310 MHz duplex available, for 1.65 billion euros.
The situation is as follows for the three main operators:
Orange Spain has acquired 10 MHz duplex in the 800 MHz band and 20 MHz duplex in the 2.6 GHz band for 437 million euros (cash payment below the European references);
Telefonica bought 10 MHz duplex in the 800 MHz band, 5 MHz duplex in the 900 MHz band and 20 MHz duplex in the 2.6 GHz band for 668.31 million euros (for comparison: 499.31 million euros without the frequencies in the 900 MHz band);
Vodafone has purchased 10 MHz duplex in the 800 MHz band and 20 MHz duplex in the 2.6 GHz band for 517.59 million euros.
The seven remaining blocks were also auctioned in November 2011. Orange Spain acquired 10 MHz duplex in the 2.6 GHz frequency band in TDD mode for 5.2 million euros. Telefónica won the 4.8 MHz block for 169 million euros and Vodafone acquired the remaining national 20 MHz duplex for 10.4 million euros.
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Mobile call termination rates
Following its invitation to tender in December 2011 for the wholesale mobile call termination market (market 7), the CMT published a decision involving a new gradual decrease of mobile call termination caps to cover the period from 2012 to 2014. The proposed caps are as follows:
Regulation of fixed telephony and broadband Internet
Local loop unbundling
In April 2011, Telefónica increased the price of local loop unbundling from 7.79 euros to 8.32 euros per month.
Wholesale line rental (WLR)
In April 2011, the CMT reduced the wholesale line rental price from 11.28 euros to 11.19 euros per month.
In November 2011, the CMT approved the new wholesale offer for access to broadband Ethernet (NEBA), which is intended to replace the current wholesale offers for bitstream access and to take effect in the first quarter of 2012. Current services (GigADSL and ADSL IP) will remain available until the new wholesale services are actually offered.
18.104.22.168 Orange Españas activities
Orange España, operating under the Orange, Ya.com and OBS (Enterprise) brands, offers fixed and mobile telecommunication services to more than 15 million customers in the residential, professional, business and wholesale segments.
In 2011, operations were still affected by the macroeconomic environment, competitive pressure and negative regulatory impact on interconnection prices. Nevertheless, Orange Españas commercial growth allowed it to increase its total revenues by 4.5% (3.9 billion euros). Fixed telephony and Internet service revenues increased by 6.6% and mobile revenues increased by 4.1%. Disregarding the impact of regulations, Oranges revenues were up 7.1%.
Ebitda grew by 9.8%, and the Ebitda margin went up 1 point to 21% compared to 2010.
In 2011, Orange España continued to carry out its transformation programs, strict cost control policies and operational efficiency improvement programs. The savings generated by these programs allowed Orange España to offset the increase in its sales and marketing expenses stemming from new customer acquisition and customer retention.
Orange also pursued its plans to transform its network in 2011 with investments, excluding licenses, up 2%. Furthermore, Orange invested 569 million euros in additional mobile frequencies, which allows it to compete on equal footing with the other operators.
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Fixed telephony and Internet
Orange Españas strategy in regard to fixed-line services remained focused on improving customer satisfaction and loyalty, as well as on improving margin by optimizing access costs and enhancing value added services such as VoIP. Priorities related to reduced churn rate and increased value led to a 13.5% increase in the number of broadband customers and a 1.9% increase in average revenue per user, which came to 32.4 euros per month at year-end 2011. The number of unbundled customers increased by 27.2% to 777,000 customers at the end of 2011, with totally or partially unbundled customers representing 78.7% of total broadband customers.
Mobile telephony activities