Item 4. INFORMATION ON FRANCE TELECOM
4.1 HISTORY AND DEVELOPMENT
History and Development
Formerly a part of the French Telecommunications Ministry, France Telecom was
created as a legally distinct public sector operator in 1991. Since December 31,
1996 it has operated as a corporation (socit anonyme) subject to French
corporate law and to the specific laws that govern it. Its length of life is 99
years, except where extended or wound up early. French law no. 2003-1365 of
December 31, 2003 now permits the State to hold, directly or indirectly, less
than half of the majority of the capital.
France Telecom's shares have been listed on the Premier march of Euronext Paris
S.A. and on the New York Stock Exchange ("NYSE") since October 1997, when the
French State sold 25% of its shares to the public and France Telecom employees.
At December 31 2003, approximately 54.5% of France Telecom's shares were
directly or indirectly held by the French State.
France Telecom's registered office is located at 6, Place, d'Alleray, 75505
Paris Ledex 15, and its telephone number is: + 33(0)1.44.44.22.22. France
Telecom's agent in the United States, France Telecom North America, is located
at 1270 Avenue of the Americas, New York, NY 10020.
In recent years, France Telecom's business and the regulatory and competitive
environments in which it operates have undergone significant changes that have
affected the structure of its revenues, as well as its business and its internal
organization. All sectors of the telecommunications market in France were opened
to competition as of January 1, 1998 (with the exception of the local
communications sector which was opened to competition on January 1, 2002),
whereas France Telecom previously had a monopoly on the provision of fixed line
services. In addition, competition has evolved according to the decisions made
by the French telecommunications regulator, the Autorit de Rgulation des
Telecommunications ("ART").
From 1999 to 2002, France Telecom pursued a strategy designed to reinforce its
competitive position in this context of deregulation and heightened competition,
particularly by introducing new services and accelerating its international
development through external growth. By pursuing this strategy, France Telecom
extended its activities towards new areas of telecommunications services,
including wireless telephony, the Internet and data transmission services in
France and internationally. Also as part of this strategy, France Telecom made
many strategic investments (including acquisitions, minority investments and
UMTS licenses). In particular, it acquired Orange plc in 2000, Global One and
Equant in 2000 and 2001, acquired interests in NTL from 1999 to 2001, in the
Polish operator TP S.A. in 2000 and 2001, in MobilCom in 2000, and acquired UMTS
licenses in various European countries.
For the most part, these strategic investments could not be financed through
equity, which resulted in a major increase in Group debt and a reduction in the
rating of France Telecom's debt by rating agencies.
Upon his arrival at the head of France Telecom on October 2, 2002, Thierry
Breton immediately commissioned a team of experts to carry out a complete review
of France Telecom's businesses and financial situation (the "State of France
Telecom S.A." mission (Mission Etat des Lieux)). The main conclusions of this
study were presented to France Telecom's board of directors on December 4, 2002:
from an operational perspective, France Telecom remains a
competitive group with a portfolio of assets that are leaders in
their principal market segments with strong brands such as France
Telecom, Orange, Wanadoo and Equant. However, given France Telecom's
strong external growth and the organization put in place over the
last few years, the Group has not fully exploited its real potential
to improve its operating margins;
during the 1999-2002 period, France Telecom's external growth cost
100 billion, approximately 80% of which was paid for in cash.
Successive plans for reducing France Telecom S.A.'s debt were not
implemented due to the market downturn, and the sale of assets was
not sufficient to reduce levels of debt; and
although it was very responsive at the operational level, the Group
was organized in an excessively decentralized manner. The central
functions did not have enough leverage to develop potential
synergies.
Based on the results of this "State of France Telecom S.A." mission, France
Telecom launched the "Ambition FT 2005" Plan for the 2003-2005 period. See "-
4.2.1 'Ambition FT 2005' Plan".
Corporate Purpose
The corporate purpose of France Telecom S.A., both in France and abroad, as
amended by the Shareholders Meeting convened to approve the accounts for 2003,
is:
to provide all electronic communication services in domestic and
international relations;
to satisfy missions related to public service and, in particular, to
provide, where applicable, a universal telecommunications service and
other mandatory services;
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to establish, develop and operate electronic communications networks
open to the public necessary for providing said services and to
interconnect the same with other French and foreign networks open to
the public; and
to provide all other services, facilities, terminal equipment,
electronic communications networks, and to establish and operate all
networks distributing audiovisual services, and especially radio,
television and multimedia broadcasting services.
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Simplified Group Organizational Chart at December 31, 2003
The following diagram shows the main operating subsidiaries and shareholdings of
France Telecom S.A. at December 31, 2003. The percentage holdings shown for each
company are the percentages controlled directly or the percentage control of the
operating company or, where jointly controlled, the percentage used to
consolidate the company proportionately:
[[Image Removed: LOGO]]
(1) This diagram does not show the shareholdings in Germany
(MobilCom), in Italy (Wind, sold in 2003) and in Sweden
(Orange Sverige) as Orange is withdrawing from these markets.
(2) Orange and Orascom Telecom have joint control of MobiNil.
Therefore, in accordance with French GAAP, MobiNil's
financial and operational data is consolidated on a
proportionate basis at 71.25% being the percentage by which
France Telecom controls MobiNil.
(3) France Telecom holds 70.6% of Wanadoo S.A.'s share
capital and 71.1% of voting rights (after adjustment for
treasury shares).
(4) As part of a consortium with Kulczyk Holding.
(5) This percentage represents the share of the capital held by
France Telecom in Jordan Telecommunications Company via Jitco
which holds 40.0% of Jordan Telecommunications Company which is
in turn 88.0% owned by France Telecom.
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4.2 STRATEGY
4.2.1 "AMBITION FT 2005" PLAN
The France Telecom management team was reorganized at the end of 2002, by first
adopting a simpler organizational structure which clearly distinguishes the
operating divisions and central functions with responsibility for the whole
Group, and second, giving a greater degree of accountability to senior managers.
This team is responsible for implementing the "Ambition FT 2005" Plan in order
to fundamentally transform the France Telecom Group, based on three major
priorities:
"TOP": a program to improve operational performances which strives
to be the motor for France Telecom to generate during the period
from 2003 to 2005 more than 15 billion in net cash provided by
operating activities less net cash used in investing activities.
This free cash flow will be allocated to reducing debt. In
operational terms, TOP's goal is to attain a level of excellence in
the performance of all processes of the company by 2005. See "-
4.2.2 'TOP' Program".
"15+15+15": a plan to strengthen the Group's financial structure:
- more than 15 billion in net cash generated through the TOP
Program and allocated to reduce debt, as described above;
- 15 billion in additional equity, with the participation of the
French State in its capacity as shareholder pro rata to its
shareholding interest, or approximately 9 billion;
- 15 billion from refinancing the Group's debt.
A strategy focused on customer satisfaction and integrated
operational management of the Group's assets which are leaders in
their principal markets, with strong brands such as France Telecom,
Orange, Wanadoo and Equant. France Telecom will consider divesting
itself of assets with weak strategic or financial positions, or
those for which majority control is impossible. It will strive to
develop strategic partnerships in areas that are not part of its
core business and where it cannot attain critical size on its own.
These three initiatives will be implemented in parallel, with the objective of
gaining greater strategic and financial flexibility and achieving a net
financial debt/operating income before depreciation and amortization ratio of
between 1.5 and 2 by the end of 2005.
Confidence in France Telecom's management and the credibility of the announced
plan made it possible to refinance debt over the period from December 2002 to
February 2003 in an amount of more than 14 billion.
As the financial pressures in the short-term have decreased and the preliminary
results of the TOP Program have exceeded its initial objectives, the Group was
able to increase its share capital by almost 15 billion on April 15, 2003.
France Telecom's liquidity crisis has therefore been resolved and its equity
capital position has been strengthened.
In line with the strategy defined in the "Ambition FT 2005" Plan, France Telecom
launched a public exchange offer for outstanding Orange S.A. shares it did not
already own that permitted France Telecom to increase its ownership of Orange
S.A.'s share capital to 98.78% upon closure of the public exchange offer.
Following the public exchange offer, France Telecom launched a tender offer
(offre publique de retrait) for, that will be followed by a compulsory purchase
of (retrait obligatoire), the outstanding shares of Orange S.A. that it did not
already hold. These offers for Orange shares were not, and will not be, extended
into certain jurisdictions, including the United States. At December 31, 2003,
France Telecom held 99.02% of Orange's share capital.
At the end of 2003, the Group exceeded its expectations as a result of the TOP
Program. As a result, France Telecom has generated new margins for maneuver such
that it has decided to increase its efforts in terms of innovation and to launch
a new growth initiatives program called the "TOP Line" Program. See "- 4.2.5
Implementing France Telecom's Strategy - Accelerating the Growth Momentum". The
improved performance under the TOP program will still remain a major priority in
the coming years.
The Group continues to streamline its asset portfolio as planned and some
non-strategic assets have been sold including, Casema, Eutelsat, Wind, CTE
(Salvador) and Telecom Argentina.
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As a reference, net cash provided by operating activities less net cash used in
investing activities, or free cash flow, amounted to 7.6 billion in 2003,
compared to 0.3 billion in 2002, as shown in the table below (see "Item 5.
Operating and Financial Review and Prospects - 5.4.2 Liquidity"). Excluding
asset disposals and the increase in short-term marketable securities, free cash
flow in 2003 amounted to 6.4 billion, compared to a cash need of 1.1 billion
in 2002.
Cash flow (in millions) 2003 2002
Net cash provided by operating activities 11,322 11,839
Net cash used in investment activities (3,737 ) (11,514 )
Net cash flow provided by operating activities less cash flow used
in investing activities (free cash flow) 7,585 325
Increase in short-term marketable securities linked to the capital
increase(1) 1,833 0
Free cash flow excluding the increase in short-term marketable
securities(1) 9,418 325
Proceeds from asset disposals (3,046 ) (1,436 )
Free cash flow excluding asset disposals(1) and the increase in
short-term marketable securities(2) 6,372 (1,111 )
(1) For a calculation of free cash flow excluding asset
disposals and a description of the manner in which France
Telecom uses it, see "Item 5. Operating and Financial
Review and Prospects - 5.4.2 Liquidity" and "Item 5.
Operating and Financial Review and Prospects - 5.9
Non-GAAP Measures and Financial Glossary - Use of Non-GAAP
Measures" .
(2) Included in investment securities.
In addition, the total net consolidated debt for the purpose of the net
financial debt/operating income before depreciation and amortization ratio
mentioned above amounted to 44.2 billion at December 31, 2003 compared to 68.0
billion at December 31, 2002 and 63.4 billion at December 31, 2001. The measure
of operating income before depreciation and amortization as determined for the
purposes of the same ratio, is operating income before depreciation and
amortization of assets and amortization of actuarial adjustments in the early
retirement plan; it amounted to 17.3 billion in 2003 compared to 14.9 billion
in 2002 and 12.3 billion in 2001. The information used to calculate this ratio
is, unless otherwise expressly indicated, that provided in the Consolidated
Financial Statements. The information, therefore, reflects changes to the scope
of consolidation, such as the effect of asset disposals.
4.2.2 "TOP" PROGRAM
France Telecom's return to a healthier financial situation depends above all on
improvements in its operational performances. The "TOP" Program is France
Telecom's plan for improving its operational performance. It strives to help
France Telecom to achieve optimal levels of performance for each of its
activities and by 2005 generate more than 15 billion in net cash flow over the
period from 2003 to 2005, which will be allocated to reducing the debt.
The objective initially set for 2003 was to generate at least 3 billion in free
cash flow, to reduce debt. In view of the results obtained in the first half of
2003, this objective was raised to 4 billion, excluding asset disposals.
Ultimately, free cash flow in 2003, excluding asset disposals and increases in
investments in cash in short-term marketable securities, amounted to
approximately 6.4 billion (see "Item 5. Operating and Financial Review and
Prospects - 5.4.2 Liquidity").
Since the beginning of 2003, France Telecom has been positioning itself to meet
the requirements of this program. Each member of the Executive Committee is
responsible for one program. Each program is broken down into projects. There
are over 150 projects in total. Each operating division therefore manages a
certain number of projects specific to it.
There are also cross-company projects that encompass the different functions of
the Group. These are programs concerning purchasing, investments, general
overhead, working capital requirements, the information system, research and
development, communication expenses, logistics, real estate and the
reorganization of support functions (financial, legal, human resourses and
communication).
A central control unit, reporting to the member of the Executive Committee in
charge of the TOP Program, provides the operational divisions with support to
help them achieve their objectives, ensures the coherence of the whole of the
TOP Program, organizes reporting and warns the Executive Committee of any
delays. It proposes, where necessary, corrective measures or the launching of
new projects.
Along with those working directly on the projects, all of France Telecom
employees have been mobilized to become involved in the TOP Program. France
Telecom's executives have a major role in mobilizing their teams. To emphasize
their responsibility for the success of the program, the Executive Committee has
decided to base the variable part of managers' salaries on the results of the
TOP Program.
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In addition, in order to increase France Telecom's reactivity and to accelerate
its rhythm, the target results and budgets of all the divisions and functions,
as well as the variable part of their managers' salaries, will be redefined
every six months.
By the end of January 2003, the projects had been launched, the managers
appointed and action plans for 2003 defined. During the launch phase, priority
was given to activities that would provide rapid results (for instance, the
reduction of general overhead: reduced usage of external consultants and
temporary employees, a new travel policy, reduction of communications expenses).
The projects then entered the deployment stage entailing a restructuring of
processes, a systematic attempt to share resources and the implementation of
synergies striving to increase the Group's operational performance on a
long-term basis.
The following are examples of the most important projects in the TOP Program:
The "TOP Sourcing" project has been split into stages, each of which
covers a number of categories of purchases. The two first stages
covering 70% of spending and 41 and 23 commodities, respectively,
were undertaken and carried out between January 2003 and January
2004. The first stage resulted in the reduction of the supplier
portfolio concerned by 60%. The combination of negotiations during
the first stage and the negotiations regarding commodities that are
not included in the stages resulted in an impact on savings of more
than 700 million for the year 2003. The target is to achieve savings
of 4 billion over the period from 2003 to 2005 (see "- 4.8
Suppliers").
In relation to investments, the establishment of corporate governance
mechanisms, such as the investment committee, has permitted a
prioritization of investments in productivity and growth programs. In
terms of fixed line telephony, expenses relating to commutation and
transmission capacity were reduced because of the very high technical
level of the network. Investments were focused on growth sectors, such
as the development of ADSL. In the wireless sector, investments were
aligned with the needs of the market, leading to large investments in
third generation technology in the fourth quarter of 2003. Thus, the
Group's level of investment will ensure long-term growth in key
sectors.
In order to quickly reduce the level of operating expenses, excluding
depreciation and amortization, savings were produced, two-thirds of
which related to external expenses from "life-style" reductions (a
new strategy concerning expenses related to travel, consulting and
temporary work). The actions taken by the "savings trackers" network
and the spread of good practices further contribute to more efficient
management.
The reengineering of operational processes and the internalization of
activities that were previously outsourced permit a better
optimization of resources and a more efficient control over costs. For
example, the streamlining of access costs at Equant, the streamlining
of international traffic delivery at Orange in the United Kingdom, the
improvement of maintenance operations on the fixed line network in
France and the streamlining of the information system of Orange
France.
With regards to information systems, actions undertaken within the
framework of the TOP Program have three goals:
- reduction in information system expenses of the Group;
- implementation of a Group-wide information system;
- establishment of governing principles for the entire Group.
Information system expenses for the Group (operating expenses, excluding
depreciation, amortization and investments in tangible and intangible assets)
were reduced by 20% between 2002 and 2003, which permitted the reduction of the
ratio of information system expenses to revenues. To this result, a systematic
analysis of the value of the principal projects was undertaken (especially for
the 50 most important projects) in order to select those aspects that are the
most valuable for the Group. Also, the number of projects at France Telecom S.A.
was reduced by 30% in 2003, with 8% of the projects already in place at France
Telecom S.A. being stopped or frozen. Finally, the convergence of the Group's
specifications within the framework of the new purchasing policy was completed.
The first stages of group-wide information system convergence have begun. For
example, the publication at the end of 2003 of the urban planning for the
information system for the entire Group and the decision to share applications
between divisions (in the areas of collection of receivables, wireless service
data platforms, billing for content services, etc.). Their roll out will
continue in 2004. The concentration of calculation centers, initiated in France,
allowed their reduction by a factor of two in 2003 and the concentration of
operations teams. The consolidation scenario for all of Europe was envisaged
over the course of the year. The consolidation of facility management in France
between France Telecom S.A., Orange France and Wanadoo France was started, and
the rate of standardized computer workstations went from 43% to 76% at France
Telecom S.A.
The establishment, starting during the first quarter of 2003, of governing
principles within the Group allowed, in particular, the precise follow-up of the
execution of the information system budget for the entire Group as well as a
group-wide consolidation of the budget for 2004. The consolidation at the level
of the information system division in the Group of various information system
activities, further reduced external expenses for the entities concerned.
In order to decrease advertising and communications expenses and other
related activities, in relation to their 2002 levels, with an
objective of decreasing costs by approximately 200 million in 2003
and approximately 600 million over the period
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from 2003 to 2005, an advertising investment committee is coordinating
France Telecom's policy and is refocusing expenditure on sales
advertising. A committee has also been formed to examine sponsorship and
to coordinate and optimize expenditure at the group level.
Support functions for the finance, human resources and real estate
divisions are being optimized by decreasing the number of sites,
pooling services and streamlining costs.
The priorities of the project to decrease working capital
requirements are to reduce debt and inventory and to improve amounts
owed to suppliers. Based on working capital requirements of 4.5
billion in 2002, the goal of achieving a reduction of at least 0.5
billion in 2003 was exceeded. The reduction in working capital
requirements rose to nearly 1.3 billion in 2003.
For a detailed analysis, see "Item 5. Operating and Financial Review and
Prospects - 5.1.2.2 Results of the 'TOP' Operational Improvements Program".
For information regarding risks related to France Telecom's level of
indebtedness, see "Item 3. Key Information - 3.3.1 Risk Factors Relating to
France Telecom's Business - The 'TOP' Program may not achieve the expected
results, which could have a material adverse impact on France Telecom's
financial condition and results of operations".
4.2.3 MARKET GROWTH AND USAGE TRENDS
France Telecom's strategy is a response to the climate of change in the
telecommunications sector, which is a growing market characterized by strong
growth in usage.
A Growing Market
The telecommunications services market is characterized by a high rate of
innovation in uses and new technologies. These services continue to increase as
a proportion of GDP as indicated by the table below.
2002 2001 2000 1999 1998
(in %) (in %) (in %) (in %) (in %)
France** 2.9 2.9 2.7 2.4 2.1
United Kingdom* N/A 3.9 3.8 3.5 3.1
Germany* N/A 3.1 2.7 2.4 2.3
* Source: OECD.
** Source: Calculation provided by the Company based on INSEE's data.
Trends in the World Market
The world market for telecommunications services, valued at $1128 billion by
Idate, grew by 5.6% in value in 2003 compared to 5.2% in 2002. Based on
forecasts for the coming years, growth is expected to continue at an annual rate
of approximately 5% between now and 2007 (source: Idate).
The momentum of the sector is mainly driven by the Internet (17% increase in
value in 2003 and an expected 12% increase between now and 2007), wireless
telephony (11% increase in value in 2003 and an expected 7% increase annually
for the period from 2004 to 2007) and by data services (6% increase in 2003).
The number of mobile telephones in service in 2003 exceeds the number of fixed
lines: 1.3 billion mobile telephones compared to 1.2 billion fixed lines
throughout the world. The number of Internet users should reach 1.1 billion by
2007 compared to 700 million in 2003 (source: Idate).
Steady Growth in Europe
In 2003, the European market continued to grow more quickly in value than the
North American market (4% compared to 1%) (source: Idate). According to Idate,
this difference is likely to continue over the coming years: 3.4% compared to
2.9% annually by 2007 (4.9% in France).
With an 82.5% penetration rate in 17 countries in Western Europe, wireless
telephony has become the sector's biggest segment with 46% of the market in
2003. The continued growth of wireless services will be spurred on by higher
speed services (GPRS then UMTS) along with the arrival of new services (MMS,
content), with expected growth of more than 4% in value per year between 2003
and 2007. However, the strongest growth will come from broadband and the
Internet which will rise by more than 14% in value annually between 2003 and
2007 (source: Idate).
Germany and the United Kingdom are still the biggest markets in Europe with 21%
and 18% of the Western European market (17 countries), followed by Italy and
France with 14% and 13%, respectively (source: Idate).
In 2003, the French market grew by 5.2% in value. The fixed line market fell
slightly by 1% while wireless telephony rose by 6.5% and the wireless
penetration rate reached 65% (source: Idate). The Internet and broadband market
grew very sharply by over 50% in value between 2002 and 2003, although it only
accounts for 6% of the total market. France has the second largest number of
broadband customers after Germany (source: Idate).
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Usage Trends
The technological momentum of the telecommunications sector has put into the
hands of its customers a variety of means of communication, which represent for
the customers the characteristics and benefits shown in the table below:
Type of service Main customer benefits (key words)
Fixed line telephony Real time, reliable, low cost
Wireless telephony Personalized, ubiquitous, modern, many functions
SMS Personalized, private, fast, cheap, always available
Email, Internet Always available, efficient, cheap, worldwide
Customers now use "communications" (telephone calls, SMS, e-mails, sessions on
the Internet etc.) through these different means, depending on their own
expectations and the properties of these tools. The number of these
communications is rising strongly.
France Telecom estimates that the number of communications per French inhabitant
per month has increased from 20 in 1990 (almost entirely telephone calls, with
some telematics) to approximately 100 in 2002: this number includes
approximately 60 fixed line or wireless telephone calls, about 20 SMS or
e-mails, and over 20 Internet sessions. These estimates, which should be
considered as orders of magnitude, are based on its traffic observations of its
fixed line and mobile telephone subscribers and the average length of their
calls, as well as surveys about Internet use. France Telecom estimates that the
total number of communications per French inhabitant per month could total some
200 in 2010.
4.2.4 FRANCE TELECOM'S STRATEGIC VISION
France Telecom has a complete portfolio of activities, including fixed line,
data, wireless and Internet services, covering all customer segments (consumers,
small- and medium-sized businesses, multinationals) and all types of usage
(personal, domestic and professional) in most situations (home, office, mobile).
France Telecom intends to take advantage of its position as leader in all areas
of telecommunications in France and Poland and as leader in the United Kingdom
by number of wireless customers and personal Internet users, and leader in
Europe in terms of Internet connections and mobile telephones.
France Telecom's strategy consists in using these major strengths to achieve
profitable growth based on the new model for the telecommunications industry, as
explained below.
A New Model for the Telecommunications Industry
During the recent period of development of new methods of communication and the
gradual process of learning to use them, customers have had to adapt to
extremely fragmented services. This is linked to the fact that the
telecommunications industry is still organized into separate fixed line,
wireless and Internet services. The terminals in each case are different, the
service platforms independent and customers have to manage these differences on
their own.
customers are required to use several mailboxes (fixed, wireless,
Internet) and several address books (stored in the memories of
their fixed lines, wireless phones and Internet messaging
systems);
several identities are required for the services - telephone
numbers, email addresses;
applications can be incompatible with those of their contacts, as is
the case with instant messaging programs at present;
there are numerous online payment methods, which are not
universally accepted by businesses.
France Telecom believes that these integration issues reduce customers' ease of
use and impede the optimization of efficiency gains from the increasingly
numerous and sophisticated services and tools, resulting in a risk of a slowdown
in market growth. France Telecom wants to anticipate the structural changes in
the industry and introduce a new model in order to provide its customers with
telecommunications services. This means integrating the networks and services in
order to offer customers a single set of services regardless of the network,
platform or terminal they use. Customers need to be offered terminals that are
ergonomically simple and familiar. The integrated offer that meets this
strategic vision will, for example, include:
single sign-on points;
messaging services that can forward messages to each other according
to the customer's instructions;
notification that an address book contact is present and available;
access to services on any access network or terminal.
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This would be a major change in model which will allow customers to define and
personalize their services. The services would then become multi-access. The
focal point then shifts from the network to the user: the customer is at the
center of his own network.
Several technological breakthroughs will encourage this revolution:
Widespread Use of the IP Protocol on all Networks:
The IP protocol will be the means for a greater degree of inter-operability
between the various networks and types of services. This will begin to challenge
the "silo-based" structure of the present networks (fixed line voice, fixed
Internet and wireless) each formed of specialized terminals accessing dedicated
services using separate infrastructures and platforms. It will be possible to
make terminals, then platforms and services and large parts of the networks
common to the various categories of services.
Widespread Use of Broadband:
Technologies such as ADSL, WiFi, gigabit Ethernet and UMTS currently offer or
will soon offer very high speeds on all fixed or wireless networks at a
competitive price.
In parallel, developments in customer terminals, such as multimedia PCs,
traditional cameras and digital cameras and multimedia mobile phones with
built-in cameras and game consoles, are leading to a requirement to exchange
very high volumes of data, which require high speeds to provide satisfactory
ease of use.
Mobility Everywhere:
Technology now satisfies or will soon satisfy the expectations of continuous
personal communication capacity: the speed and functionality capacities of
wireless networks will be considerably extended by the arrival of UMTS while
local wireless technologies (WiFi) are being introduced.
Innovative Multi-Access Terminals:
With the appearance of innovative terminals equipped with multimedia facilities,
built-in storage and operating systems, services can be made increasingly
independent of the type of terminal. In parallel, technical solutions make it
possible to connect various types of terminals to different types of networks.
For example, a wireless phone can be connected to a fixed line network through
Bluetooth, a PC can be made wireless through GPRS/UMTS or WiFi, and a television
can be connected by ADSL.
Domestic networks will play a major role in this greater flexibility in the
allocation of services to terminals and of terminals to networks.
Open Systems Making Easier Inter-Operability of Networks:
The inter-operability of networks will be made easier not just by the widespread
use of the IP protocol to the networks themselves but also by the implementation
of open platforms such as authentication platforms and transaction platforms,
with Application program interface (API) and very flexible activation mechanisms
such as web services.
France Telecom has introduced major innovations in order to make this transition
from the "old world" structured around narrowband fixed line access, broadband
Internet access, wireless access and data transmission networks towards a "new
world" that will be organized around personal and domestic usage and corporate
communications services.
In terms of the evolution in the telecommunications industry, these
technological advances lead to a convergence of the businesses of Internet
access providers and telecommunications operators.
Evolution of the Business of Internet Access Providers and
Telecommunications Operators
After the introduction of the Internet, when Internet access providers searched,
above all, for an economic model of the "media" type, which develops clientele
through online publicity and e-commerce, it is now clear that Internet access
providers must integrate their business activities with those of
telecommunications operators in order to profit together from broadband services
by offering:
new, advanced Internet services (online games, photo albums, image
messaging);
image services (TV through ADSL, VOD);
advanced telephony services (personal communications, videophony);
advanced wireless services (Image messaging, videophony, UMTS).
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Broadband access is also transforming telecommunications operators whose goal is
to provide new services, such as games, voice over IP, videophony, television or
a secured Internet connection for households.
These two evolutions in the business of Internet access providers and
telecommunications operators lead clearly to a common development strategy for
services, based on the spread of broadband access in order to meet these
converging needs.
France Telecom Adapts its Strategy to the New Model of Telecommunications
France Telecom is adapting its strategy to the new model of the
telecommunications industry, which is structured around the following:
In terms of business areas, the core areas will be wireless services
and broadband access services, providing multi-service offerings;
In terms of services, the three services of the Group are the following:
- "Personal services";
- "Home services";
- "Enterprise services".
In terms of organization, the organization of the Group will be
adapted to provide, as much as possible, services to clients by
relying on strong brands (Orange and Wanadoo in particular), and on
France Telecom's brand, the ampersand symbol, which is the symbol of
the Group's identity;
Finally, France Telecom, as an integrated operator, benefits from
the convergence of its networks and its information systems.
4.2.5 IMPLEMENTING FRANCE TELECOM'S STRATEGY
In order to implement its profitable growth strategy based on the new model for
the telecommunications industry, France Telecom will first make use of the
transformation undertaken in order to achieve operational excellence.
This is the purpose of the TOP Program which is not just a cost-cutting program
but strives to improve France Telecom's operational performance: efficiency of
working methods, excellence in operations and excellence in customer relations.
On this basis, France Telecom intends to use its first-class portfolio of
assets, its innovation potential and its strategic partnerships to successfully
change the model within its sector of activity and speed up the growth momentum.
See "- Accelerating the Growth Momentum".
This profitable growth strategy is naturally defined for each market or type of
service and for international operations. See "- Main Actions for Implementing
France Telecom's Strategy".
Accelerating the Growth Momentum
In the second half of 2003, France Telecom launched a growth initiatives program
called "TOP Line" to accelerate growth momentum. France Telecom is mobilizing
its innovation and R&D potential and is making use of strategic partnerships to
sustain this momentum and is implementing the model of an integrated operator.
The "TOP Line" Program
The "TOP Line" program includes 40 growth initiatives projects under the
responsibility of the operating divisions and 15 cross-company projects striving
to develop and launch new services. A member of the Executive Committee is
responsible for each project. Some projects will allow France Telecom to work
better as an integrated group while others relate to innovations that France
Telecom intends to launch over the next few months:
personal communications;
new broadband services;
company networks.
The priority for personal communications is to develop usages offering greater
ease of use and total fluidity between the various networks. Five projects are
being conducted by France Telecom with the goal of offering its customers the
ability to:
manage identity and authentication procedures independently of the access
network (cross-company project: identity/authentification);
have a single address book that can be used from any terminal or
service (cross-company project: address book);
know that an address book contact is present and available
(cross-company project: contact);
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contact someone on their chosen network or terminal regardless of
which network or terminal they are being contacted on (cross-company
project: availability); and
use simple and universal payment systems (cross-company project: payments).
With regards to new broadband services, France Telecom is already investing in
its network to offer more services to view and communicate still and moving
images: ADSL television, photo and video albums, personal telephony, video
conferencing and video-on-demand. These services relate to the following
cross-company projects: ADSL, Home Gateway, Videophony, Voice over IP and
Content grouping.
For the corporate sector, innovations developed by France Telecom will allow
employees on business trips to access the whole of their company's information
system, messaging system and applications with the same degree of security that
they have in their offices, which is the goal of the cross-company "Office"
project. France Telecom will also be extending its activities to the operation
of corporate networks in order to relieve companies from a considerable increase
in the operational workload. Due to widespread use of IP, companies will feel
the benefits of the gradual removal of the fragmentation between private
networks and public networks. Lastly, France Telecom will offer full network
management services to companies on a more frequent basis.
In addition, the cross-company projects aim to facilitate the customer's usage
and training (cross-company project: Ergonomic Services) and reinforce the
business performance of the Group (cross-company projects: Market analysis and
segmentation; distribution tools).
Mobilizing the Group Potential for Innovation and R&D
This strategy of quickly developing our services will mobilize France Telecom's
innovation and R&D potential in all the main areas of communications technology:
Network technologies: very high speed transmission on fixed line
networks, optimized use of the Hertz spectrum, new generations of IP
networks;
Functional middleware: communications middleware (identity, presence,
localization, contact list, profile management), security
technologies, payment mechanisms, technologies to manage conditional
access and rights;
Application middleware: development, integration and distribution of
applications; development interfaces ("API"), home gateways, home
networks, image processing.
All this expertise is accessible to all the France Telecom companies and
provides them with a competitive advantage.
Innovation is therefore one of France Telecom's main priorities. Accordingly,
France Telecom will be increasing its R&D efforts. In terms of operating
expenses before amortization and depreciation plus investments in tangible and
intangible assets, these efforts should represent about 1.3% of the consolidated
results of the Group in 2004 as compared to 1.1% in 2003.
Partnerships to Develop New Services and Emphasize France Telecom's
Individuality
France Telecom intends to remain focused on its core business: network
deployment and operation, development and marketing of its network services and
end-to-end connection services, in all fixed line or wireless technologies, all
technical protocols and in all configurations of use whether in public or
private networks. In addition, a fundamental aspect of its expertise is to
assist customers in using its networks and services by providing the consulting
and integration services required.
France Telecom intends to rely on strategic partnerships to create a competitive
advantage or to integrate new technologies where a critical size to develop
these advantages could not be achieved alone. The priorities of the strategic
partnerships will be in four areas:
networks and information systems support technologies;
terminal equipment (for example in the wireless sector with signature
devices developed by suppliers according to ergonomic specifications
defined by Orange);
content (for example with regards to new offers on ADSL);
distribution channels in order to increase sales, develop customer
loyalty and make it easier to learn how to use these new services.
The Integrated Operator's Model
The integrated operator's model has created new opportunities in the information
systems and network sectors. In the information systems sector, following an
initial phase in 2003 and 2004 of streamlining and simplifying under the TOP
Program,
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the convergence of the information systems will take place in 2004 and 2005 due
to the alignment of billing procedures for online content and customer service
as well as to the consolidation of infrastructures and data processing centers.
For the networks sector, following an initial stage of converging Fixed Line and
Wireless in the transportation network, which allowed voice traffic to be on a
single circuit switching network (the Time Division Multiplexing network: TDM)
and data traffic on a unified ATM packet network, the new infrastructures that
will be developed in the medium-term will allow voice and data traffic to be on
the same infrastructure, which will lead to a reduction in investment and
operating costs.
Main Actions for Implementing France Telecom's Strategy
The Group's strategy of profitable growth consists of basing its development on
the satisfaction of the needs and expectations of our customers in three main
areas:
"Personal services", essentially consisting of wireless services. In
this area, the key to our strategy is reinforcing the growth of Orange
through an intimate knowledge of our customers, which will, in
particular, permit us to offer our customers with the services that
interest them to make the best of multimedia applications. See
"- Reinforcing the Growth of Orange".
"Home services". The key strategy of the Group in this area consists
in enhancing "Home Services" through broadband (see "- Enhancing
'Home Services' through Broadband").
"Enterprise services", whose goal is to satisfy the totality of the
needs of companies through better solutions that combine both
performance and innovation, in France and internationally (see
"- Development of Enterprise Services" and "- Consolidating Equant's
Leading Position").
This strategy is implemented internationally, through essentially internal
growth and a focus on the most promising assets, in particular, the Polish
operator, TP Group (see "- International Strategy").
Reinforcing the Growth of Orange
Orange intends to reinforce its growth via three methods: customer intimacy,
development of partnerships, integration and convergence.
Customer Intimacy: Offering a Unique and Differentiated Experience
After the pragmatic development of networks, winning and localizing the best
customers and improving performance, Orange's strategy is focused on a sales and
marketing approach that is as close as possible to customer requirements
("Customer intimacy driving usage"). Orange strives to increase the average
revenue per unit in terms of both voice and multimedia services.
Orange will continue its strategy of obtaining and localizing the best customers
by focusing on the market share in value, segmenting the market in the same way
for each country where it operates, new customer retention schemes and a
personalized customer sales policy.
Orange wants to differentiate its services by customizing its offer to
customers. Orange wants to provide all customers with a unique wireless
communications service by boosting average customer use, expanding the range of
communications methods, integrating images, and making MMS as successful as SMS.
Following the launch in 2003 of the Orange World portal in France and the United
Kingdom, which was an important stage in the differentiation process, Orange
will continue to deploy its portal in at least six other countries in 2004.
Developing Partnerships
Orange has already demonstrated in the multimedia sector its ability to make use
of various partnerships to supply services through business models allowing for
the remuneration of partners, such as SMS+ in France and Orange Gallery. This
policy encourages the development of innovative services on GPRS networks that
prefigure the services that could be offered on UMTS networks.
Orange has joined the alliance between TIM (Telecom Italia Mobile), Telefonica
Moviles and T- Mobile with the objective of supplying all these customers with
voice and multimedia packaged services and allowing Orange customers to access
all their services in countries where Orange does not have a presence.
In the corporate market, Orange intends to strengthen its position, in
particular in countries where it still has a small market share by using
integrated offers such as Intranet and email access via wireless. For this
purpose, Orange has established several partnerships with the market leaders
such as Palm and Oracle. Orange, France Telecom and Equant are cooperating,
furthermore, in order to offer virtual private network services using GPRS.
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Along with portable handset manufacturers, Orange is developing an exclusive
range with the Orange "signature". This makes it possible to control and
optimize the ergonomics of the handsets to facilitate the development of
multimedia services.
Integration and Convergence
France Telecom's purchase of the interests held by minority shareholders of
Orange in 2003 will help it to better respond to a fundamental trend in the
telecommunications market - the convergence of wireless, fixed line and Internet
environments, which is a priority in France.
The planned opening of the UMTS network in the United Kingdom and then in France
in 2004 should make it possible to commercially launch new multimedia mobile
services with high added value as the first stage towards the convergence of
services.
Orange is also investing in its network and equipment to improve all the
customer services and to offer unique and innovative services by adding
intelligence to the network and by securing customer information transferred to
the network by wireless telephony.
The objective of the Group is to broaden the range of wireless services into a
range of personal services providing customers with permanent access to their
universe of communications built around fixed line, wireless, and WiFi access:
permanent access to personalized services;
contact list;
extended range of connectivity;
unique authentication.
Enhancing "Home Services" through Broadband
Developing Broadband and the Multi-Services Offer
The development of broadband brought about ADSL is a priority for the Group
because it enables the development of an entire range of new "Home services",
and in particular the development of:
Internet access;
television by broadcast or by demand;
new communications services (videophony, voice over IP), which are
producing a return on all of the capital spending already incurred in
both the copper pair network and the carrier network.
France Telecom has decided to accelerate the roll out of ADSL. The goal is to
have 90% of the telephone lines in France able to be connected to ADSL by the
end of 2004, and 95% by the end of 2005 (compared to 79% at the end of 2003). In
order to do so, France Telecom will invest 100 million more than planned in 2004
and 2005, bringing its total investment in ADSL to 700 million over the period
from 2003 to 2005.
Moreover, France Telecom's goal is to have total ADSL access, excluding
unbundling, reach 4.5 million subscribers by the end of 2004. France Telecom's
goal is to have ADSL revenues greater than 1 billion in 2004 (compared to 744
million in 2003). Broadband Internet access will become the norm. The goal is to
have the percentage of households connected to the Internet be greater than 40%
of the total number of households connected to the Internet at the end of 2004,
compared to approximately 30% at the end of 2003 (source: Data nova for 2003).
Developing Internet Access and Internet Services
The Wanadoo access strategy is based on the following two priorities:
Increasing the number of customers in Europe
Wanadoo will continue to promote the growth of Internet access through its
presence in all market segments, offering innovative and reliable plans. To that
end, it will make the best use of the different kinds of networks,
communications channels and handsets and will be supported by an efficient
distribution network.
Boosting average income per user
Wanadoo will continue its strategy aimed at expanding the number of paid access
plans wherever it operates in Europe. This strategy will focus on moving
Freeserve's users without subscriptions towards unlimited Internet access plans
(low speed and
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ADSL), in addition to focusing on expanding the number of high speed plans in
its primary markets. It will use innovative marketing solutions and techniques
such as launching WiFi, ADSL modem + routers for professional customers and
attractive price packages.
Services and Content
Wanadoo's services and content strategy is built around the following two
priorities:
localizing users and contributing to winning new customers on France
Telecom's portals and thematic sites, particularly by creating
partnerships with top-rate service providers and internal expansion
of its portals;
making the user portals more profitable first by increasing its
market share of advertising through a dynamic innovation policy and
second by distributing paid content and services from users (Wanadoo
customers and all web-users) using the kiosk model.
Developing Innovative Services for Fixed Line Consumer Services
As part of its strategy to develop ADSL and in order to optimize the utilization
of the fixed line network through innovative offers, France Telecom will first
be developing price packages and localizing schemes in the fixed line sector.
Second, the goal is to increase the sale and rental of handsets for the purpose
of replacing and updating household equipment and encouraging the use of
services such as new ranges giving preference to handsets compatible with new
services such as SMS, caller ID, and DECT cordless handsets.
This objective mainly entails increasing the attractiveness of the fixed line
services by offering innovative features that make life easier (3131 last call
return, auto call back, call transfer, caller number and name ID, voice mail,
PCV (collect call) France, fixed line SMS, "MaLigne" TV).
Development of Enterprise Services
In a difficult economic climate, France Telecom is offering its customers
solutions that combine performance and innovation.
France Telecom's broadband service now offers companies broadband connections to
their sites so they can exchange a growing amount of data quickly and safely.
This service helps bring France Telecom closer to its customers, employees,
partners and suppliers.
France Telecom is doing its utmost to become a corporate integrated telecoms
services supplier operator: consultancy, engineering, adaptation of network
infrastructures, deployment, managed WAN or LAN networks, network outsourcing,
customer premises equipment integration, and user support.
To address the expectations of its corporate customers, France Telecom intends
to do the following:
integrate the latest technologies (multi service DSL, Gigabit
Ethernet, MAN, WiFi, voice over IP);
widely use IP as a unifying means of intra- and inter-company exchanges;
design an Intranet solution suitable for small- and medium-sized businesses;
create a complete catalogue of network services to unburden France
Telecom from managing the network, spanning from equipment integration
(PBX), virtual private networks to full outsourcing of infrastructure;
take into account all the mobility positions of the France Telecom's
employees regardless of the terminal or the network they are using or
of their geographical position: solutions to connect to the France
Telecom's applications when mobile (e-mail, directories,
applications, etc.) from a wireless or WiFi network;
offer application solutions that rely on France Telecom's network
solutions (network security services, hosting of messaging systems
and websites);
offer businesses solutions to manage their relationships with their
own customers (customer relations management, call centers);
develop partnerships with the leading market players to offer
complete solutions.
Consolidating Equant's Leading Position
Equant's goal is to consolidate its position as the world leader in data
services for multinational companies. To do this Equant plans to:
expand its network in a multimedia structure based on IP;
expand its product range towards services with a higher added
value - IT based services;
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expand its direct and indirect sales networks;
continue to improve customer relations and quality of service.
In order to implement its strategy, in early 2004 Equant announced that it was
reorganizing its service expertise into five expertise centers:
consulting;
project management;
service management;
service integration;
managed services.
International Strategy
France, the United Kingdom and Poland are clearly considered to be vital and of
definite strategic importance for France Telecom. The Group holds strong,
competitive positions in these countries, which are economically sustainable and
already well advanced.
In addition, France Telecom considers Europe to be its new domestic market.
In order to focus on its most strategically important and profitable assets,
France Telecom began in 2003 to re-examine all its subsidiaries and
shareholdings in order to decide whether to retain them depending on two types
of criteria:
strategic criteria:
- market growth and profitability;
- quality and sustainability of the competitive position;
- potential synergies with other assets; and
- control of the company or definite opportunity to acquire control.
financial criteria:
- operating income before depreciation and amortization;
- operating income before depreciation and amortization less
investments in tangible and intangible assets (excluding
acquisitions of licenses);
- impact on the rating issued by credit rating agencies, and in
particular the impact on the consolidated net financial debt/operating
income before depreciation and amortization ratio; and
- potential for creating value through disposals or partnerships.
This analysis has resulted in the sale of some activities such as Casema,
Eutelsat, Wind, CTE (Salvador), and Telecom Argentina.
France Telecom believes that, in any event, strengthening the competitive
position of its current operations and rapidly improving the profitability of
these operations are its top priorities, and that these actions will improve its
attractiveness and ability to act however the European market further develops.
For information regarding risks related to the telecommunications and wireless
industries, see "Item 3. Key Information - 3.3.2 Risk Factors Relating to the
Telecommunications and Wireless Industries".
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4.3 BUSINESS OVERVIEW
4.3.1 DESCRIPTION OF THE GROUP
Structure
The Group structure was simplified in December 2002 by creating clear
distinctions between the operational divisions and the central functions. On
March 30, 2004, France Telecom modified its organizational structure. The new
structure is shown in the following table:
Organizational structure of France Telecom
(Divisions and Functions)
[[Image Removed: LOGO]]
Segmentation
In the first half of 2003, France Telecom created the following six business
segments in order to reflect its development and the structure of its operations
according to the different activities and subsidiaries. These segments were in
place for the year 2003 (see "Item 5. Operating and Financial Review and
Prospects - 5.7.1 Subsequent Events").
The Orange segment covers all the wireless telephony activities in
the world, in France and in the United Kingdom, which were
transferred to Orange S.A. in 2000 following France Telecom's
acquisition of Orange plc at the end of August 2000. This segment
corresponds to Orange S.A. and its subsidiaries that represent the
Orange operating division.
The Wanadoo segment that includes Internet access services, portals,
e-Merchant solutions for businesses and directories which have been
combined under Wanadoo S.A. since 2000. This segment corresponds to
Wanadoo S.A. and its subsidiaries that represent the Wanadoo
operating division.
The Fixed Line, Distribution, Networks, Large Customers and Operators
segment combines France Telecom's fixed line services mainly in France
and particularly fixed line telephony, services to operators, business
services, cable television, the sale and rental of equipment and the
support functions (including R&D services) and the Information Systems
division. This segment covers the activities of the following
operating divisions: Corporate Solutions (excluding Equant), Fixed
Line and Distribution in France, Networks and Carriers, Information
Technologies and all the central functions with responsibility for the
whole Group.
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The Equant segment covers the activities of the new Equant, formed
after the merger with Global One on July 1, 2001, in corporate
worldwide data transmission services. This segment comprises the
Dutch company Equant N.V. and its subsidiaries. Equant is part of the
Corporate Solutions division.
Since April 2002, the TP Group segment encompasses TP S.A., the
incumbent Polish operator and its subsidiaries, including its
wireless subsidiary PTK Centertel. TP Group is part of the
International division.
The Other International segment covers other subsidiaries in the rest
of the world whose main operations are fixed line telephony outside
France. It also covers some of France Telecom's wireless activities
that were not transferred to its subsidiary Orange S.A. These
activities are conducted by the International division.
This segmentation is systematically used in the section to follow, "- 4.3.2
Principal Activities" and more generally in the whole of this annual report on
Form 20-F.
General Description of Business Segments
Orange
In August 2000, France Telecom acquired Orange plc and later merged most of
France Telecom's wireless businesses with those of Orange plc to create a
European wireless operator called Orange whose parent company is Orange S.A.
Orange S.A. shares have been listed on the Premier march of Euronext Paris S.A.
and on the London Stock Exchange since February 13, 2001. France Telecom held
86.3% of Orange's capital at December 31, 2002. On September 1, 2003, France
Telecom made a public exchange offer to acquire the Orange shares it did not
already hold. France Telecom made an irrevocable offer to exchange Orange
ordinary shares for France Telecom existing or new shares based on an exchange
ratio of 11 France Telecom shares for 25 Orange shares. This offer was not
extended into certain jurisdictions, including the United States. The joint
prospectus issued by Orange and France Telecom described this as a natural
development stage for the France Telecom groups in line with the "Ambition FT
2005" Plan.
In operational terms, the public exchange offer formed part of the ongoing
strategic vision of France Telecom and was based notably on:
the increasing needs of France Telecom customers for integrated
services on a fixed to wireless platform;
a growth strategy based on developing new innovative services;
a strong cooperation model between the various activities of France
Telecom in key areas such as strategy, development of new services,
customer approach and centralized purchasing.
Upon closure of the public exchange offer, France Telecom held 98.78% of the
capital and voting rights of Orange.
On October 29, 2003, France Telecom filed with the CMF a tender offer (offre
publique de retrait) for, that will be followed by a compulsory purchase of
(retrait obligatoire), the outstanding Orange shares that it did not already
hold. The offer was launched on November 20, 2003. Following an application
before the Paris Court of Appeals for the cancellation of the decision of
admissibility of the CMF and the approval (visa) granted by the Commission des
oprations de bourse, the tender offer has been extended pending a legal ruling
by the Paris Court of Appeals see "Item 5. Operating and Financial Review and
Prospects - 5.7.1 Subsequent Events". Taking into account the Orange shares
acquired through the tender offer, France Telecom held 99.02% of the capital and
voting rights of Orange at December 31, 2003. The tender offer is not extended
into, nor can it be accepted in, the U.S. or in other jurisdictions in which the
offering would be illegal or subject to restrictions (see "- 4.3.2.1 Orange -
General Description of Orange").
Orange is one of the leading providers of wireless communications services
worldwide. Orange owns controlling or minority interests in wireless companies
that offer a broad range of voice and data communications services in 19
countries, mainly in Europe, including France and the United Kingdom.
At December 31, 2003, Orange's controlled activities had 49.1 million customers
compared to 44.4 million customers at December 31, 2002 and 39.3 million
customers at December 31, 2001. Orange France is the leading wireless operator
in France based on the number of active customers with a market share (including
French overseas departments and territories) at December 31, 2003 of 48.8% and
49.8% at December 31, 2002 and 48.2% at December 31, 2001 (source: ART). Orange
UK is the leading wireless operator in the United Kingdom based on the number of
active customers with a market share of 25.6% at December 31, 2003, 27.2% at
December 31, 2002 and 27.7% at December 31, 2001 (source: Orange UK, with the
number of the competitors' customers for 2003 provided by Mobile
Communications). In the rest of the world, Orange had 15.1 million customers at
December 31, 2003, a strong growth of 27% compared to 11.9 million customers at
December 31, 2002 and 9.1 million in 2001. See "- 4.3.2.1 Orange".
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Wanadoo
France Telecom carries out most of its multimedia and Internet activities
through its subsidiary Wanadoo S.A. Wanadoo is a major player on the European
Internet and directories market. At December 31, 2003, Wanadoo had 9.153 million
active customers (8.535 million active customers at December 31, 2002 and 6.067
million active customers at December 31, 2001) (source: Wanadoo), 17.159 million
single visitors over all of its properties in December 2003 (14.352 million in
December 2002) (source: Nielsen - panel Home) and 641,000 directory advertisers
(638,000 in December 2002 and 650,000 in December 2001). Wanadoo is the market
leader for Internet services in France and in the United Kingdom, and the second
biggest in Spain and in The Netherlands (sources: Idate, ART, European
Commission, Conseil de la concurrence, AFA, Interview NSS). At December 31,
2003, Wanadoo had 2.453 million broadband customers via cable and ADSL in France
(compared to 1.374 million at December 31, 2002 and 545,000 at December 31,
2001) and 275,000 online advertisers in its directories (compared to 238,000 at
December 31, 2002 and 202,000 at December 31, 2001) (source: Wanadoo). Wanadoo
S.A. shares have been listed on the Premier march of Euronext Paris S.A. since
July 19, 2000. At December 31, 2003, France Telecom held 70.6% of Wanadoo's
shares, a control percentage of 71.1% taking into account the treasury shares.
See "- 4.3.2.2 Wanadoo".
Fixed Line, Distribution, Networks, Large Customers and Operators
The traditional network and telecommunications services in France are organized
under three operating divisions:
Corporate Solutions: services and distribution to large businesses;
Fixed Line and Distribution in France: services for consumers and
other businesses and the distribution network in France;
Networks and Carriers: telecommunications networks, including those on
foreign markets, and services to telecommunications operators.
France Telecom believes that it has one of the most technologically advanced
networks in the world with fully digital commutation and transmission systems.
It uses a network of fully Internet based protocols designed mainly to route
Internet traffic. It makes extensive use of the ADSL network, which at December
31, 2003 covered 79% of the French population, compared to 70% at December 31,
2002 and 64% at December 31, 2001 (source: France Telecom).
At December 31, 2003, France Telecom had 33.9 customers for fixed line services
in France compared to 34.1 million at December 31, 2002 and 34.2 million at
December 31, 2001, including 5.0 million served by the Numris digital network
compared to 4.9 million at December 31, 2002 and 4.7 million at December 31,
2001, 3.1 million customers had ADSL connections compared to 1.4 million at
December 31, 2002 and 0.4 million at December 31, 2001. 8.8 million consumer
customers had fixed rate service plans compared to 6.7 million at December 31,
2002 and 4.9 million at December 31, 2001. Given the strong competition in its
national market, France Telecom's market share of long distance traffic, at
December 31, 2003, measured by interconnection rates, was down compared to 2002
when it was stabilized (61.8% at the end of 2003 compared to 64.3% at the end of
2002 and 64.6% at the end of 2001). Losses in the market share of local traffic
were significantly reduced in 2003. France Telecom lost 5.1% of its market share
of local traffic, compared to 15.9% in 2002 when competition was opened on local
traffic. The market share of local traffic was 75.8% at the end of 2003,
compared to 80.9% at the end of 2002 and 96.8% at the end of 2001.
France Telecom has a sales distribution network in France of approximately 620
points of sale which supply all the Group's services.
See "- 4.3.2.3 Fixed Line, Distribution, Networks, Large Customers and
Operators".
Equant
In order to meet the data transmission needs of multinational businesses, France
Telecom acquired 100% of the share capital of Global One in March 2000, and in
June 2001 became the majority shareholder of Equant NV ("Equant"), a Dutch
company, holding approximately 54.2% of the share capital at December 31, 2003.
At December 31, 2003, Equant provided services to 220 countries and territories
(as at December 31, 2002 and at December 31, 2001). The new Equant, which
believes that it has completed for the most part in 2003 the merger of all the
former Equant and Global One subsidiaries in other countries, is one of the
leading suppliers of global IP, data, network outsourcing and application
development services for multinational businesses (source: Gartner). Equant
N.V.'s shares are listed on the Premier march of Euronext Paris S.A. and on the
New York Stock Exchange (NYSE). See "- 4.3.2.4 Equant".
TP Group
In October 2000, a consortium led by France Telecom acquired a 35% holding in TP
S.A. In October 2001, the consortium raised this holding to 47.5%. Following the
listing of TP S.A. in November 1998 and the sales of the Polish government, it
holds
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approximately 4% of the share capital of TP S.A., with the 48.5% remaining stake
held by other private investors. TP Group is the leading telecommunications
service provider in Poland (source: URTiP, the Polish regulatory authority),
offering a broad range of services that include fixed line telephony, line
leasing, radio communications and Internet services. TP Group is also the
majority shareholder in PTK Centertel, one of three wireless operators in
Poland, with the balance of PTK Centertel's share capital (34%) being held
indirectly by France Telecom. At December 31, 2003, the TP Group had 11.1
million fixed line customers (10.8 million at December 31, 2002, and 10.5
million at December 31, 2001), and 5.7 million wireless customers (4.5 million
at December 31, 2002, and 2.8 million at December 31, 2001) (source: TP S.A.).
TP S.A. is listed on the Warsaw Stock Exchange and the London Stock Exchange.
See "- 4.3.2.5 TP Group".
Other International
In addition to TP Group, Equant and the Orange S.A. and Wanadoo S.A.
subsidiaries, France Telecom has other telecommunications activities in
international markets. These activities are managed by the International
Division. They mainly concern the traditional operators in countries outside
Europe such as Sonatel in Senegal; CI Telcom in the Ivory Coast; JTC in Jordan
and Mauritius Telecom in Mauritius. The last two companies are jointly
controlled with partners and consolidated proportionately. France Telecom is
also an alternative operator in Europe through UNI 2 in Spain. In accordance
with the policy set forth under the "Ambition FT 2005" Plan, France Telecom is
carrying out a strategic review of its activities and interests in foreign
markets. In 2003, it therefore sold its operations and shareholdings in El
Salvador (CTE) and in Argentina (Telecom Argentina) and is trying to withdraw
from Intelig in Brazil. See "- 4.3.2.6 Other International" and "- 4.4
Divestitures".
4.3.2 PRINCIPAL ACTIVITIES
France Telecom offers a full range of telecommunications services to consumers,
businesses and telecommunications operators: fixed line telephony, wireless
telephony, multimedia, Internet, data transmission, cable television and
value-added services. France Telecom's activities are now divided into six
segments: (i) Orange, (ii) Wanadoo, (iii) Fixed Line, Distribution, Networks,
Large Customers and Operators (iv) Equant, (v) TP Group and (vi) Other
International. See "- 4.3.1 Description of the Group - Segmentation".
For an analysis of revenues, operating income and tangible and intangible
investments by segment, see "Item 5. Operating and Financial Review and
Prospects - 5.2.2 Analysis of Operating Income and Investments in Tangible and
Intangible Assets by Segment".
For an analysis of revenues by geographic zone, see Note 4 of the Notes to the
Consolidated Financial Statements.
For information regarding risks related to the telecommunications and wireless
industries, see "Item 3. Key Information - 3.3.2 Risk Factors Relating to the
Telecommunications and Wireless Industries".
4.3.2.1 ORANGE
General Description of Orange
Structure
In 1989, France Telecom formed a new division to manage its activities and its
wireless telecommunications network. In 1991, France Telecom obtained a GSM900
license in France which was extended to GSM1800 in 1998. It started to operate
its GSM900 digital network in 1992. In parallel, France Telecom began to expand
its international wireless activities following the acquisition of GSM licenses
and launched operations mainly in Europe.
En 1994, Microtel Communications Ltd. ("Microtel"), the predecessor of Orange
plc, obtained a license to operate a digital GSM1800 network and began to
operate its GSM1800 network in 1994 in the United Kingdom.
Following several transactions after which Vodafone owned the capital of Orange
plc, France Telecom finalized the acquisition of Orange plc in August 2000 at a
cost of 35.5 billion on a historical basis. In addition, France Telecom assumed
the debt of 6.6 billion owed by a wholly-owned subsidiary of Orange plc, Orange
3G Limited, in connection with its successful bid for a UMTS license in the
United Kingdom.
Following this acquisition, France Telecom merged its previous wireless
telecommunications activities with those of Orange plc into a new wholly-owned
group whose parent company is Orange S.A., a corporation (socit anonyme) under
French law. The corresponding legal transactions were finalized on December 29,
2000.
On February 13, 2001, Orange S.A. shares were listed for trading on the Premier
march of Euronext Paris S.A. and on the London Stock Exchange (LSE), following
the issuance of 633 million Orange shares, representing approximately 13% of the
capital of Orange S.A., at a price of 10 per share for institutional investors
and of 9.50 per share for the tender offer principally targeting individuals.
At December 31, 2002, France Telecom held 86.3% of Orange S.A.'s capital.
On September 1, 2003, France Telecom filed a public exchange offer to acquire
the Orange shares it did not already hold. France Telecom made an irrevocable
offer to exchange Orange ordinary shares for existing or new shares in France
Telecom on the
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basis of 11 France Telecom shares for 25 Orange shares. This offer was not
extended into certain jurisdictions, including the United States. The joint
prospectus issued by Orange and France Telecom described this as a natural
development stage for the France Telecom group in line with the "Ambition FT
2005" Plan.
In operational terms, the public exchange offer was a continuation of France
Telecom's strategic vision and was based notably on:
the increasing needs of France Telecom customers for integrated
services on a fixed line/wireless platform;
a growth strategy based on developing new innovative services;
a strong cooperation model between the various areas of the France
Telecom group in key areas such as strategy, development of new
services, customer approach and centralized purchasing.
On closure of the public exchange offer, France Telecom held 98.78% of Orange's
capital and voting rights.
On October 29, 2003, France Telecom filed with the CMF a tender offer (offre
publique de retrait) for, that will be followed by a compulsory purchase
(retrait obligatoire) of, the remaining Orange shares that it did not hold.
The compulsory purchase price was set at 9.50 per Orange share. The transaction
was approved by the CMF and the COB. On completion of this transaction, France
Telecom will hold 100% of the capital of Orange and Orange shares will be
delisted from Euronext Paris S.A. and the London Stock Exchange (LSE). On the
basis of the number of shares in circulation on October 29, 2003, this
transaction will cost France Telecom approximately 560 million. The offer was
launched on November 20, 2003.
The Association for the Defense of Minority Stockholders (association de dfense
des actionnaires minoritaires) considered that the price offered in the tender
offer was too low, and on November 24, 2003 applied to the Paris Court of
Appeals for the cancellation of the CMF's decision of admissibility of the
tender offer followed by a compulsory purchase and against the approval of the
COB of the prospectus and at the same time filed a stay of execution of the
decisions of the CMF see "Item 5. Operating and Financial Review and Prospects -
5.7.1 Subsequent Events".
The Paris Court of Appeals made a ruling officially acknowledging the
undertaking of the AMF to extend the period of the tender offer for Orange
shares until the decision by the Paris Court of Appeals. The date of
implementation of the compulsory purchase, which was to be December 4, 2003, the
day before the scheduled closure of the tender offer, has therefore been
postponed. Taking into account the Orange shares purchased under the terms of
the tender offer, France Telecom held 99.02% of the capital and voting rights of
Orange at December 31, 2003.
This document does not constitute an extension of the tender offer for Orange
shares into the United States or into any other country in which such an offer
would be illegal or subject to restrictions (in particular, Canada, Japan,
Germany and Italy). The tender offer is not extended into, nor can it be
accepted in, and no document related to the offer may be transmitted, directly
or indirectly, to the United States or to any of the other countries described
above, or to persons residing in the United States or in any of the other
countries described above, by mail or by any other means of communication or
instrumentality of commerce (in particular, without limitation, transmission by
facsimile, telex, telephone, or electronic mail) or through any facilities for
securities exchange of the United States or of any of the other countries
described above.
Activities
Orange's activities are mainly centered on voice transmission on digital
networks using the Global System for Mobile Communications ("GSM") norm. The
company considers that it is at the forefront of developments in technology
increasing the speed and efficiency of its networks. For example, the roll out
of General Packet Radio Services (GPRS) has allowed Orange to successfully
launch its photo messaging service and provide Internet and multimedia services
via mobile phone. Most of Orange's subsidiaries offer GPRS technology, although
the content and services vary among the subsidiaries.
Orange intends to remain among the leaders of the wireless communications market
through continued innovation. In particular, in association with some other
wireless phone manufacturers, Orange has developed an exclusive range of mobile
telephones with the Orange Signature which provide easier access to data
transfer, photo messaging and generally to the multimedia services available on
the Orange network.
Orange has been involved in several UMTS award procedures in Europe in order to
offer third generation services when the markets, services and technologies
permit. Orange's controlled subsidiaries have been awarded UMTS licenses in
France, the United Kingdom, Belgium, Denmark, Luxembourg, The Netherlands,
Slovakia and Switzerland. Orange's minority-controlled subsidiaries have been
awarded UMTS licenses in Austria and Portugal.
Orange considers the expansion of third generation services to be a strategic
priority and to have high growth potential in the future. During 2003, Orange
invested in the deployment of its UMTS network in France, the United Kingdom and
Switzerland
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and intends to launch commercial third generation services during 2004. Orange
had already carried out tests on its third generation services at the end of
2003.
Orange continues to take a pragmatic approach with regard to its strategy
towards UMTS licenses. In the United Kingdom, where competition is strong
(following the entry in 2003 of a fifth competitor, Hutchison 3G) UMTS will be
deployed in 2004 when commercially launched in ten major cities, main rail hubs
and airports. The same procedure will apply when launched in France between now
and the end of 2004. Orange strives to become a market leader in third
generation services in Europe.
In March 2003, a new management team was formed at Orange. In the context of the
reorganization of the France Telecom group, Solomon Trujillo, Chief Executive
Officer of Orange, announced that he intended to accelerate Orange's growth over
the next three years, employing a strategy of differentiation and customer
targeting. This strategy follows the announcement in December 2002 of a plan to
generate net cash flow from operations, less net cash used in investing
activities, of a cumulative figure of between 5 and 7 billion for the period
from 2003 to 2005 by combining stricter financial objectives with stronger
discipline with regards to investment and operating costs.
In accordance with this strategy, Orange decided to withdraw from the Italian
market in March 2003 (see "- 4.4 Divestitures"). In addition, Orange has reduced
its workforce and operating expenditure in several areas of activity, including
the United Kingdom, Denmark, The Netherlands and Switzerland.
The Orange segment earned revenues of 17.941 billion in 2003 ( 17.085 billion
in 2002 and 15.087 billion in 2001).
At December 31, 2003, Orange had 49.1 million customers worldwide for all of its
controlled activities (44.4 million customers at December 31, 2002 and 39.3
million customers at December 31, 2001).
The following tables list the countries in which Orange currently has
operations, the operators, the percentage of each operator controlled by Orange,
the total number of customers and the GSM900/1800/1900 frequencies it is
authorized to use in each of these countries on its 2G network. Unless otherwise
stated, the customer numbers refer to the number of active customers. The
definition of an active customer varies according to the local market and from
one subsidiary to the next, particularly for minority shareholdings.
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France and the United Kingdom
Total number of customers
Percentage (in millions)
controlled ------------------------------------------------ 3G licenses(6)
by Orange At At At allocation
Country Operator S.A.(%)(1) December 31, December 31, December 31, 2G date/Renewal date
---------- ------------- ---------- 2003 2002 2001 ----------- -----------------
France Orange France August 2001/
(mainland) 100.0 19.6 18.53 17.2 GSM900/1800 August 2021
Orange
Carabe 100.0 0.58 0.54 0.5 GSM900/1800 -
Orange
Runion 100.0 0.16 0.13 0.1 GSM900/1800 -
United Orange UK September 2000/
Kingdom 100.0 13.65 13.3 12.4 GSM1800 December 2021
Rest of World
Wholly Owned Subsidiaries and Majority Interests(5)
Total number of customers
Percentage (in millions)
controlled ------------------------------------------------ 3G licenses(6)
by Orange At At At allocation
Country Operator S.A.(%)(1) December 31, December 31, December 31, 2G date/Renewal date
----------- -------------- ---------- 2003 2002 2001 ----------- -----------------
Belgium Mobistar March 2001/
50.8 2.6 2.3 2.5 GSM900/1800 March 2001
Denmark Orange September 2001/
Denmark 67.2 0.6 0.5 0.6 GSM1800 October 2021
Luxembourg Orange June 2002/
Luxembourg 100.0 - - - - June 2017
Netherlands Orange July 2000/
Nederland 100.0 1.3 1.0 1.1 GSM900/1800 December 2016
Rumania Orange Romania 67.8 3.3 2.2 1.6 GSM900 -
Slovakia Orange June 2002/
Slovensko 63.9 2.1 1.7 1.2 GSM900/1800 July 2022
Switzerland Orange
Communications December 2000/
S.A. 100.0 1.09 0.96 0.9 GSM1800 December 2016
Egypt ECMS (MobiNil) 71.25(2 ) 2.1 1.6 1.4 GSM900 -
Botswana Orange
Botswana 51.0 0.16 0.1 0.1 GSM900 -
Cameroon Orange
Cameroun 70.0(3 ) 0.5 0.3 0.21 GSM900 -
Ivory Coast Orange Cte
d'Ivoire 85.0 0.6 0.5 0.34 GSM900/1800 -
Madagascar Orange
Madagascar 65.9(4 ) 0.14 0.1 0.1 GSM900 -
Dominican Orange
Republic Dominicana 86.0 0.6 0.4 0.28 GSM900 -
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Minority Shareholdings(7)
Total number of customers
Percentage (in millions)
controlled by -------------------------------------------------- 3G licenses(6)
Orange At At At allocation
Country Operator S.A.(%)(1) December 31, December 31, December 31, 2G date/Renewal date
-------- ---------- ------------- 2003 2002 2001 ----------- -----------------
Austria ONE 17.5 1.4 1.3 1.4 GSM1800 November 2000/
December 2020
Portugal Optimus 20.2 2.0 1.9 1.9 GSM900/1800 December 2000/
January 2016
India BPL Mobile 26.0 0.85 0.6 0.38 GSM900 -
(Mumbai)
Thailand TA Orange 48.9 1.8 1.3 - GSM1800 -
(1) At December 31, 2003, directly or indirectly.
(2) Orange holds MobiNil under joint control with Orascom Telecom.
Accordingly under MobiNil's French GAAP, MobiNil's financial
and operating data are proportionally consolidated at 71.25%.
MobiNil's total customer base (at 100%) was 3 million at
December 31, 2003.
(3) France Telecom holds the remaining 30% of the shares of Orange Cameroun.
(4) Orange holds 51% of Telsea, a holding company which owns
65.9% of Orange Madagscar. This is the percentage used in
the table.
(5) Orange owns 100% of Orange Sverige AB (Sweden) but has
announced that it intends to withdraw from this market.
(6) For more information on the cost of acquiring UMTS
licenses, see "Item 5. Operating and Financial Review and
Prospects - 5.2.2.1 Orange Segment".
(7) Orange also holds a minority interest of 28.3% in MobilCom
(Germany) and has announced that it intends to withdraw from
this market. Orange sold its shareholding in Wind (Italy) on
July 1, 2003. (See "- 4.4 Divestitures").
Controlled Wireless Operations in France
On December 31, 2003, France was the fourth largest market for wireless
telecommunications in western Europe after Germany, Italy and the United
Kingdom. The French market grew by 8% in 2003 (4.3% in 2002 and 24.6% in 2001).
The penetration rate of 69.1% (64% at December 31, 2002 and 61.6% at December
31, 2001) is one of the lowest in western Europe. Nevertheless, the priority on
the French market has shifted from customer acquisition to creating value and
developing customer loyalty.
At December 31, 2003, Orange France had approximately 20.3 million registered
customers (including French overseas departments) (19.2 million at December 31,
2002 and 17.8 at December 31, 2001) with a market share of 48.8% (49.8% at
December 31, 2002 and 48.2% at December 31, 2001) (source: ART).
Prior to June 2001, Orange France offered its services under three main brands:
Itinris, OLA and Mobicarte, which have all been rebranded Orange. According to a
Sofres report, at the fourth quarter, 2003, the spontaneous notoriety rate of
the Orange brand was 67%. At December 31, 2003, the Orange France network
covered an estimated 99% of the French population (excluding overseas
departments) as in 2002 and 2001.
GSM Licenses
A GSM license was awarded to Orange France for a term of 15 years, from March
25, 1991 to March 2006. In accordance with the terms of the license, the renewal
conditions of the license and that of the SFR were defined in March 2004. The
new conditions approved by the French government provide for a 1% fee per year
on the revenues of wireless operators, in addition to a fee of 25 million per
year. The wireless operators have agreed to continue to reduce the price of SMS
text messages and will work in close cooperation with the French State, local
authorities and the regulatory authority to complete the rural area coverage
program and ensure 100% wireless telephony coverage for all French towns and
villages.
In the French overseas departments, Orange Carabe operates a GSM network in
Guadeloupe, Martinique and Guiana under the Orange brand. Orange Carabe had
approximately 577,100 customers at December 31, 2003 compared to approximately
546,300 customers at December 31, 2002 and approximately 502,000 at December 31,
2001. In early 2000, Orange Runion launched GSM services in Runion where it
competes with the existing operator. Orange Runion had approximately 158,000
customers at December 31, 2003 compared to 139,300 customers at December 31,
2002 and approximately 101,200 at December 31, 2001 (source: ART).
UMTS Licenses
The procedure for awarding four UMTS licenses in France was a beauty contest.
Only two operators, Orange France and SFR, applied and were awarded UMTS
licenses from the French State in the first call for tenders. After revision of
the terms of the
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license, the price of each license is made up of a one-off license fee of 619
million paid by Orange France in September 2001 and an annual license fee equal
to 1% of the operating revenues of the UMTS network. Following the second call
for tenders for two other UMTS licenses, the final number of UMTS licenses
awarded in France was three, Bouygues Telecom having obtained its license under
similar conditions as Orange France and SFR. The UMTS license awarded to Orange
France in August 2001 for a term of 20 years from the date of its award
provides, inter alia that Orange France must roll out the UMTS network over the
period from mid-2003 (58% coverage rate in voice and data at 144 Kbit/s, 7%
coverage of the population at 384 Kbit/s) until mid-2009 (98% and 17% coverage
of the population respectively). The ART review process of the schedules for
roll out of UMTS by Orange France and SFR commenced in August 2003. The initial
schedule is to be reviewed notably due to delays in the availability of network
and terminal equipment. The commercial opening of Orange France's UMTS network
is now scheduled for the end of 2004. The license does not in this respect
provide for any penalties. Pursuant to the French Telecommunications Law of
1996, the ART may suspend the license, reduce obligations or apply a penalty of
a maximum of 3% of revenues or 5% in the event of repeated breaches in the
obligations of the license.
The table below shows the main features of the French wireless
telecommunications market and the activities of Orange France, including, unless
otherwise stated, French overseas departments.
At December 31,
2003 2002 2001
Market penetration rate in France (in %)(1) 69.1 64.0 61.6
Total users in France (in millions)(1) 41.7 38.6 37.0
Service plan (in millions) 24.5 21.5 18.9
Prepaid (in millions) 17.2 17.1 18.1
Orange France registered customers (in millions)(1) 20.33 19.2 17.8
Service plan (in millions) 11.76 10.7 9.4
Prepaid (in millions) 8.57 8.5 8.4
Market share of Orange France (in %)(1) 48.8 49.8 48.2
Coverage of Orange France network (as a % of the
population)(2) 99.0 99.0 99.0
(1) Information on the penetration rate, the number of users in
France and the market share is provided by ART. At December
31, 2003, Orange France had 20.33 million registered
customers (including French overseas departments) and 19.8
million active customers (including French overseas
departments) (18.8 million active customers at December 31,
2002 and 17.5 million active customers at December 31,
2001). The ART defines active customers as those customers
who have made or received a call over the past three months,
billable or not, excluding SMS (source: for active
customers: ART for 2003 and 2002; estimate by Orange France
for 2001 done on the basis of the method adopted by the ART
in 2003 and 2002).
(2) Excluding French overseas departments and according to
Orange France estimates.
Orange France Products
Orange France offers two types of service plans, contract plans and prepaid
plans targeted at different categories of users.
Contract Plans
Orange France offers two categories of contract plans: an "adjustable" contract
plan and a "mobile account" contract plan. Every customer has the option to be
billed per second from the first second. The adjustable plan with the Optima
service is designed for the high volume users and the bill automatically adjusts
to the most advantageous monthly plan from a selection of plans varying between
2 and 15 hours. The Optima service is free for the first two months.
Subsequently, the subscriber can then either choose to keep the automatic
adjustment feature by continuing with Optima service or choose from one of the
other Orange France plans offering different price options, simply by calling
customer service. In either case, the customer can change service plan from
month to month at no extra charge. Orange France also offers services suited to
the individual needs of students, families and businesses.
The "mobile account" contract plan is designed for occasional users. They have
the choice of three options: the "one-hour mobile account", the subscription
with "mobile account" or the "SMS Orange plug with mobile account". The one-hour
mobile account is all-inclusive with automatic roll-over of unused minutes to
the next month. If the fixed rate is exceeded, customers can recharge their
mobile account with an additional amount if they wish to continue using their
phones. The rechargeable credit on the mobile account is for an unlimited
period. The mobile account contract allows users to pay a low subscription fee
and buy the minutes they need by recharging an account, the mobile account, by
debit/credit card, Mobicarte recharging cards
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or by direct debit from a bank or post office account. The SMS Orange plug with
mobile account comprises 150 text messages (SMS) and one hour's access to the
exclusive Orange plug services. This system, designed to attract teenagers, also
offers subscribers the opportunity to make calls by recharging their mobile
account.
The adjustable plans are for a minimum period of 12 or 24 months. Customers who
opt for 24 months get a discount on the fixed price. The "mobile account" offers
are for a minimum period of 12 months. After the end of the minimum contract
period, subscriptions can be cancelled with one-month's prior notice.
Pre-Paid Accounts
The Orange France pre-paid service, "La Mobicarte", is on a "no-bill,
no-contract" basis.
In conjunction with the introduction of the Orange brand in France, Orange
France reduced the price of Mobicarte, launched a loyalty program and offered a
pre-paid roaming option for travel in Europe. Following the introduction of the
euro, Orange France launched a new price plan, "the made-to-measure plan"
allowing customers to choose a time slot with a 50% reduction and a new range of
price increments (15, 25 + 5 and 35 + 10) with credits for the 25 and 35
price increments.
New Orange Multimedia Products: Orange World
On October 30, 2003, Orange launched "Orange World" to meet the individual
requirements of its customers and achieve sustained growth. Orange World
provides customers with a personalized Orange experience throughout Europe.
The new product includes a portal of wireless multimedia services, new and
simpler pricing, and a large range of handsets and Mobile Coach outside the
United Kingdom. "Orange World", announced to customers via a new worldwide
advertising campaign, is unique on the market because:
it is accessible from a wide range of handsets and offers handsets
that are particularly recommended for multimedia usage;
it offers the first non-voice packages including access to all
navigation technologies (SMS, MMS, navigation on wireless portals,
smart phones and the Internet);
it emphasizes content-rich services that are easily accessible
through the single portal of "Orange World";
it has a first time user program called Mobile Coach created by
real trainers in multimedia wireless telephony throughout France.
This service is part of a new momentum in the wireless multimedia market and
includes pre-paid customers who can now easily access all non-voice services. It
significantly strengthens the Orange multimedia strategy initiated in May 2000
and the "Orange Sans Limite" program of June 2002. This offer is completed by
the partnerships entered into with suppliers of paid content.
The "Orange World" portal, the successor to "Orange.fr", had over 3.5 millions
active users at December 31, 2003. In December 2003, 17.5 million hits were
received on the "Orange World" portal home page.
At December 31, 2003, the "Orange World" package had 550,000 customers. More
than 1.3 million customers accessed multimedia services through "Orange World"
or "Orange Sans Limite".
At December 31, 2003, 13.5 million Orange France customers had WAP-enabled
handsets (9.5 million at December 31, 2002 and 5 million at December 31, 2001),
of whom almost 3.5 million were active customers (customers who had made at
least one WAP connection during the month) (2.3 million at December 31, 2002 and
1.3 million at December 31, 2001). In addition, at December 31, 2003, Orange
France estimates that 5 million of its customers were using GPRS technology (0.8
million at December 31, 2002 and the GPRS had not yet been launched in 2001).
Orange Business Solutions
Orange France strives to support businesses in their day-to-day activities by
offering mobile solutions that are efficient and competitive for business needs.
To this end, Orange France offers businesses:
voice services that include price plans suited to all forms of
use, value added services to optimize equipment usage and cost
monitoring and a wireless virtual private network (VPN);
secure data solutions that can access messaging systems, corporate
information, divisional applications (Intranet) and the Internet
when out of the office and which include the best GPRS and WiFi
technologies available.
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Sales, Distribution and Customer Service
Orange France sells its products and services through a complete range of
distribution channels (source: Orange France).
During the year 2003, approximately 45% (41% in 2002 and 39% in 2001)
of new customers were registered through the France Telecom
distribution network which at December 31, 2003 included 620
points-of-sale (630 at December 31, 2002 et 650 at December 31, 2001).
Over the same period, 22% of the new customers in 2003 were
registered in supermarkets and department stores (25% in 2002 and
27% in 2001).
Approximately 1,000 independent distributors (2,000 at December 31,
2002 and 2,500 at December 31, 2001) sell Orange France and its
competitor products. This distribution channel accounted for 15% of
the new customers registered during 2003 (16% at December 31, 2002
and 23% at December 31, 2001).
Orange France is expanding its own point-of-sale network. There were
therefore approximately 100 "Mobistore" outlets at December 31, 2003
(110 at December 31, 2002 and 120 at December 31, 2001). They
accounted for approximately 4% of new customer registrations during
2003 (6% at December 31, 2002 and 5% at December 31, 2001).
Orange France "Corporate" products are marketed through networks that
specialize in selling corporate services: five Large Customer agencies
and 25 Corporate agencies operated by France Telecom, approximately
fifty business points-of-sale operated by France Telecom as well as
approximately 80 independent specialized distributors.
Mobicarte rechargeable cards are mainly sold through retailers,
principally tobacconists, and France Telecom points-of-sale (which
accounted for about 8% of the sales of rechargeable cards during 2003,
compared to 8% in 2002 and 8% in 2001).
Orange France customers have access to the 6,500 customer service specialists
working in customer centers and France Telecom Group call centers and 7 external
service providers any day of the week. Customer service facilities can also be
accessed at approximately 620 France Telecom points-of-sale and approximately
110 Mobistore outlets in France. Lastly, customers can also access some customer
service facilities via the mobile Internet portal Orange.fr to look at billing
information and change or alter their price plan.
Controlled Wireless Operations in the United Kingdom
At December 31, 2003, in terms of the number of users, the United Kingdom was
Western Europe's third-biggest wireless market after Germany and Italy despite a
leveling off in the rate of penetration of the United Kingdom market. The
wireless telecommunications market in the United Kingdom grew by approximately
4.4% in 2003 after 8% in 2002 and 17% in 2001 (source: Mobile Communications).
The number of wireless users in the United Kingdom has grown almost 13.4%, in
two years from 44.7 million at December 31, 2001 to approximately 49 million at
December 31, 2002 and then 51.7 million at December 31, 2003, representing
approximately 86.6% of the