Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
Item 3. KEY INFORMATION
3.1 SELECTED FINANCIAL DATA
The following
table sets forth selected consolidated financial and other operating data of France Telecom. The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and “Item 5. Operating and
Financial Review and Prospects” appearing elsewhere in this annual report on Form 20-F. The selected financial data presented below has been prepared on a basis constant with the basis of preparation used in the Consolidated Financial
Statements as described in Note 2. Prior years have been reclassified as necessary for a consistent presentation. France Telecom’s Consolidated Financial Statements are prepared in accordance with French GAAP, which differs in certain
significant respects from U.S. GAAP. See Note 33 of the Notes to the Consolidated Financial Statements for a discussion of the principal differences between French GAAP and U.S. GAAP as they relate to France Telecom and a reconciliation of its net
income and shareholders’ equity to U.S. GAAP.
The selected
consolidated financial data as of and for each of the five years ended December 31, 1999, 2000, 2001, 2002 and 2003 are extracted or derived from the Consolidated Financial Statements, which have been audited by Ernst & Young Audit and RSM
Salustro Reydel, independent auditors, for the years ended December 31, 1999, 2000, 2001 and 2002, and which have been audited by Ernst & Young Audit and Deloitte Touche Tohmatsu, independent auditors, for the year ended December 31, 2003. The
Consolidated Financial Statements as of and for the year ended December 31, 1999 have been translated into euro using the fixed exchange rate for French francs and euro on January 1, 1999.
Year ended December 31,
2003
2003
2002
2001
2000
1999
$
(1)
(
€
millions, except per share
data)
CONSOLIDATED STATEMENT OF INCOME DATA
Amounts in accordance with French GAAP:
Sales of services and products
58,101
46,121
46,630
43,026
33,674
27,233
Operating income
(2)
12,035
9,554
6,808
5,200
4,856
4,490
Interest expense, net
(3)
(4,995
)
(3,965
)
(4,041
)
(3,847
)
(2,006
)
(662
)
Other non-operating income/(expense), net
(1,410
)
(1,119
)
(12,849
)
(5,904
)
3,957
767
Net income (loss) from integrated companies
8,453
6,710
(12,809
)
(2,316
)
4,975
2,965
Goodwill amortization
(2,113
)
(1,677
)
(2,352
)
(2,531
)
(1,092
)
(136
)
Exceptional goodwill amortization
(1,432
)
(1,137
)
(5,378
)
(3,257
)
–
–
Net income (loss)
4,039
3,206
(20,736
)
(8,280
)
3,660
2,768
Basic number of shares (rounded)
2,463
1,955
1,085
1,103
1,065
1,025
Diluted number of shares (rounded)
2,754
2,186
1,159
1,177
1,091
1,050
Earnings per share/ADS:
Net income (loss) per share (basic)
2.07
1.64
(16.75
)
(6.58
)
3.01
2.37
Net income (loss) per share (diluted)
2.02
1.60
(16.75
)
(6.58
)
2.97
2.34
Dividend per share
(5)
–
–
–
1.00
1.00
1.00
Approximate amounts in accordance with
U.S. GAAP:
(6)
Borrowings net of available cash and marketable securities
55,640
44,167
68,019
63,423
60,998
14,628
Shareholders’ equity (deficit)
15,150
12,026
(9,951
)
21,087
33,157
18,903
Capital stock
(7)
31,421
24,942
29,511
28,843
28,843
10,727
Approximate amounts in accordance with U.S. GAAP:
(6)
Shareholders’ equity (deficit)
(588
)
(467
)
(26,751
)
11,411
26,311
21,678
CONSOLIDATED STATEMENT OF CASH FLOWS DATA
Amounts in accordance with French GAAP:
Net cash provided by operating activities
14,263
11,322
11,839
7,076
6,613
8,109
Purchase of property, plant, equipment and intangible assets
(6,427
)
(5,102
)
(7,943
)
(8,553
)
(14,313
)
(5,001
)
Proceeds from sale of assets
(8)
752
597
2,916
296
274
150
Cash paid for investment securities, acquired businesses, net of cash and investments in affiliates
(9)
(299
)
(237
)
(2,228
)
(4,355
)
(40,561
)
(2,804
)
Holdings of own shares
–
–
(5,022
)
(8,807
)
–
–
Issuance (repayment) of short-term borrowings and long-term debt, net
(24,919
)
(19,781
)
(63
)
5,514
39,301
(209
)
(1)
In millions. The Consolidated Financial Statements are stated in euro except for 1999, which were originally stated in French francs. The U.S. dollar amounts presented in the table above have
been translated solely for the convenience of the reader using the Noon Buying Rate on December 31, 2003 of
€
0.7938 to $1.00.
(2)
Operating income for the years ended December 31, 1999, 2000, 2001, 2002 and 2003 includes items (
€
238 million,
€
225 million,
€
210 million,
€
199 million and
€
211, respectively) relating to the amortization of part of the additional provision for early retirement payments resulting from the change in 1998 and 1999 in actuarial
assumptions used in calculating such provision. See Note 22 of the Notes to the Consolidated Financial Statements.
(3)
Including interest expense on TDIRA.
(4)
Earnings per ADS have been recalculated for all periods presented to reflect the 2002 stock dividend as required under U.S. GAAP, and as discussed in Note 33 of the Notes to the Consolidated
Financial Statements.
(5)
In 1996, prior to France Telecom’s change of status on December 31, 1996, a payment of
€
686 million, which was appropriated from net income, was made to the French State. No dividend was declared after the change of status. The annual general meeting of the shareholders for the year ended December 31, 2003
authorized a payment of
€
0.25 per share to shareholders this year.
(6)
Amounts presented under this caption were calculated by applying the principles described in Note 33 of the Notes to the Consolidated Financial Statements.
(7)
Capital stock represents the sum of share capital and additional paid-in capital.
(8)
Includes, for 2002 and 2003, a gain from the sale of real estate of
€
2,550
million and
€
419 million.
(9)
Includes, for 2000, a cash payment of
€
21,693 million in connection with
the acquisition of Orange plc.
Telephones lines (standard lines and ISDN channels) at period-end (millions)
(1)
49.3
49.5
40.0
ADSL lines in France at period-end (millions)
3.1
1.4
0.4
Total controlled wireless subscribers at period-end (millions)
56.2
49.9
43.2
Number of employees at period-end
218,523
243,573
211,554
(1)
For the purposes of this presentation, each ISDN channel is counted as the equivalent of one standard access line.
3.2 EXCHANGE RATE INFORMATION
Under the
provisions of the Treaty on the European Union signed at Maastricht in early 1992, a European Monetary Union (“EMU”) with a single European currency, the euro, was established. On May 3, 1998, European governments and central banks
announced that the following 11 member states would participate in the last stage of EMU: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxemburg, The Netherlands, Portugal and Spain. These countries have since been joined by other
member states. The last stage of the EMU, which fixed exchange rates between national currencies and the European Currency Unit, and the introduction of the euro for certain purposes, began on January 1, 1999, at which time the exchange rate between
the French franc and the euro was established at FF 6.55957 to
€
1.00 (or
€
0.1524 to FF 1.00).
Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro-denominated prices of the shares and, as a
result, will affect the market price of the ADSs in the United States. In addition, exchange rate fluctuations will affect the U.S. dollar equivalent of any cash dividends received by holders of ADSs.
The following table sets forth, for the periods and dates indicated, certain
information concerning the Noon Buying Rate in New York City for cable transfers for foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York expressed in U.S. dollars per
€
1.00. Such rates are provided solely for the convenience of the reader and are not necessarily the rates used by France Telecom in the preparation of the Consolidated
Financial Statements included elsewhere in this annual report on Form 20-F. No representation is made that the euro could have been, or could be, converted into U.S. dollars at the rates indicated below or at any other rate.
U.S. dollars per
€
1.00
Year/period
end rate
Average
rate
(1)
High
Low
Yearly amounts
1999
$
1.01
$
1.06
$
1.18
$
1.00
2000
$
0.94
$
0.92
$
1.03
$
0.83
2001
$
0.89
$
0.89
$
0.95
$
0.84
2002
$
1.05
$
0.95
$
1.05
$
0.86
2003
$
1.26
$
1.14
$
1.26
$
1.04
Monthly amounts
October 2003
$
1.16
$
1.17
$
1.18
$
1.16
November 2003
$
1.20
$
1.17
$
1.20
$
1.14
December 2003
$
1.26
$
1.23
$
1.26
$
1.20
January 2004
$
1.25
$
1.26
$
1.29
$
1.24
February 2004
$
1.24
$
1.26
$
1.28
$
1.24
March 2004
$
1.23
$
1.23
$
1.24
$
1.21
April 2004 (through April 14)
$
1.19
$
1.21
$
1.24
$
1.19
(1)
The average of the Noon Buying Rates on the last business day of each month during the relevant period.
For information regarding the effects of currency fluctuations on France Telecom’s results, see “Item 5. Operating and
Financial Review and Prospects – 5.1.1 Activity and Operating Profitability of the Group”.
3.3 RISK FACTORS
In addition to the other information contained in this annual report on Form 20-F, prospective investors should carefully consider the risks described below before
making any investment decisions. These risks, or one of these risks, could have a negative effect on the business, the financial situation, or the results of operations of France Telecom. Moreover, additional
risks not currently known to France Telecom, or that France Telecom currently deems immaterial, may also impair its business operations. France Telecom’s
business, financial condition or results of operations could be materially adversely affected by any of these risks and investors could lose all or part of their investment.
The risks described below concern:
n
Risk factors relating to France Telecom’s business (see “– 3.3.1 Risk Factors Relating to France Telecom’s Business”);
n
Risk factors relating to the telecommunications and wireless industries (see “– 3.3.2 Risk Factors Relating to the Telecommunications and Wireless Industries”);
n
Risks factors relating to financial markets (see “– 3.3.3 Risk Factors Relating to Financial Markets”); and
n
Risk factors relating to legal proceedings (see “– 3.3.4 Risk Factors Relating to Legal Proceedings”).
Risks related to France Telecom, the telecommunications industry and financial markets
are described below in each of the categories by order of decreasing importance, according to France Telecom’s current assessment. The occurrence of new external or internal events may lead France Telecom to modify this order of importance in
the future.
3.3.1 R
ISK
F
ACTORS
R
ELATING
TO
F
RANCE
T
ELECOM
’
S
B
USINESS
France Telecom may not be able to reduce its debt. If it is unable to reduce its indebtedness,
France Telecom’s cash flow may be insufficient to meet its financing needs and its ability to invest in the development of its business may be reduced.
During the period from 1999 to 2002, France Telecom achieved strong external growth at a cost of
€
100 billion, of which 80% was paid in cash. This led to a major increase of its net consolidated financial debt, which went from
€
14.6 billion at the end of 1999 to
€
68.0 billion at
the end of 2002.
The major priority of the “Ambition FT 2005”
Plan, launched in December 2002, is to reduce France Telecom’s indebtedness through an increase in capital, undertaken on April 15, 2003 for close to
€
15 billion and through its operational performance improvement program called “TOP”. These two elements, for the most part, allowed France Telecom to reduce its net consolidated financial debt to
€
44.2 billion at December 31, 2003.
Nevertheless, in the future, France Telecom may not be able to generate sufficient cash flow to further reduce its indebtedness. This situation could result from
negative factors such as the following:
n
competition or decisions made by regulatory authorities that have the effect of reducing prices or revenues;
n
the slowdown of the current growth in terms of business volume (wireless activities, data base services, Internet services);
n
the decrease in business volume of older sectors (a tendency that is already being experienced in fixed line telephony);
n
obstacles to the efforts to achieve savings in terms of operating expenses before amortization and depreciation and in terms of investments in tangible and intangible assets;
n
the necessity, due to competition or technological advancement or changes in regulations, to incur operational or investment expenses that are greater than those planned.
If France Telecom does not succeed in reducing its
indebtedness, its cash flow may be insufficient to meet its financing needs, including meeting scheduled repayments of its debt.
Furthermore, France Telecom’s financing agreements contain a certain number of financial covenants (see Note 20 and Note 20.4 of the Notes to the Consolidated
Financial Statements). If France Telecom fails to meet its obligations arising from its financing agreements or other payment obligations, its creditors may require early repayment. Many of France Telecom’s financing agreements and its
outstanding securities include cross-default and cross-acceleration provisions pursuant to which a payment default or acceleration, or a failure to respect a financial covenant, may result in the acceleration of all or a significant part of France
Telecom’s debt and an inability to draw upon its credit lines. France Telecom’s high level of debt, its obligations to maintain certain financial ratios and its other obligations may limit its ability to borrow additional funds and invest
in the development of its 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.
The
“TOP” operational performance improvement program strives to achieve optimal levels of performance for each of its activities and generate more than
€
15 billion in net cash flow over the period from 2003 to 2005.
The results of the “TOP” Program in 2003 are discussed in “Item 5. Operating and Financial Review and Prospects – 5.1.2.2 Results of the
‘TOP’ Operational Improvements Program”.
In particular,
the “TOP” Program allowed France Telecom to generate approximately
€
6.4 billion in free cash flow excluding asset
disposals (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 Financial Measures and Financial Glossary”). France Telecom’s management uses free cash flow excluding asset disposals to analyze its ability to generate net cash available
for debt repayment in the context of the “TOP” Program. Operating expenses before depreciation and amortization decreased, on a comparable basis, from
€
30.3 billion in 2002 to
€
28.8 billion in 2003, representing a decrease of close to
€
1.5 billion. Investments in tangible and intangible assets (excluding acquisitions of licenses) decreased, on a comparable basis, from
€
6.95 billion in 2002 to
€
5.1 billion in 2003, representing a decrease of close to
€
1.9 billion.
In the future, the goals of this program may not be achieved or may be delayed, which
would have a material impact on the financial condition and results of operations of France Telecom. France Telecom may encounter difficulties in the implementation of the program. For example, reorganization costs may be greater than expected (from
€
800 million to
€
1 billion), especially in cases of withdrawals from certain markets (for example, the withdrawal of Orange from the Swedish market).
Furthermore, the implementation of the “TOP” Program could lead to unexpected results. For example, investments in tangible and intangible assets, and
more generally, the investments made in growth sectors, may be insufficient to maintain the Group’s status as a leader, to improve networks and to develop and promote new and existing services, especially in the highly competitive sectors of
wireless and Internet services.
France Telecom may not be able to successfully
integrate the companies that it has acquired or to achieve planned synergies.
During 2003, France Telecom continued to pursue its integration of Equant and TP Group. France Telecom may:
n
have difficulty integrating the operations and personnel of the acquired entities;
n
fail to successfully incorporate networks or acquired technology into its network and product offerings;
n
fail to generate anticipated synergies;
n
fail to maintain uniform standards, controls, procedures and policies; or
n
fail to maintain satisfactory employee relations with acquired entities as a result of changes in management and ownership.
Any major difficulties related to the integration of these entities or other
businesses acquired by France Telecom could have an adverse effect on its business, financial condition and results of operations.
France Telecom faces risks relating to certain subsidiaries and joint ventures in which it shares control or does not hold a controlling interest.
In some of the Group’s activities, especially in the “Orange” and
“Other International” segments, France Telecom holds a non-controlling interest. Under the governing documents or agreements for certain of these entities, certain key matters such as the approval of business plans and decisions as to the
timing and amount of distributions require the agreement of France Telecom’s partners, and in some cases, decisions regarding these matters may be made without France Telecom’s approval. There is a risk of disagreement or deadlock or a
risk that decisions contrary to the interests of France Telecom will be made. For example, following the difficulties encountered with MobilCom, France Telecom was obliged to depreciate the total amount of its investment in MobilCom in 2002.
The consolidated subsidiaries that may be impacted by the risks
described above are either proportionately consolidated (as in the case of control exercised with one or more other shareholder(s)) or consolidated according to the equity method (see Note 32 of the Notes to the Consolidated Financial
Statements).
Companies that are consolidated proportionately mainly
include ECMS (Mobinil), a subsidiary of Orange in Egypt, which is consolidated at 71.25%, as well as operators in Mauritius (Mauritius Telecom) and Jordan (JTC), in which France Telecom has a 40% controlling interest in each.
Companies that are consolidated by the equity method (see Note 11 of the Notes to the
Consolidated Financial Statements) mainly include the operating subsidiaries of BITCO/TA Orange, a subsidiary of Orange in Thailand controlled at 49%, and
Radianz, a subsidiary of Equant controlled at 49%. At December 31, 2003, following an additional depreciation, the book value of the securities of BITCO was brought to
zero. Moreover, France Telecom has a 36% interest in the share capital of Tower Participations following its withdrawal from TDF and a 20% interest in the share capital of Bluebird Participations France following its withdrawal from Eutelsat.
Finally, France Telecom has non-consolidated holdings (see Note 12 of
the Notes to the Consolidated Financial Statements) that could be impacted by the risks mentioned above, in particular, Orange’s interests in the share capital of ONE (17.5%, Austria) and Optimus (20%, Portugal). France Telecom fully
depreciated at December 31, 2003 the value of its 27% interest in the share capital of Noos (Cable television, France).
In some cases, strategic or joint venture partners may choose not to continue their partnership. In addition, France Telecom’s arrangements with its joint
venture partners may expose France Telecom to requirements for additional financing, or additional capital expenditure or investment requirements or obligations to buy or sell holdings. See Note 28 of the Notes to the Consolidated Financial
Statements.
These factors could impact France Telecom’s ability to
pursue its stated strategies with respect to those entities or have a material adverse effect on its results of operations or financial condition.
The high cost of UMTS licenses, and investments and expenses necessary for the success of this technology, could adversely affect France Telecom’s business, financial
condition and results of operations.
At December 31, 2003, France
Telecom had paid over
€
8 billion to acquire UMTS licenses in Europe (excluding minority interests, notably MobilCom). Under the
terms of these licenses, France Telecom has agreed to make significant investments in its networks in order to offer new products and services. If France Telecom decided not to pursue UMTS development in certain countries, or if it was unable to
meet the costs, it may incur significant costs, including revocation of the licenses, relating to its withdrawal from these markets.
For example, if Orange cannot fulfill the conditions under its UMTS licenses or obtain their modification, the licenses may be revoked and Orange may be liable for
damages to the state that awarded the licenses, or to its partners in UMTS development in these countries, as well as to its creditors or its suppliers. All of these risks could have a significant negative impact on France Telecom’s financial
condition and results of operations.
In addition, once its UMTS network
has been launched, the costs related to the development and marketing of new products are difficult to estimate and may be very high, in particular to promote demand for UMTS services or to subsidize UMTS-compatible handsets.
France Telecom cannot be certain that the demand for UMTS products and services will
justify the related high costs. Low demand, or demand with weak growth, for UMTS products and services in markets where France Telecom offers them would adversely affect its results of operations. The level of demand for UMTS products and services
may be adversely affected by the failure of prior preliminary launches by France Telecom’s competitors or by the launch of alternative technologies. France Telecom will need to offset the high purchase costs of the licenses, network capital
expenditures and the related amortization costs with increased revenues from customers. Furthermore, any delay in the provision of UMTS products and services resulting from problems with suppliers of components of the UMTS network, the roll out of
the network, the unavailability of products compatible with UMTS services, the inability to comply with the requirements of UMTS licenses or any other factor may adversely affect revenues from UMTS services or the date from which such revenues are
generated. If, in the future, France Telecom’s current estimates relating to future cash flow generated under the UMTS licenses are not met, France Telecom’s revenues could be adversely affected, and France Telecom could be required to
significantly depreciate the value of its UMTS licenses and related assets recorded in its financial statements.
To the extent that France Telecom expects to generate significant cash flows from its wireless telephony subsidiaries, such as Orange and PTK Centertel, the failure
by these activities to generate sufficient revenues could render France Telecom unable to meet its financing needs related to the development of UMTS or its other activities. Its financial condition and results of operations may be adversely
affected.
For more information relating to the cost and value of UMTS
licenses, see “Item 5. Operating and Financial Review and Prospects – 5.2.2.1 Orange Segment – Investments in Tangible and Intangible Assets”.
France Telecom recorded significant goodwill following the acquisitions it made between 1999 and 2002. Accelerated amortization of this goodwill
may be required, which could have a material negative impact on France Telecom’s results.
France Telecom recorded significant goodwill in connection with its acquisitions since 1999, particularly for the acquisitions of Orange, Equant and TP Group.
Goodwill amounted to approximately
€
26 billion at December 31, 2003. Pursuant to French generally accepted accounting principles,
goodwill is amortized over a period determined at the time the goodwill is recorded.
The value of goodwill is reassessed annually and, when events and circumstances indicate that a decrease in value may occur, France Telecom depreciates this goodwill,
particularly in the case of events and circumstances that include lasting material adverse changes affecting the economic environment or affecting the assumptions and objectives that were used at the time of the acquisition. For example, France
Telecom depreciated its investments in Equant and in certain subsidiaries of Orange and Wanadoo in 2002 and 2003. France Telecom cannot guarantee that new events or unfavorable circumstances will not take place that would lead France Telecom to
reassess the value of its goodwill and record additional significant exceptional amortization, which could have a material adverse effect on France Telecom’s revenues.
For further information relating to the exceptional amortization of goodwill, see “Item 5. Operating and Financial Review and
Prospects – 5.2.3.8 Goodwill Amortization”.
France Telecom’s
technical infrastructure is vulnerable to damage or interruptions caused by floods, storms, fires, power outages, war, intentional acts and other similar events. Technical network and information technology system failures may result in reduced user
traffic, reduced revenue and harm to France Telecom’s reputation.
The occurrence of a natural disaster, such as the major storms in December 1999 that affected service in France at the beginning of 2000, or the flooding in southern France in 2002, and other unanticipated problems at France Telecom’s
facilities or any other damage to or failure of its network could result in interruptions in its service. In 2000, such damages amounted to approximately
€
150 million. In certain circumstances, France Telecom has no insurance for damages to its aerial lines and must itself finance these costs. Information technology system (hardware or software) failures, human error or computer
viruses could also affect the quality of its services and cause temporary service interruptions. While the risk cannot be quantified, such events could result in customer dissatisfaction and reduced traffic and revenues for France Telecom.
France Telecom will be obligated to adopt new accounting standards in 2005 that may
have a material impact on its accounts and may render a comparison between financial periods more difficult.
In June 2002, the European Union adopted new regulations requiring all listed EU companies, including France Telecom, to apply International Financial Reporting
Standards (“IFRS”) (previously known as International Accounting Standards or “IAS”) in their financial statements from January 1, 2005.
The IFRS norms may have a material impact on important items in the accounts and balance sheet of France Telecom. For further information on the impact of IFRS
norms, see “Item 5. Operating and Financial Review and Prospects – 5.7.2 Implementation of IFRS (International Financial Reporting Standards) within the France Telecom Group”.
The value of France Telecom’s international investments in telecommunications companies
outside Western Europe may be materially affected by political, economic and legal developments in these countries.
France Telecom has made a significant number of investments in telecommunications operators in countries in Eastern Europe, the Middle East, the Caribbean, Latin
America, Asia and Africa, particularly with respect to its activities in the “Orange” and “Other International” segments.
The political, economic and legal systems of the countries in these regions of the world (as, for example, in the Ivory Coast) may evolve in an unpredictable
manner. Political or economic upheaval or changes in laws may negatively affect the operations of companies in which France Telecom has invested, and may impair the value of these investments.
The downgrading of France Telecom’s debt ratings in 2001 and in 2002 by rating agencies
increased the cost of its debt. Despite the ratings increases in December 2002, in 2003 and in 2004, the downgrading of its debt rating could limit its ability to borrow and may increase the cost of access to financial markets.
In October 2001, the rating agencies that evaluate France Telecom’s debt
downgraded their ratings on France Telecom’s short- and long-term debt. Standard & Poor’s Ratings Services, or S&P’s, lowered its rating on France Telecom’s long-term debt from A- to BBB+, with a negative outlook, and
downgraded France Telecom’s short-term debt rating from A1 to A2. Moody’s Investors Service, or Moody’s, lowered its rating of France Telecom’s long-term debt from A3 to Baa1, with a negative outlook, and downgraded its rating of
France Telecom’s short-term debt from P1 to P2. Fitch Ibca downgraded its rating of France Telecom’s long-term debt from A– to BBB+ with a negative outlook, and lowered the rating of its short-term debt from F1 to F2. After the
publication of France Telecom’s annual accounts in March 2002, S&P’s and Moody’s placed their respective BBB+ and Baa1 ratings of France Telecom’s long-term debt, on review for downgrade; similarly, Fitch Ibca placed its F2
rating of France Telecom’s short-term debt on review for downgrade beginning March 2002. On May 13, 2002, Moody’s also placed France Telecom’s short-term debt under review.
On June 24, 2002, Moody’s downgraded its rating of France Telecom’s
long-term debt from Baa1 to Baa3 and downgraded France Telecom’s short-term debt rating from P2 to P3, with a negative outlook for the long-term debt. On June 25, 2002, S&P’s downgraded France Telecom’s long-term debt rating from
BBB+ to BBB and downgraded France Telecom’s short-term debt
rating from A2 to A3. S&P’s also put France Telecom’s long-term rating on review, with a negative outlook. On July 5, 2002, Fitch Ibca downgraded its
rating of France Telecom’s long-term debt to BBB-, with a stable outlook, and lowered its rating of France Telecom’s short-term debt from F2 to F3. On July 12, 2002, S&P’s again downgraded its rating of France Telecom’s
long-term debt from BBB to BBB-, with a stable outlook.
These ratings
downgrades have limited France Telecom’s access to financial markets while it faces significant debt repayments in 2003, 2004 and 2005. According to the rating agencies, the downgrading of France Telecom’s ratings and their placement under
review is due to doubts about France Telecom’s ability to execute its debt reduction plan, due to both the deterioration of market conditions in the telecommunications sector and the difficulties encountered by France Telecom in carrying out
its asset disposal program. The rating agencies have also expressed concern about the possible assumption by France Telecom of MobilCom’s debt. In this regard, France Telecom recently completed, in 2003, the transactions contemplated by the MC
Settlement Agreement with MobilCom (see Note 22.3 and Note 26 of the Notes to the Consolidated Financial Statements).
On December 5, 2002, after the announcement related to the launch of the “Ambition FT 2005” Plan (see “Item 4. Information on France Telecom –
4.2.1 ‘Ambition FT 2005’ Plan”) Fitch Ibca amended its outlook on France Telecom’s long-term debt from stable to positive and S&P’s confirmed its rating of France Telecom’s long-term debt at BBB- with a stable
outlook. On December 9, 2002, Moody’s also confirmed France Telecom’s long-term debt rating at Baa3 with a stable outlook. On May 14, 2003, S&P’s increased its rating on France Telecom’s long-term debt from BBB- to BBB with a
positive outlook and its rating on short-term debt from A-3 to A-2. On August 7, 2003, Fitch IBCA increased its rating on France Telecom’s long-term debt from BBB- with a positive outlook to BBB with a positive outlook. On September 23, 2003,
Moody’s increased its outlook on the long-term debt placed at Baa3 from stable to positive, then on December 5, 2003, placed it under positive review. On February 18, 2004, S&P’s increased its rating on France Telecom’s long-term
debt to BBB+ with a positive outlook. On February 19, 2004, Fitch Ibca increased its rating on France Telecom’s long-term debt to BBB+ with a positive outlook. On March 3, 2004, Moody’s increased its rating on France Telecom long-term debt
to Baa2 with a positive outlook and its short-term rating to P2, with a stable outlook.
France Telecom cannot guarantee that the rating agencies will not further downgrade its credit ratings, particularly if the TOP Program does not produce the expected results or if France Telecom is unable to reduce its
indebtedness.
A significant portion of the debt (
€
17.1 billion outstanding at the end of 2003) includes step-up provisions, or provisions that will lead to the amendment of the coupons or
margins should the ratings of France Telecom change. The deterioration in the ratings of France Telecom in June and July of 2002 led to an increase in coupon bonds starting September 2002 for bonds denominated in U.S. dollars or in pounds sterling,
and starting in February and March of 2003 for the other bonds (annual bonds). This can be explained by the impact of the deterioration in the ratings of France Telecom that occurred in 2002 on interest expense which was approximately
€
40 million in 2002, compared to
€
164 million in 2003.
Furthermore, France Telecom
S.A.’s securitization programs require, where applicable, a rating above BB-.
France Telecom cannot guarantee that it will succeed in applying the measures adopted to reinforce or maintain its credit ratings. It also cannot guarantee that the rating agencies will deem the undertaken measures sufficient.
In addition, factors outside France Telecom’s control, including factors relating to the telecommunications industry or specific countries or regions in which it operates, may affect the rating agencies’ assessment of France Telecom’s
credit profile.
For information purposes, France Telecom believes that
a decrease of one notch in its long-term debt rating by S&P’s and Moody’s would automatically increase its annual interest expense by approximately
€
90 million, based on its current level of indebtedness, and would also adversely affect its ability to access, and the conditions under which it accesses, the financial markets.
In addition, in the event of a ratings downgrade, certain derivatives contracts and
certain contracts related to lease transactions with distinct third parties may be terminated or require the posting of collateral. France Telecom has already been required to post collateral for certain of these contracts.
3.3.2 R
ISK
F
ACTORS
R
ELATING
TO
THE
T
ELECOMMUNICATIONS
AND
W
IRELESS
I
NDUSTRIES
The profound and permanent transformation of the telecommunications industry
could render existing technology obsolete. A deficiency in France Telecom’s response to technological advancement could lead to the loss of customers or market share in the sectors in which France Telecom operates and could have an impact on
its revenues and results of operations.
The telecommunications
industry has experienced profound changes in recent years, and France Telecom believes that these changes will continue. If France Telecom fails to rapidly adapt its business to meet the developments of the telecommunications industry, it may be
unable to compete effectively and its business activities, financial condition and results
of operations may suffer. France Telecom may be unable to appropriately anticipate the demand for certain technologies or may not be in a position to acquire or
finance the necessary licenses and intellectual property rights in time. Further, new technologies that France Telecom chooses to develop may lead to significant costs and may not be as successful as planned. As a result, France Telecom may lose
customers or market share or may be obligated to undertake substantial expenditures to maintain its customers.
The intense competition of the telecommunications industry in Europe may strain France Telecom’s resources.
France Telecom faces intense competition in all areas of its business.
In the fixed line telephony business in France, which has been open to competition
since January 1, 1998, France Telecom faces competition that has created a dramatic reduction in rates, as well as a reduction in its market share from 1998 through 2001. In addition, competition in the markets for regional and local calls is
intensifying. The recent regulatory changes, such as the unbundling of its local loop, the preselection of operators, number portability and main distribution frame access, have increased the ease with which its customers can use the services of
other telecommunications carriers instead of France Telecom’s services. In the local call sector principally, with the introduction of carrier preselection at the beginning of 2002, France Telecom lost approximately 25% of its market share at
December 31, 2002. France Telecom expects a further decrease of its market share and continued decreases of rates in the fixed line services in France, where it currently enjoys the greatest market share. In addition, according to France Telecom, an
increasing proportion of calls that would previously have been made over the fixed line network are now being made on mobile telephones, a process known as “fixed-wireless substitution”. The level of competition is significantly influenced
by decisions of the ART, which could make decisions that would lead to further declines in rates in the fixed line telephony business. For further information regarding competition and regulatory decisions that could affect the level of competition,
see “Item 4. Information on France Telecom – 4.5.3 Fixed Line, Distribution, Networks, Large Customers and Operators” and “Item 4. Information on France Telecom – 4.12.2 French Regulations”.
In addition, restructuring by certain competitors and overcapacity in the
international transmissions sector could materially affect France Telecom’s results in the international transmissions business. If these conditions continue, they could negatively impact France Telecom’s results in this market. In the
data transmissions market, Equant and Transpac, both subsidiaries of France Telecom, face intense competition. The success of the France Telecom group in this market will depend on the ability of Equant and Transpac to compete with the other large
telecommunications operators, intellectual property and data specialists and new entrants in this market, including operators from competing networks and suppliers of Internet services or other value added services. France Telecom believes that the
number of competitors, the vertical and horizontal concentration of this activity, the pressure on rates and the competition in terms of market share could increase in the future.
In the wireless telecommunications business, France Telecom faces intense competition in all of its principal markets (particularly in
France and the United Kingdom) from existing and new market participants. In certain countries, France Telecom must compete with new non-traditional operators that offer wireless communications services without maintaining their own networks (known
as mobile virtual network operators). Although competition based on handset subsidies has diminished in France and the United Kingdom, competition based on rates, subscription options offered, coverage and service quality remains intense. As these
markets have become increasingly saturated, the focus of competition is starting to shift from customer acquisition to customer retention, which could lead to higher expenses for customer loyalty initiatives. Rates for wireless communications have
been declining over the past several years and may continue to decline in France Telecom’s principal markets.
France Telecom also faces competition in the market for Internet and multimedia services, particularly in France. The Internet access market is experiencing
increased competition and shifting usage patterns which exert a pressure that may be influenced by regulation, particularly in France. There are few substantial barriers to entry in the Internet industry and connection costs for users and customers
are low. As a result, France Telecom’s most significant competitors in this segment may be new entrants such as the French postal service that would not be burdened by the costs of modernizing older equipment. It may be very expensive for
France Telecom to upgrade its networks, products and technology in order to continue to compete effectively with other competitors. Wanadoo faces competition in the printed directories market from editors that offer regional directories in France.
Online directories remain highly competitive with many market participants.
Competition in any or all of France Telecom’s lines of business could lead to:
n
price erosion for France Telecom’s products and services;
n
an inability to increase market share or a loss of market share;
n
loss of existing or prospective customers and greater difficulty in retaining existing customers;
n
more rapid deployment of new technologies and obsolescence of existing technologies;
n
the increase of costs related to investments in new technologies that are necessary to retain customers and market share;
increased pressure on France Telecom’s profit margins, preventing it from maintaining or improving its current level of operational profitability; and
n
difficulties repaying the debt it incurred to finance its acquisitions and strategic and technological investments if it cannot generate revenues and an adequate gross margin of internal
financing.
If growth in the Internet and wireless businesses slows,
France Telecom’s revenues may not grow as rapidly as in the past and may even decrease, which in turn could adversely affect its profitability.
In recent years, France Telecom’s revenues, at a constant exchange rate, have grown in large part because of rapid expansion in its Internet and wireless
communications businesses, in line with growth in the Internet and wireless markets in Europe. If these markets do not continue to expand, particularly in France and the United Kingdom, France Telecom’s revenue may not grow or may even slow,
which in turn could affect its financial condition and results of operations, in particular if the revenues of the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment were to decrease.
Despite the current trend towards deregulation in France and other European countries, France
Telecom continues to operate in highly regulated markets in which its flexibility to manage its business is limited.
France Telecom must comply with an extensive range of requirements that regulate and supervise the licensing, construction and operation of its fixed line, wireless
and Internet networks and the provision of its products and services. It must also cooperate with agencies or other governmental authorities that regulate and supervise the allocation of frequency spectrum and that oversee the general
competitiveness of the telecommunications market. Furthermore, France Telecom faces a number of regulatory constraints as a result of its dominant position in the fixed line telecommunications market in France, including certain obligations that
lead to significant costs. For example, France Telecom is required to provide interconnection services to other operators on terms that must be approved by the regulatory authority. France Telecom is also required to have its rates for fixed line
voice telephony services approved by the regulatory authority prior to implementation. France Telecom believes that, in general, it fulfills the requirements imposed by the applicable regulations, but it cannot predict the opinion of regulatory or
judicial authorities, who could be asked to review or have already been asked to review France Telecom’s compliance.
Like other operators, France Telecom’s activities and operating income may be impacted significantly by legislative, regulatory and governmental changes and,
in particular, by decisions made by regulatory authorities and competition authorities in relation to:
n
granting, modifying and renewing licenses (see “Item 5. Operating and Financial Review and Prospects – 5.2.2.1 Orange Segment – Investments in Tangible and Intangible
Assets” for further information on the renewal of the GSM license in France);
n
rates or the possibility of extending activities to new markets;
n
network accessibility to virtual network operators and other service providers; or
n
access to third party networks.
Such decisions could significantly impact results of operations.
The following can be cited as examples of risks related to regulatory changes or decisions: the conditions for the renewal of Orange France’s GSM license and
Wanadoo’s obligation to submit to the European Commission accounting information related to its broadband offers.
Regarding the first point, the GSM license granted to Orange France for a period of 15 years, from March 25, 1991, expires in March 2006. In compliance with the
terms of the license, the conditions for renewing the license, like those for 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 other countries where it
operates, France Telecom cannot foresee the new conditions that will be applicable within the framework of GSM licenses following their renewal, and in particular, cannot dismiss the possibility that the cost to the operator may be significantly
higher than the current cost of the license fees.
Regarding the second
point, within the framework of a July 2003 decision by the European Commission (see Note 29 of the Notes to the Consolidated Financial Statements) imposing a fine of €10.4 million on Wanadoo France for having abused its dominant position in the
retail market for broadband Internet access by practicing predatory pricing between 2001 and October 2002 (Wanadoo filed an appeal against this decision), the European Commission has required that Wanadoo France furnish it with its operational
accounts related to its broadband offers until 2006, in order to enable the Commission to verify that Wanadoo France is not engaging in predatory pricing.
Furthermore, licenses are required in most countries to provide telecommunications services and operate networks. These licenses frequently impose requirements
regarding the way the operator conducts its business, including, in particular, minimum service requirements, roll out completion deadlines, and network quality and coverage.
Failure to meet these requirements could result in fines or other sanctions, including, ultimately, revocation of
the licenses.
Alleged health risks of wireless communications devices could lead to
decreased wireless communications usage or increased difficulty in obtaining sites for base stations or litigation, that may have adverse effects on the results of operations of France Telecom.
In France, by decree dated May 3, 2002, the Health Ministry required wireless
operators to provide their customers with recommendations on the use of mobile telephones and information on the remaining uncertainties relating to potential health risks. In addition, Orange signed charters of good conduct relating to the
installation of transmitter sites with other operators and certain municipalities in France. On January 21, 2003, the ART published a scientific study regarding the health risks associated with wireless telephone transmitter sites and mobile
telephones. The results of this study, ordered by the French National Institute for Industrial Environment and Risks (the
Institut national pour l’environnement industriel et des risques
, or “Ineris”), confirmed the conclusions
of an independent report published in 2001, which found that “no study has been able to conclude that exposure to radio-frequency fields emitted by mobile telephones or their base stations have had a harmful influence on health”. In total,
at least four scientific studies with the same conclusions, including the one mentioned above, were published in 2003.
In the United Kingdom, a study on wireless telecommunications health issues conducted by the Independent Expert Group on Mobile Phones, known as the Stewart Report,
reported that to date, there is no evidence that suggests that wireless phone technologies pose a health risk for the general public. The Department of Health in the United Kingdom has nevertheless required that information be made available to
customers so that they can make their own informed choices about how to use mobile phones. In the United Kingdom, Orange and other wireless network operators are promoting in-depth scientific research into wireless technology through joint financing
of a program with the government of the United Kingdom. The published scientific studies concluded that no long-term health risks exist.
While to date France Telecom is not aware of any substantiation of health risks associated with wireless communication devices, actual or perceived health risks may
adversely affect France Telecom’s results of operations or financial condition through a reduction in the number of customers, reduced usage per customer, exposure to potential litigation or other liability. In the event that future evidence is
considered to show that health risks exist, the use of mobile phones could be subject to regulations which, for example, could limit emission levels from handsets or transmitter sites. Such regulations could have an adverse effect on France
Telecom’s operations and results of operations.
3.3.3 R
ISK
F
ACTORS
R
ELATING
TO
F
INANCIAL
M
ARKETS
France Telecom’s business may be affected by fluctuations in exchange rates.
A significant portion of France Telecom’s revenues and expenses are accounted for
in currencies other than the euro. Over the course of 2002 and 2003, the main currencies for which France Telecom was exposed to exchange rate risk were the pound sterling, the Polish zloty and the U.S. dollar. Where appropriate, France Telecom
enters into derivative instruments to hedge underlying exposures to changes in exchange rates, but France Telecom cannot guarantee that these derivative transactions will effectively or totally hedge its risks. To the extent that France Telecom has
not entered into derivative instruments to cover a portion of this risk, or if its strategy of using these instruments is not successful, France Telecom’s cash flow and revenues may be affected. Derivative instruments are described in Note 20
of the Notes to the Consolidated Financial Statements.
For
consolidation purposes, the balance sheets of France Telecom’s consolidated foreign subsidiaries are converted into euro using the exchange rate at the end of the period, and their income statements and cash flow charts are converted using the
average exchange rate for the period. The impact of such a conversion on the balance sheet and shareholders’ equity may be significant. From one period to another, fluctuations in the average exchange rate relating to a particular currency may
significantly affect the reported revenues as well as the expenses incurred in such currency, as reflected in France Telecom’s income statement, which could significantly affect its results of operations. For example, in 2003, the impact of
fluctuations in the exchange rate on France Telecom’s revenues was approximately
€
2 billion.
France Telecom’s business may be affected by fluctuations in the financial markets, including
changes in interest rates.
In the ordinary course of its business,
France Telecom is exposed to financial market risks, including changes in interest rates. Where appropriate, France Telecom enters into derivative instruments to hedge underlying exposures to changes in interest rates. The derivative instruments
used by France Telecom are described in Note 20 of the Notes to the Consolidated Financial Statements. France Telecom’s exposure to market risks is described in “Item 11. Quantitative and Qualitative Disclosures about Market Risk –
11.1 Exposure to Market Risks and Financial Instruments”.
Risk factors relating to the volatility of France Telecom’s shares.
France Telecom S.A.’s share prices may fluctuate due to a number of factors,
including:
n
a change in France Telecom’s credit rating, or level of indebtedness or sales of assets;
n
changes in recommendations made by financial analysts with respect to France Telecom;
n
changes in analysts’ forecasts regarding the markets in which France Telecom operates;
n
an announcement by France Telecom or one of its competitors regarding strategic partnerships, results of operations, changes in its capital structure or other important changes in activity;
n
the recruitment or departure of key employees; and
n
general stock market fluctuations.
Following the exchange offer for Orange shares completed in 2003, France Telecom held none of its own shares at December 31, 2003.
In addition, the share prices of France Telecom’s listed subsidiaries, Wanadoo,
Equant and TP S.A., may fluctuate. This could impact the financial condition of France Telecom or its share price.
Future sales by the French State of its shares in France Telecom may impact France Telecom’s share price.
At December 31, 2003, the French State held, directly or indirectly, through the intermediary, ERAP, approximately 54.5% of the share
capital of France Telecom. Until January 2004, the French State had the legal obligation to hold more than 50% of the share capital of France Telecom. However, French law no. 2003-1365 of December 31, 2003, relating to the public telecommunications
service and to France Telecom, allows the French State to transfer its holding to private investors. If the French State decides to reduce its holding in the share capital of France Telecom, such a sale or even the perception of potential sales
could impact France Telecom’s share price.
The price of France Telecom’s
ADSs and the U.S. dollar value of any dividends will be affected by fluctuations in the U.S. dollar/euro exchange rate.
The ADSs are quoted in U.S. dollars. Fluctuations in the exchange rate between the euro and the U.S. dollar are likely to affect the market price of the ADSs. For
example, because France Telecom’s financial statements are reported in euro, a decline in the value of the euro against the U.S. dollar would reduce France Telecom’s earnings as reported in U.S. dollars. This could adversely affect the
price at which the ADSs trade on the U.S. securities markets. Any dividend that France Telecom might pay in the future would be denominated in euro. A decline in the value of the euro against the U.S. dollar would reduce the U.S. dollar equivalent
of any such dividend.
Holders of ADSs may face disadvantages compared to holders of
France Telecom’s shares when attempting to exercise voting rights. Holders of shares wishing to exercise their voting rights must block their shares for at least five days prior to the shareholders’ meeting pursuant to French law.
In order to vote at shareholders’ meetings, ADS holders who
are not registered on the books of the depositary are required to transfer their ADSs for a certain number of days before a shareholders’ meeting into a blocked account established for that purpose by the depositary. Any ADS transferred to this
blocked account will not be available for transfer during that time. ADS holders who are registered on the books of the depositary must give instructions to the depositary not to transfer their ADSs during this period before the shareholders’
meeting. ADS holders must therefore receive voting materials from the depositary sufficiently in advance in order to make these transfers or give these instructions. There can be no guarantee that ADS holders will receive voting materials in time to
instruct the depositary to vote. Also, the depositary is not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. It is possible that ADS holders, or persons who hold their ADSs through
brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote at all.
In order to participate in any general meeting, a holder of shares held in registered form must have its shares registered in its name in a shareholder account
maintained by France Telecom or on France Telecom’s behalf by an agent appointed by France Telecom by 3:00 p.m. (Paris time) the day before the meeting. A holder of bearer shares must obtain a certificate (c
ertificat
d’immobilisation
) from the accredited intermediary with whom the holder has deposited its shares, and the certificate must state that the shares are not transferable until the time fixed for the meeting. The holder must deposit this
certificate at the place specified in the notice of the meeting by 3:00 p.m. (Paris time) the day before the meeting.
Preemptive rights may be unavailable to holders of France Telecom’s ADSs.
Holders of France Telecom’s ADSs or U.S. resident shareholders may be unable to exercise preemptive rights granted to France Telecom’s shareholders, in
which case holders of France Telecom’s ADSs could be substantially diluted. Under French law, whenever France Telecom issues new shares for payment in cash or in kind, France Telecom is usually required to grant
preemptive rights to its shareholders. However, holders of France Telecom’s ADSs or U.S. resident shareholders may not be able to exercise these preemptive rights
to acquire shares unless both the rights and the shares are registered under the Securities Act of 1933 or an exemption from registration is available.
If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the
rights to lapse, in which case no value will be given for these rights.
3.3.4 R
ISK
F
ACTORS
R
ELATING
TO
L
EGAL
P
ROCEEDINGS
France Telecom is involved in several investigations or legal proceedings that are more fully described in Note 29 of the Notes to the
Consolidated Financial Statements. France Telecom’s position as the leading operator and provider of networks and telecommunications services in France and one of the leading telecommunications operators in the world subjects it to the scrutiny
of its competitors and French and European competition authorities. In addition, France Telecom is regularly involved in legal disputes with competitors as a result of its leading positions in the fixed and wireless telecommunications markets in
which it operates. With the exception of the proceedings set forth in Note 29 of the Notes to the Consolidated Financial Statements, France Telecom believes that none of these proceedings, taken by itself, would have a material adverse effect on the
financial condition or results of operations of the Group.
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 (
société 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 marché
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
Autorité de Régulation 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:
n
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;
n
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
n
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:
n
to provide all electronic communication services in domestic and international relations;
n
to satisfy missions related to public service and, in particular, to provide, where applicable, a universal telecommunications service and other mandatory services;
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
n
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.
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:
(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.
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:
n
“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”.
n
“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.
n
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.
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” P
ROGRAM
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.
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:
n
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
Supplier
s
”).
n
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.
n
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.
n
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.
n
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.
n
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
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.
n
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.
n
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 M
ARKET
G
ROWTH
AND
U
SAGE
T
RENDS
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
(in %)
2001
(in %)
2000
(in %)
1999
(in %)
1998
(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).
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 F
RANCE
T
ELECOM
’
S
S
TRATEGIC
V
ISION
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.
n
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);
n
several identities are required for the services – telephone numbers, email addresses;
n
applications can be incompatible with those of their contacts, as is the case with instant messaging programs at present;
n
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:
n
single sign-on points;
n
messaging services that can forward messages to each other according to the customer’s instructions;
n
notification that an address book contact is present and available;
n
access to services on any access network or terminal.
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:
n
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.
n
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.
n
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.
n
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.
n
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.
n
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:
n
new, advanced Internet services (online games, photo albums, image messaging);
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:
n
In terms of business areas, the core areas will be wireless services and broadband access services, providing multi-service offerings;
n
In terms of services, the three services of the Group are the following:
-
“Personal services”;
-
“Home services”;
-
“Enterprise services”.
n
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;
n
Finally, France Telecom, as an integrated operator, benefits from the convergence of its networks and its information systems.
4.2.5 I
MPLEMENTING
F
RANCE
T
ELECOM
’
S
S
TRATEGY
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:
n
personal communications;
n
new broadband services;
n
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:
n
manage identity and authentication procedures independently of the access network (cross-company project: identity/authentification);
n
have a single address book that can be used from any terminal or service (cross-company project: address book);
n
know that an address book contact is present and available (cross-company project: contact);
contact someone on their chosen network or terminal regardless of which network or terminal they are being contacted on (cross-company project: availability); and
n
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:
n
Network technologies: very high speed transmission on fixed line networks, optimized use of the Hertz spectrum, new generations of IP networks;
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:
n
networks and information systems support technologies;
n
terminal equipment (for example in the wireless sector with signature devices developed by suppliers according to ergonomic specifications defined by Orange);
n
content (for example with regards to new offers on ADSL);
n
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,
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:
n
“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”.
n
“Home services”. The key strategy of the Group in this area consists in enhancing “Home Services” through broadband (see “– Enhancing ‘Home
Services’ through Broadband”).
n
“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.
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:
n
permanent access to personalized services;
n
contact list;
n
extended range of connectivity;
n
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:
n
Internet access;
n
television by broadcast or by demand;
n
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
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:
n
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;
n
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:
n
integrate the latest technologies (multi service DSL, Gigabit Ethernet, MAN, WiFi, voice over IP);
n
widely use IP as a unifying means of intra- and inter-company exchanges;
n
design an Intranet solution suitable for small- and medium-sized businesses;
n
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;
n
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;
n
offer application solutions that rely on France Telecom’s network solutions (network security services, hosting of messaging systems and websites);
n
offer businesses solutions to manage their relationships with their own customers (customer relations management, call centers);
n
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:
n
expand its network in a multimedia structure based on IP;
n
expand its product range towards services with a higher added value – IT based services;
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:
n
consulting;
n
project management;
n
service management;
n
service integration;
n
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:
n
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.
n
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”.
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)
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”).
n
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.
n
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.
n
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.
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.
n
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.
n
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 marché
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:
n
the increasing needs of France Telecom customers for integrated services on a fixed to wireless platform;
n
a growth strategy based on developing new innovative services;
n
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 opérations 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”.
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 marché
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:
n
Corporate Solutions: services and distribution to large businesses;
n
Fixed Line and Distribution in France: services for consumers and other businesses and the distribution network in France;
n
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 Numéris 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 marché
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
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 P
RINCIPAL
A
CTIVITIES
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 O
RANGE
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 (
société 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 marché
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
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:
n
the increasing needs of France Telecom customers for integrated services on a fixed line/wireless platform;
n
a growth strategy based on developing new innovative services;
n
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 défense 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
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.
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:
Itinéris, 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 Caraïbe operates a GSM network in Guadeloupe, Martinique and Guiana under the Orange brand. Orange Caraïbe 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 Réunion launched GSM services in Réunion where it competes with the existing operator. Orange Réunion 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
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
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:
n
it is accessible from a wide range of handsets and offers handsets that are particularly recommended for multimedia usage;
n
it offers the first non-voice packages including access to all navigation technologies (SMS, MMS, navigation on wireless portals, smart phones and the Internet);
n
it emphasizes content-rich services that are easily accessible through the single portal of “Orange World”;
n
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:
n
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);
n
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.
Orange France sells its products and services through a complete range of distribution channels (source: Orange France).
n
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).
n
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).
n
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).
n
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).
n
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.
n
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 United Kingdom population (81.9% at December 31, 2002 and 75.1% at December 31, 2001).
At December 31, 2003, Orange UK had approximately 13.65 million active customers (13.3
million at December 31, 2002 and 12.4 million at December 31, 2001) (source: Orange UK) with an estimated market share of 25.6% of active customers in the United Kingdom (27.2% at December 31, 2002 and 27.7% at December 31, 2001) (source: Orange UK,
with the number of the competitors’ customers provided for 2003 by Mobile Communications).
A GSM license was awarded to Orange UK for a term of 25 years from July 25, 1995 to July 2020.
Orange UK has one of the biggest mobile telephone networks in the United Kingdom. At December 31, 2003, it is estimated that the
network covered approximately 99.4% of the population (99.4% at December 31, 2002 and 99.0% at December 31, 2001).
On September 1, 2000, Orange 3G Limited, a wholly-owned subsidiary of Orange UK, was awarded one of the five UMTS licenses for a period of 20 years at a cost of
approximately
€
6.6 billion. This license covers two 10MHz spectrums and one 5MHz spectrum. For operational reasons, the license was
revoked and reallocated to Orange UK. The conditions of the license provide inter alia for Orange UK to be able to supply UMTS telecommunications services to at least 80% of the United Kingdom population before December 2007. The opening of UMTS
service has been planned for 2004. The UMTS license may be withdrawn in the event of a significant breach of any of these conditions. If a UMTS license is withdrawn, amended or surrendered, refunds of purchase costs are only payable under
exceptional circumstances.
The table below shows the main features of the wireless telecommunications market in the United Kingdom and the
activities of Orange UK:
At December 31,
2003
2002
2001
Market penetration rate in the United Kingdom (%)
(1)
86.6
81.9
75.1
Total users in the United Kingdom (millions)
(1)
51.7
49.0
44.7
Service plan (millions)
(2)
16.9
15.9
13.8
Prepaid (millions)
(2)
34.8
33.1
30.9
Orange UK active customers (millions)
(2)
13.65
13.3
12.4
Service plan (millions)
(2)
4.46
4.2
3.8
Prepaid (millions)
(2)
9.19
9.1
8.6
Market share of Orange UK (%)
(2)
25.6
27.2
27.7
Coverage of Orange UK network ( % of population)
(2)
99.4
99.4
99.0
(1)
Information provided by Mobile Communications.
(2)
Information provided by by Orange UK for 2003, with the number of the competitors’ customers being provided by Mobile Communications; information provided by Orange UK for 2002 and 2001.
Orange UK Service Plans
Orange UK offers two types of service plans for individual customers and service plans
targeted at businesses.
Personal Customers
Monthly Plans
The “Your Plan” contract offers good value to individual customers who can use the specific talk time to make calls to other
wireless or fixed line networks in the United Kingdom. In addition, the introduction of numerous other options has helped to improve the flexibility of this contract and customer service: 50% extra talk time for the same price if the talk time is
used exclusively for calls to Orange numbers and fixed numbers, an off-peak contract which includes 1,000 minutes per month, nights and weekends, and a full package of services.
Orange believes that it offers the best value for money in the United Kingdom and subsequently developed “Orange Value
Promise”, which enables Orange to offer a wider choice of tariffs than any other network. If a customer or potential customer of Orange UK thinks that a contract being offered by a different United Kingdom operator would suit him better than
one of Orange UK’s offers, Orange UK undertakes to provide him with an equivalent service on the Orange UK network and to bill this customer essentially the same as its competitors. “Orange Value Promise” offers the equivalent of a
selection of non-promotional rates to customers subscribing to a monthly service contract with an O2, Vodafone or T-Mobile retailer.
Customers subscribing to a monthly service plan can normally terminate their plan giving one month’s prior notice, subject to a minimum initial period,
normally 12 months.
“Pay as You Go” Plans
The Orange “Pay as you go” plan allows customers to buy a handset and
call time when and as they need it. This plan does not currently include fixed costs, recharges have no expiry date and there is no minimum commitment period. There are several quick ways in which customers can recharge their account: recharges,
bank cards, cash payment or using a Swipe card at a sales point, or using certain automatic distributors.
Orange now offers three “Pay as you go” service plans providing flexibility and choice. “Choose your own off-peak” offers customers competitive
prices for peak hours and off-peak hours and the opportunity to choose their own range of off-peak hours. “Talk and Save” offers sliding rates geared to larger-scale users who prefer to pay for what they use. “Fixed rates all
day” is a new fixed rate plan for people who want the cost of their calls to be totally transparent. There is no minimum commitment period for “Pay as you go” service plans.
Businesses
Small businesses (up to 49 employees)
Orange’s “Business Standards” is a solution specifically designed to give small businesses optimum quality-price ratio, effective support and
peace of mind. Small businesses benefit from the flexibility of the “Your Plan” contract and several additional
advantages: free recovery of messages on voice mail, free one-year warranty, handset replacement within 24 hours, free assistance, option of sharing talk time with
colleagues and an extra line for personal calls.
Medium and large
businesses (50 employees upwards)
For medium and large businesses,
Orange offers a full range of flexible voice and data plans. The “Your Plan for Business” range includes rate options based on use and talk time. The rate option based on use rewards customers depending on their volume of use and the
number of Orange handsets they own. Voice contracts with talk time vary from 2,000 to 10,000 minutes inclusive per month. Medium and large businesses also benefit from significant advantages on calls between users. The voice portfolio is
supplemented by contracts covering international calls and use of personal handsets abroad. A range of data plans has been launched for Mobile Office Card, Office Freedom, business LAN and Internet (“free the laptop”). These plans are
available separately, or in addition to, the customer’s voice contract.
Orange
Business Solutions
In 2002, Orange UK launched “Orange
Business Solutions”, a fully integrated business unit designed to meet the wireless needs of medium sized businesses, companies and public sector organizations. “Orange Business Solutions”, which is responsible for total end-to-end
management of its customers, offers a wide portfolio of business-specific products and services, including a flexible range of voice options, Orange business messaging, wireless messaging and a whole series of other innovative wireless services.
In 2003 “Orange Business Solutions” launched several new
voice and data solutions such as “Orange Link Voice & Data” and “Mobile Office Card”. “Orange Link Voice & Data” is a unique offer which enables businesses to consolidate their voice traffic, GPRS and SMS on the
same link. The “Mobile Office Card” solution allows laptop users to connect to the Internet, Intranet and messaging services while on-the-move via a simple and intuitive software interface.
Orange World
In April 2003, Orange World launched its new WAP portal, featuring a new range of colors, simplified navigation and improved
personalization options. As part of the “Learn” initiative, free trials were offered to customers with WAP terminals.
In November 2003, “Orange World”, the new name for Orange’s global wireless portal, was launched on WAP terminals and smart phones, in particular the
SPV E200, Orange UK’s headline product. In the United Kingdom more than 500,000 clients input their personal preferences, giving them faster access to their favorite contents and establishing “Orange World” as a personalized and
powerful channel of customer communication. “Orange World” offers the following benefits:
n
an increased number of wireless services including brand names such as Warner Music, Time Out, Financial Times, Maxim, EMAP and Disney, as well as access to better content services (payment
through Orange);
n
a wider and continuously updated range of polyphonic ringtones, color images and java games;
n
a broader spectrum of customer options: messaging a friend, registration of a personal Web page, downloading of a card or participation in new discussion forums on “Orange World”;
n
video content coinciding with the launch of SPV1, SPV2, P800, P900 and Nokia 6600 handsets.
Telephone enquiry services were deregulated in the United Kingdom in early 2003 and Orange launched its 118 000 (national) and 11 88
80 (international) telephone enquiry service. During the first three months, 90% of Orange’s customers dialed the new numbers which replaced British Telecom’s 192 service.
At December 31, 2003, “Orange World” users accounted for approximately 1.65 million active customers (compared to 1.1
million at December 31, 2002).
Sales and Distribution
Orange UK sells its products and services in the United Kingdom
through a wide range of distribution channels (source: Orange UK).
n
In 2003, Orange UK registered approximately 34% of its new customers through general retailers.
n
Approximately 100 distributors and specialist retailers offer the various types of Orange UK services and Orange “Pay as you go” cards. In 2003, these distributors and retailers
accounted for approximately 36% of all new customers.
n
Orange UK distributes Orange products and services through its retail stores, which only market Orange products. In 2003, Orange UK shops accounted for approximaetly 20% of all new customers.
In 2003, the number of retail stores rose to 253 compared to 245 in 2002 and 200 in 2001.
n
In 2003, the sales force managed by Orange UK Business Solutions accounted for approximately 6% of all new Orange UK customers.
Individuals can obtain Orange UK products and services and purchase accessories on the Orange UK website or by using long distance distribution channels, which accounted for approximately 4%
of new Orange UK customers in 2003.
France Telecom’s Controlled
Wireless Operations in Europe
France Telecom’s controlled
wireless operations in Europe are discussed below.
Belgium
The following table shows the main characteristics of the wireless
telecommunications market in Belgium and the activities of Mobistar.
At December 31,
2003
2002
2001
Penetration rate in Belgium (%)
(1)
76.3
73.7
70.1
Total no. of users in Belgium (millions)
(1)
7.9
7.6
7.2
Active Mobistar customers (millions)
(2)
2.6
2.3
2.5
Mobistar market share (%)
(1)
33.3
30.4
30.8
Mobistar revenues (
€
millions)
(2)
1,167.0
1,004.0
881.0
Mobistar network coverage (% of population)
(3)
99.0
99.0
99.0
(1)
Source: Mobile Communications.
(2)
Revenues shown above include intragroup invoicing, which accounted for a total amount of
€
6 million in 2002 compared to
€
15 million in 2001, not included in the revenues published elsewhere by
Mobistar S.A. Moreover, at the end of 2001, the number of customers published by Mobistar included a number of inactive prepaid customers and postpaid customers suspended for late payment. Mobistar’s 2003 and 2002 customer base excludes
inactive prepaid customers and customers with suspended contracts. For comparison purposes, Mobistar would have had approximately 2.2 million customers in 2001, excluding inactive prepaid and suspended contract customers.
(3)
Information supplied by Mobistar.
Orange provides wireless services in Belgium through Mobistar. Mobistar was formed in 1995, awarded its GSM900 license in the same year and launched its services in
August 1996. Orange indirectly holds 50.7% of Mobistar’s capital. The remaining 4.7% and 4.1% of the capital are held by the Belgian company Telindus and Bruficom (according to the most recent stock ownership report signed by Bruficom), with
the balance of 40.5% being held by members of the public following the initial public offering of Mobistar shares on Euronext Brussels in October 1998.
Mobistar was the second operator to enter the Belgian market and had the second highest market share at December 31, 2003 (source: Mobile Communications).
In order to improve its network quality and capacity, Mobistar
installed a GSM1800 network in 2001. Mobistar deployed its GPRS network with estimated 99% population coverage in January 2001. In May 2001, Mobistar was the first operator to launch a commercial GPRS services offer geared towards the Belgian
business market. Mobistar has offered GPRS terminals since May 2001 and GPRS services to residential customers since August 2002. It launched MMS services in January 2003. In 2003, in collaboration with Banksys and Gemplus, Mobistar launched
m-banxafe, Belgium’s first national wireless payment application (compatible with all the country’s banks). Since September 2003, Mobistar’s customers have had the option of downloading Java games on their mobiles.
Mobistar distributes its services through major retail outlets and over 100 retail
shops.
During 1998, Mobistar was awarded fixed line telephony licenses
and infrastructure licenses and, as a result, offers an indirect access telephone service to residential customers and small and medium businesses. Mobistar also provides fixed line telephony services, high speed data transmission services and
wireless telecommunications services to businesses.
On March 2, 2001,
Mobistar obtained a 20-year UMTS license from the Belgian government based on a bid of
€
150 million. The terms and conditions of the
license provide that among other things Mobistar should deploy its network between 2005 and 2008. Mobistar fulfilled its first commitments by introducing the technology in Belgium in September 2003. This initial stage was validated by the Belgian
regulator. Under the license conditions the license could be withdrawn and penalties applied if the licensee failed to meet its obligations. The next stage in the launch of UMTS for Mobistar is the roll out, before January 1, 2006, of a network
covering 30% of the population. In order to reach this objective, sites have been acquired with the coverage obligation in mind, despite the constant difficulties in obtaining the necessary administrative authorizations.
Mobistar employed approximately 1,650 staff (full-time equivalent) at December 31, 2003 (approximately 1,700 at
December 31, 2002 and 1,800 at December 31, 2001).
Denmark
The following table shows the main characteristics of the wireless
telecommunications market in Denmark and Orange’s A/S activities.
At December 31,
2003
2002
2001
Penetration rate in Denmark (%)
(1)
94.35
78.6
75.5
Total no. of users in Denmark (millions)
(1)
5.0
4.2
4.0
Orange A/S customers (millions)
(2)
0.6
0.5
0.6
Orange A/S market share (%)
(1)
11.5
12.2
15.0
Orange A/S revenues (
€
millions)
258.0
241
194
Orange A/S network coverage (% of population)
(2)
99.0
98.0
96.0
(1)
Information provided by Mobile Communications.
(2)
Information provided by Orange A/S.
Orange provides wireless services in Denmark through its subsidiary Orange A/S. Orange A/S was formed and awarded its GSM1800 license in 1997, then started
operating its services in 1998. In 2000 Orange A/S also obtained a GSM900 license, enabling it to extend its network coverage. At December 31, 2003, Orange A/S estimated that its network covered 99% of the Danish population (source: Orange A/S) and
that it had a market share of approximately 12.3% with 0.6 million active customers (source: Mobile Communications).
Orange A/S was the fourth wireless operator to enter the Danish market and had the third largest market share at December 31, 2003 (source: Mobile Communications).
Orange holds 67.2% of the capital in Orange A/S, with the remaining
22.9% being held by a group of financial investors and 9.9% by Finansministeriet, the Danish Ministry of Finance.
Following an auction, Orange A/S was awarded one of four UMTS licenses at a cost of 950 million Danish kroner in September 2001 (approximately
€
128 million). The UTMS license is for a period of 20 years from the date of issue. Under the terms of the UTMS license, Orange A/S must
achieve 30% UMTS network coverage of the Danish population at December 31, 2004 and 80% of the population at December 31, 2008. The Danish telecommunications market regulator oversees compliance with the terms and the conditions of wireless licenses
in accordance with the stipulated procedures and may issue injunctions, impose daily fines and in certain circumstances revoke the license if these procedures are not observed. The license holder could incur penalties as defined by Danish law if the
population coverage rate stipulated in the license is not achieved.
Orange A/S also has a high capacity national fixed line network and offers fixed line telecommunications services for businesses. According to its own estimates, Orange A/S had approximately 70,000 customers at December 31, 2003 (76,000 at
December 31, 2002 and 32,000 at December 31, 2001).
Orange A/S employed
approximately 740 staff (full-time equivalent) at December 31, 2003 (approximately 1,000 at December 31, 2002 and approximately 1,330 at December 31, 2001).
Luxembourg
Orange Communications Luxembourg S.A. is a wholly-owned subsidiary of Orange. It was incorporated in May 2002 and awarded a 15-year UMTS license in Luxembourg in
June 2002. Two other licenses were also awarded. Orange paid an initial price of
€
60,000 and will have to pay low management costs
and an annual license fee of 0.2% of revenues or a minimum of
€
200,000. Orange Communications Luxembourg S.A.’s commercial
opening has been postponed and is now scheduled for August 2005. Orange Communications Luxembourg S.A., which has just started up operations, had no employees at December 31, 2003. The construction of a network will begin during the first six months
of 2004. The commercial opening is planned for August 2005.
The following table shows the main characteristics of the wireless telecommunications market in The Netherlands and the activities of Orange Nederland B.V.
At December 31,
2003
2002
2001
Penetration rate in The Netherlands (%)
(1)
82.6
74.6
74.7
Total no. of users in The Netherlands (millions)
(1)
13.2
11.9
11.8
Orange Nederland B.V. active customers (millions)
(2)
1.3
1.0
1.1
Orange Nederland B.V. market share (%)
(1)
10
8.6
9.5
Orange Nederland B.V. revenues (
€
millions)
465
400
363
Orange Nederland B.V. network coverage (% of population)
(2)
99.9
99.0
99.0
(1)
Information provided by Mobile Communications.
(2)
Information provided by Orange Nederland N.V.
Orange provides wireless services in The Netherlands through its wholly-owned subsidiary, Orange Nederland N.V. (formerly Dutchtone N.V.). Formed in 1997, Orange
Nederland N.V. was awarded a GSM1800/EGSM license in February 1998 and started operating its network in January 1999. On March 31, 2003, Orange Nederland N.V. changed its name (abandoning Dutchtone N.V.) and rebranded its activities under the Orange
name.
At December 31, 2003, according to its own estimates, Orange
Nederland N.V. covered 99.9% of the population of The Netherlands (source: Orange Nederland N.V.) and had a 9.3% market share (source: Mobile Communications) with approximately 1.3 million active customers (source: Orange Nederland N.V.).
At December 31, 2003, Orange Nederland N.V. was the fifth wireless
telephony operator in The Netherlands in terms of number of customers (source: Mobile Communications). Orange Nederland N.V. introduced its WAP services in October 2000 and GPRS services in December 2002. Orange Nederland N.V. markets its services
through 100 retailers and 40 shops, which it owns through its subsidiary Orange Retail B.V. (formerly Dutchtone Retail B.V.).
In July 2000, Orange Nederland N.V. was awarded one of the five UMTS licenses sold, by auction, at a cost of
€
436 million. The term of the license is 15 years. It relates to two 10MHz spectrums and one 5MHz spectrum. The terms and conditions of the license provide that Orange
Nederland N.V. must, among other things, be able to cover all cities in The Netherlands by the beginning of 2007. The license could be revoked if the licensee fails to meet its obligations.
In April 2002 Orange Nederland N.V. and T-Mobile Netherlands B.V. (formerly Ben
Nederland B.V.) signed a joint venture agreement relating to the deployment, operation and maintenance of UTRAN (UMTS Radio Access Network). The Rann B.V. Joint Venture enables the two companies to share third generation network installation costs.
Orange Nederland N.V. and T-Mobile Netherlands B.V. will share the network and UMTS sites on which each will offer a separate service.
Orange Nederland N.V. and Orange Retail B.V. employed approximately 1,200 staff (full-time equivalent) at December 31, 2003 (approximately 1,330 at December 31,
2002 and approximately 1,550 at December 31, 2001).
Romania
The following table shows the main characteristics of the wireless
telecommunications market in Romania and the activities of Orange Romania.
At December 31,
2003
2002
2001
Penetration rate in Romania (%)
(2)
32.5
22.8
16.8
Total no. of users in Romania (millions)
(3)
7.0
5.1
3.9
Orange Romania registered customers (millions)
(2)
3.3
2.2
1.6
Orange Romania market share (%)
(1)
48.0
43.5
44.0
Orange Romania revenues (
€
millions)
467.0
393
378
Orange Romania network coverage (% of population)
(2)
95.0
95.0
94.0
(1)
Orange Romania estimate for 2003 and information provided by Mobile Communications for 2002 and 2001.
(2)
Information provided by Orange Romania.
(3)
Information provided by EIU Romania Country Forecast, August 2003.
Orange provides wireless service in Romania through its subsidiary Orange Romania. Orange Romania was formed and
awarded a 15-year GSM900 license in 1996. At December 31, 2003, Orange Romania estimated that it covered approximately 95% of the Romanian population and with approximately 3.317 million active customers, had the country’s second largest market
share after MobiFon/Connex, (source: Orange Romania). Orange holds 67.8% of the capital in Orange Romania, with the remaining 20.7% being held by a consortium headed by AIG and 11.5% by other minority shareholders.
Orange Romania was the fourth wireless operator to enter the Romanian market and
currently ranks second on this market (source: Orange Romania estimate).
A UMTS license tender is scheduled for early 2004. Licenses will be awarded on a competitive basis. The cost of the UMTS licenses is set by the Romanian State at
€
35 million. Orange Romania plans to participate in the tender.
Orange Romania employed approximately 1,490 staff (full-time equivalent) at December 31, 2003 (approximately 1,380 at December 31, 2002 and approximately 1,200 at
December 31, 2001).
Slovakia
The following table shows the main characteristics of the wireless telecommunications
market in Slovakia and the activities of Orange Slovensko.
At December 31,
2003
2002
2001
Penetration rate in Slovakia (% )
(1)
64
53.2
39.8
Total no. of users in Slovakia (millions)
(1)
3.8
2.9
2.1
Orange Slovensko active customers (millions)
(2)
2.1
1.7
1.2
Orange Slovensko market share (%)
(1)
60.0
59.8
56.1
Orange Slovensko revenues (
€
millions)
(2)
392
315
235
Orange Slovensko network coverage (% of population)
(2)
98.5
98.0
96.0
(1)
Orange Slovensko estimates for 2003 and information provided by Mobile Communications for 2002 and 2001.
(2)
Orange Slovensko estimates.
Orange provides wireless service in Slovakia through its subsidiary Orange Slovensko. Orange Slovensko was formed in 1996 and awarded its GSM900 license the same
year. In August 2001, Orange Slovensko’s license was extended to GSM1800. At December 31, 2003, Orange Slovensko estimated that its network covered 98.5% of the Slovakian population and that it had the largest market share in the country
with approximately 2.065 million active customers. Orange holds 63.9% of Orange Slovensko’s share capital, the remainder being held by private investors.
Orange Slovensko was the second operator to enter the Slovakian market and had the largest market share at December 31, 2003 (source: Orange Slovensko).
In addition, Orange Slovensko was awarded a UMTS license in June 2002
for approximately 1.5 billion Slovakian krone (approximately
€
35 million) and an annual fee of 0.08% of license-generated revenue.
The UMTS license is for a period of 20 years from the date of issue. Under the terms of the license, Orange Slovensko may be required by another national operator to achieve network coverage of 20% by 2006 in order to enter into a roaming
agreement with that operator.
Orange Slovensko employed approximately
1,230 staff (full-time equivalent) at December 31, 2003 (approximately 1,140 at December 31, 2002 and approximately 920 at December 31, 2001).
Sweden
Orange Sverige is a wholly-owned subsidiary of Orange. Orange Sverige was awarded a 15-year UMTS license in Sweden in December 2002. In January 2002, Orange Sverige
acquired one-third of the capital of 3G Infrastructure Services A.B. (3Gis), a joint venture between Europolitan Vodafone and Hi3G specialising in UMTS infrastructure. In May 2003, Orange Sverige A.B. terminated the joint venture agreement relating
to 3Gis and all associated contracts, including the 3Gis financing agreements and a guarantee granted by Orange S.A. This was done on the grounds that 3Gis would be unable to fulfil its basic commitment to UMTS network deployment in Sweden before
the end of 2003, in view of the current progress of the project and the substantial changes in market conditions since the original agreements were signed.
On December 29, 2003, Orange Sverige signed a license transfer agreement with Svenska UMTS Licens II A.B. The
object of the transfer concerns the licenses held by Orange Sverige, the UMTS license, as well as the permits for the use of radio frequencies. The execution of the transfer will not occur until the condition precedents have been performed, among
them the prior approval of the transfer by the Swedish regulatory agency and by the competition authority.
Orange and Orange Sverige A.B. are involved in arbitration proceedings with 3Gis. See “– 4.11 Legal Proceedings” and “Item 5. Operating and
Financial Review and Prospects – 5.7.1 Subsequent Events”.
Orange Sverige employed four employees (full-time equivalent) at December 31, 2003 (approximately 230 at December 31, 2002 and approximately four at December 31, 2001).
Switzerland
The following table shows the main characteristics of the wireless telecommunications market in Switzerland and the activities of Orange Communications S.A.
At December 31,
2003
2002
2001
Penetration rate in Switzerland (%)
(1)
85.1
78.9
73.3
Total no. of users in Switzerland (millions)
(1)
6.1
5.7
5.4
Orange Communications S.A. active customers (millions)
(2)
Orange Communications S.A. network coverage (% of population)
(2)
98.6
97.8
97.0
(1)
Information provided by Mobile Communications.
(2)
Estimates of Orange Communications S.A.
Orange provides wireless services in Switzerland through its subsidiary Orange Communications S.A., which was formed in January 1998 and awarded its GSM1800 license
in May 1998. At December 31, 2003, Orange Communications S.A. estimated that its network covered 98.6% of the Swiss population and that its market share was approximately 18% with 1.085 million active customers. Orange holds 100% of the capital and
100% of the voting rights in Orange Communications S.A.
Orange
Communications S.A. was the third operator to enter the Swiss market and was third in terms of market share at December 31, 2003 (source: Orange Communications S.A.).
Orange Communications S.A. marketed the “24 hour tariff” in June 1999, WAP services in June 2000, “Orange Fast
Data” (HSCSD) in August 2000 and its wireless Internet portal in November 2000. In 2001, Orange Communications S.A. launched rates specifically targeted at large-scale SMS users as well as the first family contract in Switzerland. Orange
Communications S.A. launched its MMS service on October 24, 2002 and the SPV telephone operating on Windows
®
in November 2002. In 2003, Orange launched three exclusive smart phones, the SPVE100 and the SPVE200 operating on Windows,
and the Handspring Treo 600. In 2003 Orange also introduced electronic recharging for prepaid customers, as well attractive rates for multimedia services users.
In December 2000, Orange Communications S.A. was awarded a 15-year UMTS license at a cost of 55 million Swiss Francs (approximately
€
35 million). This license relates to two 15MHz spectrums. Three other licenses were awarded to SwissCom Mobile A.G., TDC Schweiz
A.G. and 3G Mobile A.G. Under the license terms Orange Communications S.A. must among other things be able to cover 50% of the population before the end of 2004. The license could be revoked if the licensee fails to meet its obligations. Penalties
could be applied of up to 10% of the revenues for the year preceding the awarding of the license.
Orange Communications S.A. employed approximately 1,500 staff (full-time equivalent) at December 31, 2003 (approximately 1,600 at December 31, 2002 and
approximately 1,560 at December 31, 2001).
Orange (Liechtenstein) A.G.,
a subsidiary of Orange Communications S.A., holds a license to operate a GSM1800 network in the Principality of Liechtenstein and operates under the brandname “Look”. Orange (Liechtenstein) A.G. and Orange Communications S.A. have a joint
market share of approximately 20% (source: Orange Communications S.A. estimate). Orange (Liechtenstein) A.G. also holds a UMTS license in Liechtenstein.
Other Minority-Owned Wireless Operations in Europe
MobilCom (Germany)
Orange holds 28.3% of the capital of MobilCom. According to information provided by MobilCom, the remainder of the capital is held by the public and by a fiduciary
who holds less than 5%. MobilCom was created in 1991 and its shares have been listed on the Frankfurt Stock Exchange since 1997.
MobilCom has three activities: fixed line line telephony operator, Internet service provider, through its subsidiary
freenet.de
A.G., and provider of
wireless telecommunication services, with a recharging of the services of the four network operators in Germany.
In an auction in August 2000, MobilCom obtained a UMTS license for approximately
€
8.4 billion. Since then, relations between shareholders have worsened. Following the cancellation of a cooperation agreement between the shareholders on June 11, 2002 and the appointment of a mediator, a
“MC Settlement Agreement” was signed on November 20, 2002 establishing a rescue plan for MobilCom and putting an end to the agreements of the France Telecom group and of MobilCom on the development of UMTS in Germany (see Note 22 of the
Notes to the Consolidated Financial Statements).
MobilCom announced its
decision in December 2003 to return its UMTS license to the German agency responsible for telecommunications regulation.
ONE GmbH (Austria)
The Connect Austria consortium was awarded the third Austrian wireless license in 1997. Orange holds approximately 17.5% in the capital of Connect Austria, which
was renamed ONE GmbH on July 1, 2003. The other members of the consortium are the German conglomerate E.ON and the Norwegian and Danish wireless telecommunications operators, respectively Telenor and Tele Danmark.
ONE launched its digital GSM1800 service in 1998 under the “ONE” brand name.
At December 31, 2003, ONE covered, according to its own estimates, 98% of the Austrian population as in 2002 and 2001. ONE had 1.4 million active customers (1.3 million active customers at December 31, 2002 and 1.4 million active customers at
December 31, 2001). ONE had a total market share of 19.4% (20.1% at December 31, 2002 and 20% at December 31, 2001) compared to 43.8% for MobiKom Austria (45.1% at December 31, 2002 and 42.7% at December 31, 2001), 28.5% for T-Mobile (30.3% at
December 31, 2002 and 33% at December 31, 2001), 8% for Telering (4.5% at December 31, 2002 and 4% at December 31, 2001) and 0.3% for 3 Austria. At December 31, 2003, the Austrian market had approximately 7.1 million wireless customers (6.6 million
users at December 31, 2002 and 6.7 million users at December 31, 2001),
i.e.,
a penetration rate of approximately 87.1% (82.1% at December 31, 2002 and 81.2% at December 31, 2001) (source: Mobile Communications).
ONE was awarded a 20-year UMTS license for
€
120 million on November 3, 2000. This license covers 2 x 5MHz spectrums. Five other licenses were awarded according to an auction procedure. The terms and conditions of
the license provide,
inter alia
, that ONE should be able to cover 25% of the population before the end of 2003. ONE may have to pay a fine if this level of coverage of the population is not met. This was not the case as ONE fulfilled its
coverage requirements prior to December 31, 2003.
Optimus (Portugal)
Orange provides wireless service in Portugal through its minority
shareholding in Optimus. Optimus, formed in 1997, was awarded its GSM900 and GSM1800 licenses in the same year and opened its network in 1998.
Orange owns 20.18% of Optimus’s share capital, and 10.09% of the voting rights. The remainder of the voting rights is held as follows: 52.34% by Sonae.com,
29.76% by Thorn Finance, 2.77% by Maxistar Communicaçoes Pessoais S.A. and 5.04% by IPE Tecnologias de Informacào.
At December 31, 2003, Optimus’s network, based on its own estimates, covered approximately 99% of the Portuguese population as in 2002 and 2001. At this date,
Optimus had a market share of approximately 2.0 million registered customers (1.9 million registered customers at December 31, 2002 and 1.9 million registered customers at December 31, 2001)(source: Mobile Communications).
The market penetration rate in Portugal was 97.5% at December 31, 2003 (90.5% at
December 31, 2002 and 84.8% at December 31, 2001), with approximately 9.8 million wireless customers in Portugal (9.0 million customers at December 31, 2002 and 8.4 million customers at December 31,2001) (source: Mobile Communications). Optimus
was the third operator to enter the Portuguese market and is the third in terms of market share with a market share of 20.5% at December 31, 2003 (20.5% at December 31, 2002 and 22.4% at December 31, 2001) compared to 30.3% for Vodafone (formerly
Telecel) (32.4% at December 31, 2002 and 32.7% at December 31, 2001) and 49.2% for TMN (47.1% at December 31, 2002 and 44.9% at December 31, 2001) (source: Mobile Communications).
When the Portuguese government awarded four UMTS licenses in December 2000, Optimus was awarded a license for
€
100 million. The license is valid for a period of 15 years. The terms of the license provide,
inter alia
, that Optimus should
be able to cover 20% of the population by July 1, 2005,
i.e.
, one year after the commercial launch of services planned for July 1, 2004. If Optimus fails to fulfil the obligations set out in its license, it may be suspended or revoked.
Wind (Italy)
During the first six months of 2003, Orange provided wireless, fixed line and Internet
services in Italy through its minority shareholding in Wind. Orange sold its 26.6% shareholding in Wind’s capital to Enel, the Italian national grid. Enel already held the remaining 73.4% shareholding. See “– 4.4 Divestitures”.
Wireless Operations Outside Europe (including both majority and minority interests)
These interests include MobilNil (Egypt), and other interests
(excluding Egypt) described below in the alphabetical order of the countries or territories concerned.
Egypt:
Orange holds 71.25% of MobilNil (MobiNil Telecommunication S.A.E.), which holds 51% of Egyptian Company for Mobile Services (“ECMS”), an
operational company that operates under the MobiNil brand name. Orange holds 71.25% of MobiNil and the Egyptian group Orascom Télécom holds 28.75%. Orascom Télécom also directly holds 16.6% of ECMS. The remaining 32.4% of
ECMS’s capital is listed on the Cairo and Alexandra Stock Exchange.
ECMS was established in 1998 and it was awarded its GSM900 license the same year. At December 31, 2003, based on its own estimates, ECMS’s network covered approximately 91% of Egypt’s population (approximately 91% at December 31,
2002 and approximately 86% at December 31, 2001) and ECMS estimates that it had a market share of approximately 52.4% (approximately 52.4% at December 31, 2002 and 54.5% at December 31, 2001) with approximately 3 million active customers at December
31, 2003 (2.3 million active customers at December 31, 2002 and 1.9 million at December 31, 2001),
i.e.
, 2.1 million active customers for Orange’s share (1.6 million active customers at December 31, 2002 and 1.4 million at December 31,
2001). ECMS believes that it is the leader in this market.
Botswana:
Orange has a 51% shareholding in Orange Botswana, which launched its GSM900 network in June 1998 under the name of Vista Cellular. Orange Botswana has been operating under the “Orange” brand since March 2003.
Orange Botswana had approximately 163,000 active customers at December 31, 2003 (approximately 137,000 active customers at December 31, 2002 and approximately 100,000 at December 31, 2001) and held the second place in terms of market share among the
two operators present in this market (second in 2002 and in 2001).
Cameroon:
Orange has a 70% shareholding of Orange Cameroun (France Telecom owns the remaining 30%) which launched its GSM900 service in January 2000 under the Mobilis brand. Orange Cameroun has operated under the “Orange”
brand since June 2002. Orange Cameroun had approximately 539,000 active customers at December 31, 2003 (approximately 320,000 at December 31, 2002 and approximately 210,000 at December 31, 2001). Orange Cameroun held first place in terms of market
share among the two operators present in this market (first in 2002 and in 2001).
Ivory Coast:
Orange has a 85% shareholding in Orange Côte d’Ivoire, which launched its GSM900 network in 1996 under the Ivoiris brand. Orange Côte d’Ivoire has operated under an GSM900/1800 license
since January 2002. Orange Côte d’Ivoire has operated in the Ivory Coast under the “Orange” brand since May 2002. At December 31, 2003, Orange Côte d’Ivoire estimated that it had approximately 586,000 active customers
(approximately 497,000 active customers at December 31, 2002 and approximately 340,000 at December 31, 2001). The current events in the Ivory Coast constitute a risk for Orange’s operations there.
India (Mumbai):
Orange has a 26% shareholding in BPL Mobile Communications,
which launched its mobile network at the end of 1995 to cover the metropolitan area of Mumbai (Bombay). BPL Cellular Holdings, which has interests in wireless, Internet and broadband services in India, owns the remainder of the capital. BPL held
second place in terms of market share at December 31, 2003, among the three operators present in this market (second in 2002 and in 2001) (source: Cellular Operators Association of India). BPL Mobile estimated the number of registered customers at
December 31, 2003 at 855,000 (approximately 574,000 registered customers at December 31, 2002 and approximately 380,000 at December 31, 2001).
Madagascar:
Orange has a 51% shareholding in Telsea, which holds 65.9% of Orange Madagascar (formerly Société Malgache de Mobiles). Telsea
launched its GSM 900 network in 1998 under the Antaris brand. Orange Madagascar has operated under the “Orange” brand since June 2003. Orange Madagascar estimated the number of its active customers at December 31, 2003 at 144,000
(approximately 99,000 active customers at December 31, 2002 and approximately 100,000 at December 31, 2001). Orange Madagascar held first place in terms of market share among the three operators present in this market (first in 2002 and in 2001)
(source: EMC World Cellular Database for market shares).
Dominican
Republic:
Orange has a 86% shareholding in Orange Dominicana, which launched its GSM900 network in 2000 under the “Orange” brand. At December 31, 2003, Orange Dominicana estimated the number of its active customers at 562,000
(approximately 433,000 active customers at December 31, 2002 and approximately 280,000 at December 31, 2001) and that it held second place in terms of market share at
December 31, 2003 among the six operators present in this market (third at December 31, 2002 and fourth at December 31, 2001).
Thailand:
Orange has approximately a 49% shareholding in Bangkok Inter Teletech Company Limited (BITCO) in Thailand, which owns 99.86% of TA Orange Co. Ltd.,
a company that has a concession to operate a GSM1800 network. The GSM1800 network was launched completely under the Orange brand of TA Orange in Bangkok in March 2002. At December 2003, the network had approximately 1.8 million active customers
(approximately 1.3 million active customers at December 31, 2002). On the same date, TA Orange ranked third in terms of market share, among the 5 operators present in the market (source: EMC World Cellular Database). TA Orange continues to develop
its network in Thailand and covers 76% of the population at December 31, 2003 (70% at December 31, 2002) (source: TA Orange). In order to encourage development, Orange entered into agreements with the goal of supporting the development of BITCO/TA
Orange according to the conditions described in Notes 11 and 28 of the Notes to the Consolidated Financial Statements. Furthermore, the book value of the consolidated BITCO securities was amortized and set at zero at December 31, 2003. See Notes 11
and 28 of the Notes to the Consolidated Financial Statements and “Item 5. Operating and Financial Review and Prospects – 5.7.1 Subsequent Events”.
Licensing Agreements
The “Orange” brand was first launched in the United Kingdom in 1994 and has since been licensed in Europe to Orange companies in France, Denmark, The
Netherlands, Romania, Slovakia, Switzerland and outside Europe in Botswana, Cameroon, Ivory Coast, Madagascar and the Dominican Republic for a period of 10 years and in Thailand for a period of 20 years. The trademark license was granted to Orange
France on December 17, 2001 and it expires on December 17, 2011. Under these brand license agreements, Orange assists its licensees in promoting the brand in local markets by giving them access to material and support services. The license
agreements provide that Orange UK shall retain its title to the intellectual property rights attached to the brand in consideration of a percentage of the licensees’ operating revenues. The licensee in Thailand paid an initial one time fee and
shall pay an additional amount over a 10-year period. The other licensees must pay a percentage of their revenues.
Moreover, prior to the acquisition of Orange plc by France Telecom, the Orange brand was licensed to several companies of the Hutchison Group, (the previous
majority shareholder of Orange plc), for its operations in Australia, Hong Kong and India, as well as to Partner Communications for its operations in Israel. These licenses are exclusive and do not generate any revenues. Apart from the agreement
concerning Australia, which expires in 2013, the licenses were granted for an indefinite term. However, all these agreements may be terminated on certain terms, such as misuse of the brand or change of control.
Roaming
Roaming allows wireless customers to make and receive calls while in the coverage area of a network of which they are not a customer
and to be billed for service by their home network. Wireless customers who are roaming can expect to enjoy substantially the same services, features and security while travelling as they do with their home network. Orange’s roaming service was
entirely created using the GSM technical standard and policies and procedures established by the GSM Association.
Orange’s roaming policy is set in accordance with local market conditions by the individual Orange companies. The roaming rates reflect the wholesale charges
between operators and the pricing policy applied by each operator for its customers.
For example, Orange UK customers may use roaming service in more than 130 countries as a result of the roaming agreements that Orange UK has signed with approximately 300 other network operators and Orange France contract
customers may use roaming service in more than 160 countries as a result of roaming agreements that Orange France has signed with approximately 340 other network operators (source: Orange).
Furthermore, Orange rejoined the alliance of TIM (Telecom, Italia Mobile), Telefonica
Moviles and T.Mobile with the goal of providing to all of its customers a seamless offer for voice and multimedia services and to allow an Orange customer access to its services in countries where Orange is not present.
4.3.2.2 W
ANADOO
Wanadoo, a
subsidiary of France Telecom, which owns a 70.6% shareholding of its capital (71.1% taking into account the cancellation of treasury shares), is a major player on the European Internet and directories market with, at December 31, 2003, 9.153 million
Internet access customers (8.535 million at December 31, 2002 and 6.067 million at December 31, 2001) (source: Wanadoo), 17.159 million single visitors in December 2003 (14.352 million in December 2002) (source: Nielsen – panel Home) and
641,000 directories advertisers (638,000 at December 31, 2002 and 650,000 at December 31, 2001) (source: Wanadoo). See “Item 5. Operating and Financial Review and Prospects – 5.7.1 Subsequent Events”.
At December 31, 2003, Wanadoo was the leader in the Internet access service market in
France and in the United Kingdom and second 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 subscribers to
cable and ADSL (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 had revenues of
€
2.617 billion in 2003 (
€
2.075 billion in 2002 and
€
1.563 billion in 2001)
and had approximately 6,670 employees at December 31, 2003 (approximately 7,000 at December 31, 2002 and approximately 4,900 at December 31, 2001).
Internet Access, Services and Content and E-commerce
Internet Access
Through its marketing innovation and its knowledge of the market, Wanadoo differentiates its offers according to the profiles of its customers, its prospects and its technological developments (switched telephonic network up to
64Kbit/s, ADSL from 128 to 1,024 Kbit/s and cable), enabling everyone to benefit from the best technology. The primary objective of Wanadoo is to encourage broadband upgrades for its customers via the success of its ADSL offers.
The offers available to Wanadoo customers include:
n
a complete range of “inclusive” packages from 5 to 100 hours in France;
n
“Free”, “Hometime” and “Anytime” lines for international services;
n
“Light”, “Standard” and “Intensive” broadband offers in slightly different models according to the country and complemented by a large range of services and
customer commitments.
In all countries in which it
operates, Wanadoo distributes its access offer through multiple distribution channels that are remunerated according to the services:
n
in department stores, retailers and stores specialized in IT or telecommunications;
n
by distributing free installation of CD-Rom (for instance, in movie theaters) and direct marketing;
n
by pre-loading on personal computers or modems;
n
online, via banners that allow users to download the access software.
In France, this sales network, which includes more than 3,000 sales outlets, is complemented by the distribution network of approximately 620 points of sale. In the
United Kingdom, this sales network is comprised of approximately 4,350 sales outlets, including 1,300 for Lloyds Pharmacy, 250 for Orange, 200 for Littlewoods, and 1,100 for Dixons (whose distribution agreements expire respectively in February 2004
for the narrowband and in February 2005 for the broadband).
The table
below shows the breakdown of customers per type of offer (in thousands of subscribers):
Breakdown of customers per type of offer (in thousands of subscribers)
Country
Offers
December 2003
December 2002
December 2001
France
Low speed
2,704
2,881
2,586
Broadband
1,816
1,044
415
TOTAL France
4,520
3,925
3,001
United Kingdom
Low speed
2,422
2,525
2,224
Broadband
158
49
2
TOTAL United Kingdom
2,580
2,574
2,246
Spain
Low speed
1,310
1,364
404
Broadband
190
99
9
TOTAL Spain
1,500
1,463
413
The Netherlands
Low speed
255
288
197
Broadband
288
157
103
TOTAL The Netherlands
543
445
300
Total
(1)
Low speed
6,700
7,161
5,522
Broadband
2,453
1,374
545
TOTAL
9,153
8,535
6,067
Source: Wanadoo
(1)
Including: 9 thousand at December 31, 2003, 128 thousand at December 31, 2002, and 109 thousand at December 31, 2001 for Morocco and Wanadoo Belgique (until December 2002).
Wanadoo is the leader of the Internet in France through its two general portals, “
wanadoo.fr
” and “
voila.fr
”, and specialized
sites with more than 7.975 million single visitors in France in December 2003 compared to 6.350 million in December 2002 and 4.425 million in December 2001 (source: Nielsen – panel Home). With its portals abroad, the Group totaled more
than 17.159 million single visitors in December 2003 compared to 14.352 million in December 2002 (source: Nielsen – panel Home).
Creating value for the content and services offers is based on developing this audience by two main sources of income: advertising with an Internet advertising
sales division and the establishment of paying services.
Online
advertising
Wanadoo has an advertising sales division for each of
its portals and offers its customers a complete range of advertising services. It has been able to take full advantage of the recovery of the online advertising market over the past year, with an annual growth of 50% in 2003 compared to 2002. For
pan-European companies, Wanadoo also relies on an European partnership of portals, which include “
Web.de
” in Germany and the “Libero” portal (Wind) in Italy which together have approximately a total of thirty million
single visitors (source: Nielsen). This network provides online advertising and direct marketing (e-mailing campaign).
Fee based services
The fee based services mainly include three types of services:
n
services related to access and browsing on the Internet (anti-virus PC, parental control, firewall, priority hotline);
n
services related to e-mails and more generally to communication tools (anti-virus mail, anti-spam, video messages, audio chat, SMS alerts);
n
editorial content and practical services (horoscopes, IQ tests, meetings, downloading of logos and telephone chimes for mobile telephones, video on demand, TV channels, online music, online
games).
E-Merchant business
Wanadoo’s e-Merchant (or e-business) operations mainly consist of two sites:
n
“
Alapage.com
”, which markets cultural goods (books, CDs, DVDs and Cd-Roms) on the Internet;
n
“
Marcopoly.com
”, which markets capital goods (computers, hi-fi, audiovisual and household appliances) on the Internet.
Directories
The Directories group together all operations related to the publication of paper and online directories, the distribution thereof,
sale of advertising space, selling of marketing data bases and creation of Web sites for advertisers.
The operations include the following services:
n
Pages Jaunes (Yellow Pages) provides access to professional subscribers (in its printed version, Internet version – “
pagesjaunes.fr
”, Minitel version – 3611. It is
also available on WAP and WAP GPRS color);
n
The Directory – which contains non-business subscribers listed by name and location (former Pages Blanches in printed and Minitel versions);
n
“QuiDonc” (reverse phone book service on the WAP, WAP GPRS, and on the pay services of the Group’s Internet portals: “
wanadoo.fr
” and
“
voilà.fr
” and also accessible from “
pagesjaunes.fr
”);
n
“Kompass” products (worldwide database of company information accessible via the Internet, Intranet, CD-Rom, printed version and Minitel;
n
PagesPro (business directory in printed form or via the Internet or on CD-Rom;
n
Creation of Web sites;
n
Wanadoo Data direct marketing, marketing of domestic and business data and database hosting services, computerized processing of addresses, email, data enhancement and analysis of customer
data;
n
International operations (in particular QDQ media in Spain).
The directories are distributed through a large number of media that includes paper directories, the Internet, wireless telephony, Wap, GPRS, Wap or color GPRS,
Minitel, CD-Rom, voice servers and interactive television.
Wanadoo estimates that the directories provide professionals with exceptional visibility and proximity to
customers. In France, its local sales force of approximately 1,490 commercial advisors, which is present throughout France with 19 agencies, contacted approximately one million advertisers in 2003. Approximately 553,000 advertisers bought the
advertising spaces of the 2003 editions (paper directories, Internet and Minitel) (source: Wanadoo).
The table below shows the number of advertising customers of Pages Jaunes in France in 2003, 2002 and 2001:
Service
Number of advertising customer
2003
2002
2001
Paper Directory and Pages Jaunes
522,000
522,000
511,000
Internet Pages Jaunes
264,000
230,600
202,000
Minitel Pages Jaunes
365,800
358,000
352,000
Source: Wanadoo
Note: one advertiser could be a customer of one, two or all three of these services.
4.3.2.3 F
IXED
LINE
,
DISTRIBUTION
,
NETWORKS
,
LARGE
CUSTOMERS
AND
OPERATORS
This segment mainly relates to the operations carried out chiefly in France, of the
operational divisions responsible for fixed line networks and services in France:
n
Corporate Solutions (excluding Equant): for services and distribution to large business services;
n
Fixed Line and Distribution in France: for services designed for the general public and other businesses and the distribution network in France;
n
Networks and Carriers: for the telecommunication networks, including services abroad and services to telecommunication operators.
At December 31, 2003, France Telecom had 33.9 million fixed lines in service in France
(34.1 million at December 31, 2002 and 34.2 million at December 31, 2001), including 5.0 million that are served by the digital network integrating Numéris services (4.9 million at December 31, 2002 and 4.7 million at December 31, 2001).
At December 31, 2003, 3.1 million customers had access to ADSL (1.4
million at December 31, 2002 and 0.4 million at December 31, 2001). At the same date, 8.8 million “consumer” customers, or a proportion of 34.9%, benefited from pre-paid offers (6.7 million at December 31, 2002 and 4.9 million at
December 31, 2001).
The Fixed Line, Distribution, Networks, Large
Customers and Operators segment earned revenues of
€
21.761 billion in 2003 (
€
23.064 billion in 2002 and
€
24.054 billion in 2001),
before intra-group eliminations.
Operations of the Fixed Line,
Distribution, Networks, Large Customers and Operators segment mainly include:
n
fixed line telephony services offered both to the general public and to businesses (small- and medium-sized businesses and key companies);
n
other services for the general public (payphone and card services, cable television);
n
other services to businesses (data transfer services, network services and radio broadcasting services);
n
services to operators; and
n
sales and distribution operations.
Fixed Line Telephony
Fixed line telephony
services include, on the one hand, basic subscription services and telephone communications services, and on the other hand, online services, broadband access to the Internet and television access.
Telephone Communication and Subscription Offers and Rates
France Telecom’s standard fixed line services are subscriptions, local and long
distance telephone communications in France and international calls. France Telecom also offers its fixed line subscribers a broad range of value added services.
France Telecom rates for fixed line telephony are subject to special regulations. See “– 4.12.2 French Regulations –
Rate Policy for Fixed Line Telephony”.
In early 1997, France
Telecom introduced a price scale rebalancing which is still in progress. This readjustment resulted in an increase in the monthly subscription rate, a reduction in the cost of calls and, since the end of 2000, the creation of flat rate call plans.
Customers are connected to the telephone network via the telephone line, for which customers are charged fixed access costs upon the installation of the line and a
monthly subscription. France Telecom proposes a range of subscriptions designed to satisfy the various needs of residential, professional and business customers. The differences mainly concern service commitment levels (warranty related to the time
it takes to restore the service) and the availability of services related to the line (number identification and possibility of publication in professional directories).
France Telecom adjusted its subscription rate, which increased on July 20, 2002 from
€
12.55 (including tax) to
€
13 for consumers and from
€
12.65 (excluding tax) to
€
13.10 for business contracts. The impact on revenues for 2003 was
€
108 million.
On August 6, 2003, pursuant to an EC community directive, the ex-directory service
became free of charge, with actual application beginning August 6, 2003. This service was billed at
€
2.31 including tax per month.
The impact on revenues was
€
52 million in 2003; the impact over one full year was estimated at
€
130 million.
National and International Calls
Telephone
calls are billed either per unit or on a package basis. When telephone calls are billed per unit, the price includes a fixed cost, plus a price per minute calculated by the second. The fixed cost may be in the form of a time credit (a certain number
of seconds included in the fixed cost) or a connection cost, calculated by the second as from the first second. The part billed on a time basis is based on a variable price depending on the call destinations with the application of a normal rate and
a reduced rate depending on times.
The price scale for national calls
(local and long distance) has not changed since 2001.
For fixed line
calls to mobile telephones, France Telecom reduced its rates in 2003 as it had previously done in 2001 and 2002, in accordance with a three-year undertaking with regard to the ART. In 2001, the rate reductions concerned the rates of fixed line calls
to Orange and SFR mobile telephones, by 16% in February 2001 and to Bouygues mobile telephones, by 29% in May 2001, and for a few international call destinations in July for professionals. France Telecom reduced rates on April 30, 2002, by 12.8% for
residential and 7.9% for professionals to Orange and SFR mobile telephones; then by 10.3% for residential customers and 5.1% for professionals on October 8, 2002 for calls to Bouygues mobile telephones. In 2003, rates to Orange and SFR mobile
telephones were reduced by 9.1% on January 14 for residential customers and 8% on February 14 for professionals; rates to Bouygues mobile telephones were reduced by 7.7% on July 1 for residential customers and by 6.4% for professionals.
On October 10, 2003, France Telecom reorganized the price scale of international
calls by reducing the number of zones from 14 to 8, by establishing a pricing per second as from the first second for residentials and a single rate for professionals by eliminating off-peak times. Due to the zone readjustment that accompanies this
pricing plan, France Telecom has remained competitive in the market.
In
addition to the other call plans, France Telecom proposes Option Plus, which enables a customer for an additional
€
1.50 (including
tax) per month for residentials and
€
1.20 (excluding tax) per month and per line for professionals and small- and medium-sized
companies, to benefit from France Telecom’s most competitive rates to all its call destinations: metropolitan France, DOM-TOM (French overseas regions and territories), international and fixed line calls to mobile telephones.
For large businesses, France Telecom proposes price offers with discounts based on the
volume of local calls, national long distance and international calls to and within the limits of pre-defined geographic regions and for customers of private virtual network services, discounts based on internal traffic. Large businesses can also
benefit from discounts on calls made on their fixed line telephones to the mobile telephones of their employees using the Orange, SFR and Bouygues networks.
Package Plans
Since the end of 2000, France Telecom has launched monthly plans with numerous advantages for consumers: simplicity of a global offer, price and volume of usage known in advance, choice of a package within an open-ended range,
no time credit, calculation by the second and validity 24 hours a day and 7 days a week. In particular, France Telecom launched the “local hours” plan on local calls in 2002 and then the “France hours” plan on local and national
calls (excluding calls to mobile telephones) in July 2002.
These new
plans are continuing to develop. They strive to:
n
maintain or increase the income per customer;
n
absorb the seasonal variation in use and ensure a recurrent income;
n
stimulate the average consumption per customer and the increase in range.
At the same time, France Telecom launched a range of monthly local call plans for professionals, “Local Pro
Package” and for small- and medium-sized businesses a “SME Local Package” and a range of national monthly packages with “France Pro Package” and “France SME Package”. In October 2003, the range for professionals
and small- and medium-sized companies was enriched with a new type of package plan, covering calls from fixed lines to mobile telephones.
The ranges for both residential and professional customers evolved in 2003 through rate reductions, through the creation of bonuses to enable customers to benefit
from a call time supplement in their package, through introductory plans from 1 hour for residential customers and 2 hours for professional customers and through the extension of the range of packages up to 185 hours per month for professional
customers.
Value Added Services
For residential customers, France Telecom proposes value added services: e-mail, call
signal, automatic call back of the last number, call transfer, three party conversation, number identification and caller name identification. For companies, the value added services include: shortened numbers, toll-free numbers, shared cost
numbers, management of calls and telephone conferences, management of bills, directory enquiries and private virtual networks with shortened numbers and network management services. The rates for these services are adjusted in relation to the
customer’s needs within the various categories.
France Telecom is
continuing its policy of enriching its range of services to satisfy the practical needs of its customers:
n
launch in March 2002 of the new version of the voice messaging system Top Messages, with a stock of 6.7 million voice mail boxes at the end of 2003 (5.8 million at the end of 2002 and 3.2
million at the end of 2001);
n
launch in April 2002 of the name identification service in addition to the number identification services; both services accumulated more than 4.1 million subscribers at December 31, 2003
(3.6 million at December 31, 2002);
n
launch in January 2003 of the single price call, national limited offer;
n
launch in January 2003 of the general inauguration of 3 unlimited numbers;
n
launch in May 2003 of the written mini message transfer service (SMS from fixed telephone lines);
n
launch in October 2003 of the conservation of the same number in the event of a change of operator or geographic move;
n
launch in December 2003 of the express messaging service (personalized voice messages).
To respond to the expectations of small- and medium-sized businesses, France Telecom associates the following services with its various plans:
n
price reductions on calls to preselected numbers;
n
a combined Numéris/Internet subscription;
n
special billing for directory enquiry services and keeping the same number.
France Telecom also proposes a company telephony service based on a Virtual Private Network (“Atout RPV”) to key companies. This plan offers:
n
a price component, “
Atout RPV Tarif
”, which proposes discounts on traffic within the company based on call volumes;
n
a service component, “
Atout RPV Service
”, which delivers the main functionalities of private networking of the company’s sites throughout France.
France Telecom launched the “unified VPN” in
November 2003, a first offer of convergent fixed/wireless telephony, also based on a Virtual Private Network. This offer proposes a set of homogeneous and convergent company telephony services (private numbering plan, call filtering, referrals,
management and remote billing services, web administration), to fixed and mobile telephones, coupled with price offers on calls from fixed or mobile telephones. It is especially designed for small – and medium – sized companies or small
autonomous subsidiaries of major groups.
ISDN
France Telecom has been proposing its ISDN service to residential and professional
customers since 1987 under the Numéris brand name. Numéris provides voice, data and image transmission at much higher speeds than ordinary telephone lines, while using the same medium. Numéris customers pay a fixed cost on
commissioning that covers the costs of connection and a monthly subscription. The base rates of Numéris calls are the same as for standard calls.
Several offers are available. “Numéris Itoo” for residential customers and “Numéris
Duo” for small businesses that allows connection to analog (telephone, fax) and digital (micro-computer) terminals. Numéris basic access for small sites and Numéris primary access for bigger sites are adapted to the connection of
professionals and companies. Numéris has now reached a high penetration rate on the customer targets for which it is designed: the number of equivalent 64 Kbit/s channels amounted to 5.0 million at December 31, 2003 compared to 4.9 million at
the end of 2002 and 4.7 million at the end of 2001. Since December 2001, France Telecom has offered Numéris Grand Site to businesses, a broadband voice connection on fiber optic that allows access to a reinforced offer of services with graded
rates based on the number of accesses.
Online Services, Broadband Internet Access and
Access to Television
Minitel/Télétel
Télétel is used to connect companies and residential customers
throughout France via Minitel terminals and computers fitted with modems. Customers use their terminals to connect to the Télétel, which gives them direct access to a vast number of services designed for residential customers and
companies, such as the electronic directory, reservation times and services, banking services, e-mail, weather reports, games and classified advertisements. The standard Minitel terminals are lent on request at no additional charge to subscribers to
a fixed telephone line. France Telecom requests payment of a fixed monthly price for more terminals with advanced features.
Minitel is gradually losing ground to the Internet. For this reason, Télétel posted a decrease in traffic of approximately 23% in 2003 (22% in 2002
and 17% in 2001).
Audiotel
The Audiotel service consists of a number of calls to a kiosk service (no. 892, etc.)
of which a part of the revenues is paid back to the service provider company. This service slowed in 2003 due to the growth in competition. France Telecom traffic was practically stable (with growth of 0.4%) while growth was 5% in 2002 and 14% in
2001.
Broadband Internet Access
France Telecom markets broadband Internet access to customers (ADSL line) and
wholesale access to Internet access providers (including Wanadoo) under the name of IP ADSL.
The ADSL broadband Internet access was launched in November 1999. ADSL technology uses the copper wire telephone network and offers a bandwidth, depending on the configurations, from several hundred kilobits to several
megabits. It is therefore possible to have easy access to high volume content. France Telecom proposes special ADSL services to residential customers and companies, in addition to its range of ADSL services accessible to all Internet access
providers. At December 31, 2003, these services had been deployed to cover a portion of the territory representing approximately, according to France Telecom estimates, 79% of the national population (70% at December 31, 2002 and 64% at December 31,
2001). France Telecom believes, on the basis of a study published by Datanova in September 2003, that approximately 30% of households that use the Internet in France, had access to Internet through ADSL at the end of 2003.
Since the commercial launch of ADSL in 1999, the prices of France Telecom ADSL lines
(retail offer of 512 Kbit/s) have decreased by 38% (not taking into account the latest decrease occurring in January 2004). The most recent decreases were in October 2002 (16.7%) and at January 1, 2004 (25% on average). They were accompanied by a
substantial decrease in wholesale prices.
Television Access
To accompany and promote the development of broadband Internet in France, France
Telecom launched, with TPS, an experimental television-related offer on ADSL in the Lyon metropolitan area on December 18, 2003. An extension has been planned for the Paris area in the spring of 2004 (see “Item 5. Operating and Financial Review
and Prospects – 5.7.1 Subsequent Events”).
Other General Public Services
Payphone and Card Services
At December 31, 2003, France Telecom had a stock of more than 192,200 public
telephones (200,000 at December 31, 2002 and 214,000 at December 31, 2001), including 63,000 telephones in France installed on the public domain and subject to universal service obligations which impose 45,000 such telephones (see “–
4.12.2 French Regulations – Universal Service”). The public telephone prices are slightly higher than prices applicable to private telephones.
France Telecom proposes payment by bank card, phone card, prepaid cards and France Telecom cards in its payphones. The France Telecom card allows a user to make
calls from a private telephone, public telephone booths and mobile telephones and the amount thereof can be charged to his/her fixed line telephone bill. Lastly, France Telecom proposes “
Tickets de téléphone
”,
which are prepaid telephone cards, sold under different names, which allow users to make prepaid calls from public or private telephones in France or in several other
countries by dialing a prefix and a secret code. The range of prepaid cards was drastically reorganized in June 2003, with the reorganization of international price scales and the launch of the France ticket.
Cable Television
France Telecom is an important cable television network equipment operator in France and provides cable television services to French
households. France Telecom operates its own cable television network via France Telecom Câble.
France Telecom also provides dedicated cable television services to NC NumériCable, a service provider owned by Canal+ (see “Item 5. Operating and
Financial Review and Prospects – 5.7.1 Subsequent Events”).
Moreover, France Telecom also owns a minority shareholding in Noos, a cable television service provider which owns its own cable television network, but which also uses a part of the France Telecom network.
Households served and the number of subscribers, by cable operator, according to
the most recent publication of the French Association of Multiservices Network Operators (AFORM), dated September 2003, are as follows:
Commercial plugs
(in millions)
December 31, 2001
December 31, 2002
December 31, 2003
Note for 2003
France Telecom Câble
1.5
1.5
1.5
Definitive
Noos
2.8
2.9
3.0
September 30
NC Numéricâble
2.3
2.3
2.3
September 30
UPC France
1.3
1.4
1.4
September 30
Other
0.6
0.7
0.7
September 30
Total
8.4
8.8
8.8
Subscribers
(in millions)
December 31, 2001
December 31, 2002
December 31, 2003
Note for 2003
France Telecom Câble
0.8
0.8
0.9
Definitive
Noos
1.0
1.1
1.1
September 30
NC Numéricâble
0.7
0.8
0.8
September 30
UPC France
0.5
0.5
0.6
September 30
Other
0.3
0.4
0.4
September 30
Total
3.3
3.6
3.7
Other Services to Companies
Services to companies mainly consist of company network services and radio
broadcasting services. At the end of 2003, more than 245,000 company sites had access to high speed Internet/Intranet through different France Telecom offers (compared to 192,000 at the end of 2002 and 116,000 at the end of 2001).
Company Networks
The network services are composed of leased lines (especially Transfix services), fiber optic services, DSL company services and data
network services.
Leased Lines
France Telecom leases to its professional and business customers “leased
lines” that are either digital (digital Transfix lines) or analog. At December 31, 2003, France Telecom leased approximately 292,000 lines in France (327,000 at December 31, 2002 and 345,000 at December 31, 2001), of which 73% were digital
Transfix lines (72% at December 31, 2002 and 70% at December 31, 2001) Although the total number of lines leased by France Telecom has decreased since 1997, its total transmission capacity has increased considerably. This trend results to a large
extent from the decrease in the number of analog lines and their gradual replacement by high capacity digital lines or by other switched products such as Numéris, X 25, Frame Relay and IP. The total transmission capacity of digital lines
leased by France Telecom increased by 28% in 2003 (39% in 2002 and 70% in 2001).
Subscribers to France Telecom’s leased line services pay initial connection costs in relation to the type of line rented, then a monthly subscription depending on the line (analog or digital), its capacity, its length and the term of
the rental. The costs of
France Telecom leased lines have regularly decreased each year since 1998. This reduction mainly concerns digital and long distance services.
Moreover, France Telecom offers in its interconnection catalogue for 2003
“partial terminal connections” for speeds between 64 Kbit/s and 2 Mbit/s. This service allows third party operators to terminate their leased lines up to the sites of their customers throughout France. This service lowers fees between 40%
to 50%, based on the speed and distance of the lines, compared to the base rates of the Transfix services.
Fiber Optic Services
France Telecom has
been using fiber optic cable at the heart of its national network for several years. It is also the medium generally used to connect the sites of companies that make a strong contribution to value production and that are important nerve centers, as
for instance, the registered office, the administrative center, the research and development center, the regional office and the main production sites.
At December 31, 2003, approximately 10,000 establishments had access to fiber optic cables which provide them with adaptable, evolving flows of traffic at
increasingly higher speeds (approximately 7,000 at December 31, 2002 and approximately 5,500 at December 31, 2001).
Offers of transport on fiber optic cable are available throughout France, whether it is a matter of interconnecting the local networks of small and medium sized
companies, backing up the data bases of large companies or supporting collaborative engineering applications between subcontractors and their customers. They propose speeds of up to several Gbit/s in standard mode.
Short distance interconnection needs are covered in all towns with a population of
20,000. Performance, rapidity, reliability, flexibility and durability are just some of the qualities of these networks (SMHD, MultiLAN, InterLAN, Intracity) that endeavor to find a solution to geographic distance. Teams and sites can thus
immediately share expertise and resources everywhere.
The bandwidth
that France Telecom offers telecommunications operators and suppliers of Internet services to build their networks or to support their services now has in the tens of Gbit/s.
France Telecom is continuing to develop the range of very high speed services of the new generation and deploys “Giga
Ethernet” technology that allows a connection debit of 10 Gbit/s.
DSL Company
Services, Satellites and WiFi Services
DSL company services allow
the various sites of a company such as regional agencies, maintenance sites and commercial branches, to be interconnected through ADSL. At the end of 2003, approximately 45% of the company sites in France were connected to the Internet by ADSL.
France Telecom is launching Internet access service by satellite for
companies located in areas outside the ADSL deployment plan. This solution provides permanent broadband Internet connection to the Internet. In this way, France Telecom offers companies broadband coverage for the whole of France (DSL and
satellites).
Moreover, in co-operation with local communities, France
Telecom has conducted several satellite + WiFi experiments to provide broadband Internet coverage to districts located in rural areas.
These experiments should lead in 2004 to solutions to complete DSL coverage, which will be available throughout the whole of France.
Data Networks
Data transmission operations mainly consist of data communication services provided to customers in France via the Transpac network
and data communication services outside France and sold in France by Transpac to multinational companies based in France via an exclusive distribution agreement with Equant. The convergence of Equant/Transpac networks and services to offer customers
continuity of service worldwide became operational in October 2002.
The
Transpac network serves as a platform for a vast range of services to companies, including VPN IP, Internet access services, e-mail, hosting and security.
France Telecom (Transpac) offers its customers three types of services: (i) data transmission services to build company Intranets or Extranets or online services
for Internet access providers, with customer services such as after sale service and the production of statistics. Various types of access are available: leased line (“transfix”), ADSL, ATM, Frame Relay, X25, PSTN/ISDN/GSM/GPRS. Various
protocols are proposed and carried end-to-end; these are mainly IP and Frame Relay; (ii) Internet access services that include access to the backbone network dedicated to companies, which is inter-connected with the Internet via the heart of the
France Telecom long distance network; and (iii) services with high added value that include e-mail, security, collaborative working tools and site hosting.
Radio Broadcasting Services
France Telecom offers radio broadcasting services through GlobeCast. GlobeCast is established mainly in northern Europe, the United
States and Singapore. GlobeCast operates transmission services by satellite for professional television broadcasters, company multimedia networks and Internet access providers. It has sixteen offices and teleports through which it offers a range of
solutions for the transportation, distribution and broadcasting by satellite of, in particular, television and radio programs, Internet content and sports events or news.
Services to Operators
Relationships with International Operators
Payment agreements signed by operators for international communications provide that France Telecom will be paid a fee by operators that use its network to carry
their international calls to France and that it will pay a fee to use the networks of other operators for calls made from France. The billing currency used is the SDR (Special Drawing Right), a basket of currencies in which the U.S. dollar and the
euro have significant weight. See “Item 3. Key Information – 3.3 Risk Factors”. Payment is made in the currency chosen by the creditor operator.
Until 2000, these rates tended to decrease significantly. This trend has gradually slowed since then, in particular, for France, the other members of the
European Union and the United States.
Interconnection Services
French telecommunication regulations require that France Telecom provide the
interconnection of its switched public network with other operators for calls leaving the France Telecom network or incoming from the networks of competing operators.
This business area is regulated by the ART (see “– 4.12.2 French Regulations – Interconnection”). Volumes
exchanged between France Telecom and the other operators are valued by rates approved by this authority.
In 2003, for voice services, prices dropped by 1% for traffic exchanged at the local switch closest to the end customer (compared to a 6% drop in 2002 and a 7.55%
drop in 2001) and a 4% drop for traffic exchanged at the level of regional switches (16% in 2002 and 7.65% in 2001).
For the same services, the price for traffic exchanged at the local switch is stable in 2004 and the price for traffic exchanged at the level of regional switches
dropped by 2%. Regarding the rate for volumes exchanged at the level of double transit, as from 2004, it will no longer be the subject of an ART approval procedure.
Sales and Distribution
Sales and customer services operations are conducted by three divisions, the Large Business Solutions division (for large companies), Networks and Carriers (for
operator customers) and the Fixed Line and Distribution division (for all other customers).
The Fixed Line and Distribution division distributes consumer goods, in particular, via its approximately 620 points of sale located throughout France. This division is also responsible for payphones and card user services. 89%
of these agencies are located in town centers and shopping centers. The Fixed Line and Distribution division also services corporate customers for voice and data transmission operations, through a company agencies network. The Corporate Solutions
division is responsible for very large national and international companies, in particular via Transpac in France and Equant in the rest of the world. The Networks and Operators division distributes France Telecom products and services to third
operators and suppliers of telecommunication services.
4.3.2.4 E
QUANT
The Equant
segment, composed of Equant and its subsidiaries, earned revenues in 2003 of
€
2.612 billion, before intra-group eliminations (
€
3.156 billion in 2002, not comparable in 2001).
General Presentation and History
Equant, one of the leading data transmission companies in the world (source: Gartner), was formed and operates under the laws of The Netherlands. It has its
registered office in Amsterdam. Given its international structure, Equant has four main places of business: Paris (France), Herndon (United States), Slough (United Kingdom) and Singapore (Singapore).
France Telecom signed a series of agreements with Equant in November 2000, which
provided that France Telecom would contribute Global One Communications World Holding B.V. and Global One Communications Holding B.V. to Equant in
exchange for Equant shares. Furthermore, France Telecom agreed with SITA to exchange the totality of the interest that SITA holds in the capital of Equant for France
Telcom shares. For a more detailed discussion of these agreements, see Note 3 of the Notes to the Consolidated Financial Statements. Under these agreements, France Telecom became the majority shareholder of Equant on July 1, 2001, with a 54.2%
shareholding and the right to appoint five out of the nine members of Equant’s supervisory board and one out of the three members of the management board as long as France Telecom owns at least 34% of Equant’s shares. France Telecom was
still a majority shareholder at December 31, 2003. In this respect, Equant (Equant and its subsidiaries) has been fully consolidated in France Telecom’s financial statements since July 1, 2001.
On the closing date of these transactions, France Telecom S.A. issued a contingent
value right per ordinary Equant share for Equant shareholders other than SITA Foundation and for some holders of share options and of
Restricted Share Awards
, contingent value rights which Equant had awarded prior to November 19, 2000. Each
contingent value right held at June 24, 2004 will entitle its holder to receive a cash payment for the difference between the average price of the Equant share over a defined period and
€
60, within the limit of
€
15 per contingent value
right,
i.e.
, a maximum risk of
€
2.077 million, for which a full provision was recorded in its accounts at December 31, 2001.
In accordance with the contribution agreement, France Telecom
transferred Global One’s operations related to data transmission services for companies to Equant, but retained Global One’s services to operators and most of its operations related to call cards.
France Telecom may not hold more than 70% of Equant shares prior to June 29, 2006,
unless France Telecom acquires these shares by virtue of a (i) tender offer or (ii) in accordance with a strategic merger operation pursuant to market conditions. France Telecom may not transfer or distribute more than 25% of its shareholding in
Equant prior to June 29, 2005, unless it has been approved by independent directors or other shareholders, unless the transfer is the result of a strategic merger operation involving Equant and another company in which France Telecom holds at least
34% of the voting rights.
Upon completion of this transaction, Equant
terminated the joint venture agreement that it had with SITA, a co-operative established and operating under Belgian law, which groups together airlines worldwide in order to offer it telecommunication services, and replaced it with a series of
agreements. A Strategic Relationship Umbrella Agreement which defines general principles governing relations between Equant and SITA was thus entered into for a period of 10 years. This agreement provides for an exclusivity period of five years
during which, in particular, SITA cannot buy network services from Equant’s competitors, without the latter’s approval and Equant cannot sell network services to airline companies. The agreement may be terminated only in the event of a
serious breach by the parties of their obligations. It included a minimum income clause for Equant, which is valid until June 30, 2003. After this date, the wholesale price will be determined by reference to the market price. A Network Services
Agreement, which defines the terms and conditions in which Equant will supply network services to SITA, was signed for a period of 10 years. In accordance with the agreement, which is currently applicable between Equant and SITA, Equant controls and
manages the network. Equant provides SITA with its range of products and services which SITA then provides globally to air carriers.
On June 26, 2001, Equant signed, via Transpac, France Telecom’s subsidiary, a series of agreements with France Telecom, which governs the relations of Equant
and France Telecom in relation to terms in which Equant shall sell and supply services in France via Transpac. In 2002, Equant signed a series of final agreements with France Telecom and its subsidiaries for the supply of switched voice services.
Furthermore, France Telecom undertook to pay the costs of restructuring Equant’s voice network.
Due to the numerous transactions that resulted from Equant’s merger with Global One, Equant launched an in-house reorganization in 2001. Equant now proposes
products and services via a centralized organization. Equant reports on its earnings according to French accounting standards and no longer according to American standards. Equant has now completed most of the legal integration in each country of
its former subsidiaries and former subsidiaries of Global One, of which integration had been planned.
The operational merger between Equant and Global One produces important synergies related to the streamlining of networks and the support and sales functions.
Activities
Through its offer of services, Equant is considered to be one of the leaders in the area of international services and data for
multinational companies (source: Gartner). By offering network services and integration services, Equant assists its customers in using data networks, such that they are able to manage their operations more efficiently, reduce their costs and use
data transmission to provide new services. At December 31, 2003, Equant considered that it offered outstanding geographic coverage using a seamless data network, which connected main business centers in approximately 220 countries and territories
(as at December 31, 2002 and at December 31, 2001), with local support in approximately 165 countries (approximately 165 countries
at December 31, 2002 and 145 countries at December 31, 2001) (source: Equant). Via the network, users can have access to their company’s data and applications and
to those available via the Internet anywhere in the world. This data may be accessed either directly or by remote access using laptop computers or using other network access interfaces. Equant is increasingly endeavoring to help its customers
develop solutions that use IP technologies, either by providing new services, or by proposing services currently available on the Intranet, Extranet or Internet.
Equant offers a complete portfolio of network management services based on end-to-end IP solutions and a large range of traditional
data transmission services, value added services for voice and mobiles and innovative outsourcing and integration services. Equant also offers a range of management tools with which its customers can check the performance of the network and its
availability and correct its defects. Among its main products are IP-VPN MPLS, used by approximately 1,000 companies at December 31, 2003 (approximately 650 at December 31, 2002) and which is fully operational in 142 countries (as in 2002 and in
2001), the Frame Relay distributed in 186 countries (185 countries at December 31, 2002 and 176 countries at December 31, 2001) and ATM distributed in 47 countries (55 countries at December 31, 2002 and 55 countries at December 31, 2001).
4.3.2.5 TP
GROUP
General Presentation
In October 2000 in Poland, a consortium managed by France Telecom
acquired a 35% shareholding in Telekomunikacja Polska S.A. ("TP S.A."), the Polish state-owned telecommunications operator, for an investment of approximately
€
4.5 billion, including
€
3.4 billion for France Telecom. France Telecom acquired 25% of TP S.A. and
Kulczyk Holding, its Polish partner in the consortium, acquired 10% of the capital of TP S.A. Following the sale by the Polish government in 2000 and 2001 of shares of the Polish operator TP S.A., the consortium set up by France Telecom and Kulczyk
Holding owned at December 31, 2003, 47.5% of TP S.A., of which France Telecom owned 33.9%.
Following the shareholders' meeting of January 26, 2002, the consortium led by France Telecom and Kulczyk Holding holds a majority of the members of the supervisory board of TP S.A. TP Group (TP S.A. and its subsidiaries), as a
consequence, has been fully consolidated in France Telecom's financial statements starting April 1, 2002.
For more information on the commitments of France Telecom within the framework of its partnership with Kulczyk Holding, see Notes 22 and 28 of the Notes to the
Consolidated Financial Statements.
The Telekomunikacja Polska Group
("TP Group") is the leading telecommunications group in central Europe in terms of revenues and number of customers (source: URTiP, HIF and CTU, Polish, Hungarian and Czech regulators, respectively). TP Group is the leading provider of
telecommunications services in Poland (source: URTiP) and offers a large range of services that include fixed line telephony, leased lines, radio communication and data transmission, including Internet services. TP Group is also a majority
shareholder of PTK Centertel, the capital of which France Telecom holds the remainder,
i.e.
, 34%.
At December 31, 2003, 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).
TP Group had approximately 43,400 employees (full-time employees) in 2003, compared to approximately 45,200 in 2002 (figures non-inclusive of the consolidation with France Telecom at December 31, 2001). The TP Group segment
earned revenues of
€
4.164 billion in 2003, before intra-group eliminations (
€
3.471 billion for the first nine months of 2002; figures non-inclusive of the consolidation in 2001).
Activities
Fixed Line Telephony Services – TP S.A.
Customers use these services to make national and international calls or calls to mobiles. When there are digital lines, TP Group offers the following services:
voice messaging, call transfer, call waiting, number identification in the analog network, fast dialing (for shorter numbers), telephone conference, general limitation of calls and limitation of calls made when a monthly amount is reached.
In addition, TP Group offers its customers ISDN services. These
services include, in particular, the possibility of having two telephone lines, digital quality connections, number identification and faster Internet connection. Two types of access are proposed:
n
basic access called OCTOPUS S (2B+D) for residential customers and small businesses;
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advanced access called OCTOPUS XL (30B+D) for medium and large sized companies.
In September 2000, TP Group launched the installation of automatic debit card telephones operating on ISDN lines.
TP Group also proposes the following services: free calls, shared
payment calls, universal numbers, vote by telephone and telephone cards. TP Group has been offering a voice messaging service since June 2000.
TP S.A. operates in areas of business that have been fully opened up to competition since January 1, 2003, the date on which the international communications sector
was opened up to competition, while other areas of business are progressively being opened up to competition.
Leased Network
TP Group considers itself as the
leading leased lines provider in Poland. These lines can be used by its customers for their own purposes or to offer telecommunication services to their customers. Currently, this network is mainly used by Polish providers of wireless telephony
networks, the Ministry for Defence, the Ministry for the Interior and the Administration, financial institutions and Internet service providers.
The rental price of the TP Group network is based on two factors: the number of connections and the monthly subscription. The latter varies, in particular, in
relation to the capacity or type of network. TP Group’s strategy is to increase transmission capacity of the network, while decreasing the cost of use for customers.
Wireless Telephony – PTK Centertel
PTK Centertel Sp. Z.o.o., or PTK Centertel, is the wireless subsidiary of TP S.A., which holds 66% of its capital. France Telecom holds the remaining shares (34%).
PTK Centertel was awarded several licenses: a 15-year license (expiring in August 2012) in order to set up and maintain a GSM1800 digital network, a 25-year license (expiring in December 2016) in order to set up and maintain an NMT 450i analog
network and a 15-year license (expiring in July 2014) in order to provide a GSM900 service. In December 2000, PTK Centertel was awarded a UMTS license for an amount of
€
650 million, of which
€
260 million has been paid and the balance of which will be paid
in eighteen installments beginning in 2005. The terms and conditions of the license provide for a minimum coverage of 20% of the population. Implementation is planned for, at the latest, January 1, 2006. The UMTS license ends on January 1, 2026.
The bi-band network (GSM900 and GSM1800) covers voice and data
transmission, which includes dispatch of SMS, call transfers, message services, telephone conferences, CLIP (“calling line identification presentation”) and CLIR (“calling line identification restriction”). Roaming service is
also available.
At December 31, 2003, PTK Centertel entered into 288
commercial roaming agreements with operators in 224 countries such that its users can have access to the GSM900, GSM1800 and PCS1900 network when they travel.
The Polish wireless telecommunications market grew by 24% in 2003, compared to 39% in 2002 and 48% in 2001, in terms of the number of customers. PTK Centertel
became the second Polish digital wireless network operator in 2003 and had 5.7 million customers at December 31, 2003, compared to 4.5 million customers at December 31, 2002 and 2.8 million customers at December 31, 2001 (source: TP S.A.).
Internet Services
Since June 1996, TP Group has been offering narrowband Internet access. It is possible to have Internet access via a national number
0-20221 for the cost of local access (or less in off-peak hours) and without subscription. Similarly, the number 0-202422 provides Internet access via the ISDN service.
In 1999, a flat rate Internet broadband access was launched, which allows voice telephone calls to be made on the same lines. In mid
2001, TP Group launched the ADSL Neostrada service.
TP Group proposes
Internet services under two brands: “Neostrada” for broadband services and “Internet Numbers of TP” for narrowband services.
Broadband Internet access represents an important priority for TP Group. Broadband access via ADSL is still in a preliminary stage with 134,000 customers at
December 31, 2003 (14,000 at December 31, 2002).
TP Group’s main
portal is “
Telekomunikacja.pl
”. TP Group intends to reinforce and develop this portal. TP Group’s other portals will include links with “
Telekomunikacja.pl
.”
In addition, the wholly owned Internet subsidiary of TP S.A., TP Internet, offers the
following services:
“Internet Biznes” is a service that
consists of obtaining space on a server for Internet pages and e-mail accounts. A customer may reconfigure his space on the server, as well as his user rights, without restriction, using a simple graphic interface.
“Kolory.tpi” provides its customers with e-mail accounts, virtual Internet
servers and space on the server called i-Baza.
“I-Serwer” is a rental service for allocated servers. This equipment uses the resources of the Data
Center, which is owned by TP Internet.
“Konto-e-konto
business package” combines all the advantages of modern bank account with diversified Internet support. The Bank Zqchodni WBK S.A. and TP Internet set up the project. At December 31 2003, TP Internet was the sole company in Poland that could
simultaneously broadcast live audio/video content to 2,200 Internet users. The streaming technology used in this application is RealNetworks. TP Internet also offers Internet advertising services, including advertising campaigns on the Internet.
“Magellan.net”, a member of the TP Internet group, is
specialized in the development of interactive Internet sites and multimedia presentations and offers an Internet support tool.
“Wirtualna Polska”, was acquired by TP Internet in 2001. Wirtualna Polska (Virtual Poland – WP.pl.) is a portal that is consistently cited as one of
the most visited and recognized sites in Poland. Wirtualna Polska (WP.pl) considers itself the second Internet portal in Poland. The portal provides the most popular services on the Internet (e-mail, chat, p2p communicator, Internet search engine)
and more than 50 information and entertainment services and e-business applications (virtual e-mail, auctions, airline ticket booking, tour operator). On February 28, 2004, the board of directors of Wirtualna Polska submitted a petition for the
opening of bankruptcy proceedings before the court having jurisdiction (see “Item 5. Operating and Financial Review and Prospects – 5.7.1 Subsequent Events”).
4.3.2.6 O
THER
INTERNATIONAL
Europe
In Spain, France Telecom wholly owns Uni2 (Lince
Telecomunicaciones). At December 31, 2003, Uni2 provided fixed line telephony services to 1.7 million customers, or 2.7 million lines, compared to 1.6 million customers, or 2.6 million lines at December 31, 2002 and 1.2 million clients, or 2.1
million lines at December 31, 2001.
In Portugal, France Telecom
indirectly holds 43.3% of the capital of the fixed line telephony operator, Novis. This alternative operator offered its services to approximately 210,000 customers at December 31, 2003, compared to 115,000 customers at December 31, 2002 and 123,000
customers at December 31, 2001. In Portugal, France Telecom also indirectly holds 43.3% of Clixgest’s capital, an Internet access provider.
South America
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France Telecom sold most of its indirect shareholding in Telecom Argentina in December 2003. See “– 4.4 Divestitures”.
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France Telecom sold its shareholding in the consortium, which held 51% of the shares of CTE, which is the national telecommunications operator in El Salvador in October 2003. See “–
4.4 Divestitures”.
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France Telecom indirectly holds 25% of the capital of Intelig, an alternative fixed line telephony operator for long distance national and international calls in Brazil. This operator began
its operations in the first half of 2000. This specific shareholding has been transferred.
Asia and Oceania
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France Telecom signed a partnership agreement in July 1997 with VNPT, the Vietnamese fixed line telephony operator. Under this agreement, France Telecom provides financial, technical and
management assistance to the project to install new lines east of HoChiMinh City; these agreements generate off-balance sheet commitments (see Note 28 of the Notes to the Consolidated Financial Statements).
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France Telecom set up Tahiti Nui Telecom in partnership with the
Office des Postes et Télécommunications de Polynésie française
(OPT), of whose it holds
34.0%, in April 2002. This company offers telephony services for international calls from French Polynesia to 55,000 fixed line customers of OPT at December 31, 2003 (53,000 customers at December 31, 2002).
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France Telecom sold its 40% shareholding in Pramindo Ikat, a company that operates the Sumatra fixed line telephony network, in 2002. See “– 4.4 Divestitures”.
Middle East and Africa
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France Telecom owns a 51% shareholding in Côte d’Ivoire Télécom, which is the national telecommunications network in the Ivory Coast. CI Telcom
provided its fixed line telephony services on approximately 328,000 lines at December 31, 2003 compared to 333,000 lines at December 31, 2002 and 294,000 lines at December 31, 2001. This shareholding is held by the holding company, FCR Côte
d’Ivoire, of which FCR is the main shareholder with 90% of the capital. The operations of
CI Telcom are affected by current events in the country, such that the value of these assets has been fully depreciated at December 31, 2002.
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France Telecom holds a 42.3% shareholding in Sonatel, which is the national telecommunications operator in Senegal. Sonatel provided fixed line telephony services to approximately 229,000
lines at December 31, 2003, compared to 225,000 lines at December 31, 2002 and 236,000 lines at December 31, 2001. Furthermore, the wireless subsidiary of Sonatel had, at December 31, 2003, 576,000 customers, compared to 456,000 at December 31, 2002
and 302,000 at December 31, 2001.
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France Telecom indirectly holds 40% of the shares of Jordan Telecommunications Company, which provided fixed line telephony services to approximately 632,000 lines at December 31, 2003,
compared to 680,000 lines at December 31, 2002 and 667,000 lines at December 31, 2001. Furthermore, the wireless subsidiary of Jordan Telecom had, at December 31, 2003, 356,000 customers, compared to 316,000 at December 31, 2002 and 133,000 at
December 31, 2001. Jordan Telecommunications Company was listed on the Amman Stock Exchange (in Jordan) in 2002.
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France Telecom indirectly holds 40% of the capital of Mauritius Telecom, the historic operator of Mauritius. Mauritius Telecom had a stock of approximately 348,000 telephone lines at December
31, 2003, compared to 327,000 lines at December 31, 2002 and 307,000 lines at December 31, 2001. Furthermore, the wireless subsidiary of Mauritius Telecom had, at December 31, 2003, 326,000 customers, compared to 251,000 at December 31, 2002
and 184,000 at December 31, 2001.
4.4 DIVESTITURES
The main divestitures of
France Telecom are described in Note 3 in the case of subsidiaries and consolidated shareholdings and under Note 12 in other cases. See Note 3 and Note 12 of the Notes to the Consolidated Financial Statements.
The divestititures refer to the following transactions:
n
For the year 2003:
-
disposals of subsidiaries and consolidated shareholdings: Casema, Eutelsat, Wind, CTE Salvador and Nortel/Telecom Argentina;
-
disposals of other shareholdings: Sprint PCS, Bull (bonds with option of conversion into new or existing shares), Immarsat.
n
For the year 2002:
-
disposals of subsidiaries and consolidated shareholdings: TPS (Télévision Par Satellite), Stellat, Pramindo Ikat and TDF.
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For the year 2001: flotation of Orange S.A. In 2003, France Telecom made a public exchange offer, followed by a tender offer for, that will be followed by a compulsory purchase of, the shares
of Orange S.A. that it did not hold. This offer was not extended into certain jurisdictions, including the United States. At December 31, 2003, France Telecom held 99.02% of Orange’s capital. See “ – 4.3.2.1 Orange – General
Description of Orange”.
4.5 COMPETITION
For information regarding
risks related to competition, see “Item 3. Key Information – 3.3.2 Risk Factors Relating to the Telecommunications and Wireless Industries – The intense competition of the telecommunications industry in Europe may strain France
Telecom’s resources”.
4.5.1 O
RANGE
Orange faces
significant competition from European wireless telecommunications providers, such as Vodafone, T-Mobile, mmO2, TIM (Telecom Italia Mobile), Telefónica Móviles, NTT DoCoMo and Hutchison Whampoa, all of which have international networks.
In addition, Orange’s network operators face competition from national operators in each of the countries in which they operate. To the extent that use of mobile telephones is complementary to fixed line telephones, Orange also competes with
fixed line telecommunications providers.
n
In France, Orange France’s main competitors are SFR and Bouygues Telecom. SFR, which is controlled by Vivendi-Universal and partially held by Vodafone, started GSM900 operations in 1992.
Bouygues Telecom, which is controlled by Bouygues, has operated a GSM1800 network since 1996.
At December 31, 2003, Orange France’s market share in France (including the French overseas departments) was 48.8%, compared to 35.3% for SFR and 15.9% for
Bouygues Telecom (compared to 49.8% in 2002, with 35.1% for SFR and 15.1% for Bouygues Telecom and 48.2% in 2001, compared to 33.9% for SFR and 17.9% for Bouygues Telecom in 2001) (source: ART). During 2003, the net increase in the number of Orange
France customers was approximately 1.1 million of the 3.1 million new registered customers on the French market (including French overseas departments), compared to approximately 1.2 million for SFR and approximately 0.8 million for Bouygues Telecom
(1.4 million for Orange France in 2002 of a total of 1.6 million new
customers on the French market, compared to approximately 1 million for SFR and a decrease of approximately 0.8 million for Bouygues Telecom; 3.5 million for Orange
France in 2001 of a total of 7.3 million new customers on the French market, compared to 2.4 million for SFR and 1.4 million for Bouygues Telecom) (source: ART).
The competitive landscape has been stable since the entry of Bouygues Telecom as the third GSM operator. Orange France, SFR and
Bouygues Telecom have been awarded UMTS licenses for the French market. Furthermore, in December 2002, the ART dismissed Télé2’s claim for the settlement of a dispute following Orange France’s refusal to enter into a virtual
wireless operator agreement with Télé2.
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In the United Kingdom, Orange UK’s principal competitors are the three other existing GSM networks: Vodafone, O2 (wholly-owned by mmO2) and T-Mobile (wholly owned by Deutsche Telekom).
All of these networks commenced their operations before Orange UK. At December 31, 2003, Orange UK estimated that it had 25.6% of the British market in terms of the number of customers compared to 27.2% at December 31, 2002 and 27.7% at December 31,
2001. At December 31, 2003, Vodafone had 23.9% of all mobile users in the United Kingdom, compared to 25.4% at the end of 2002 and 26% at the end of 2001. O2 had 24.5% of users at December 31, 2003 compared to 24.3% at the end of 2002 and 20% at the
end of 2001. T-Mobile had 25.5% of users at the end of 2003, compared to 18.2% at the end of 2002 and 24% at the end of 2001 (source: Orange UK; Mobile Communications for the number of customers of Orange’s competitors).
In addition to the current wireless network operators in
the United Kingdom, Orange UK will face competition from the new UMTS entrant, Hutchison 3G UK Ltd, which launched market services under the trademark “3” in March 2003. Hutchison 3G UK Ltd is owned by a consortium that is
majority-controlled by Hutchison Whampoa and also includes NTT DoCoMo and KPN Mobile as shareholders. Its market share was approximately 0.5% at December 31, 2003 (source: Orange UK; Mobile Communications for the number of customers of Orange’s
competitors).
In November 1999, the joint venture between the Virgin
Group and Deutsche Telekom became the first mobile virtual network operator in the United Kingdom when it launched a service operating on the basis of call time purchased from One2One (now T-Mobile). At December 31, 2003, its market share was
approximately 7.0% (source: Virgin Mobile).
To the extent that mobile
telephones are replacing fixed line telephones, Orange UK also competes with providers of fixed line telecommunications services, including British Telecom, and operators of cable telephony systems.
On all other markets where Orange has wireless telephony operations, it faces strong
competition. In most cases, Orange’s main competitors are subsidiaries or joint ventures of the other major telecommunications operators, for instance:
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In Belgium, Mobistar competes with two other operators: Proximus, which is owned by Belgacom and Vodafone, and BASE (formerly KPNO), which is owned by KPN Mobile. At December 31, 2003,
Mobistar’s market share was approximately 33.3%, Belgacom Mobile (formerly Proximus) had approximately 53.7% and BASE had 13%, compared to 30.4%, 53.8% and 15.5% at December 31, 2002 and 30.8%, 54% and 13% at December 31, 2001, respectively
(source: Mobile Communications).
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In Denmark, Orange A/S competes with three other operators: TDC Mobil, which is part of the TDC Group, Sonofon, which is controlled by the Norwegian telecommunications operator Telenor, and
Telia Denmark, which is wholly-owned by the Swedish telecommunications company Telia. At December 31, 2003, Orange A/S’s market share was approximately 11.5%, compared to approximately 50.0% for TDC Mobil, 28% for Sonofon and 10.5% for Telia
Denmark compared to 12.1%, 47.9%, 28.4% and 11.5% at December 31, 2002 and 15%, 50%, 26% and 9% at December 31, 2001 respectively; 3 Denmark, which began its operations in Denmark in March 2003, had a market share of approximately 0.1% at December
31, 2003 (source: Mobile Communications).
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The Netherlands is one of the most competitive mobile telephone markets in Europe with five network operators: KPN Mobile, which is indirectly owned by KPN and NTT DoCoMo; Vodafone; Telfort,
held by Dutch venture capital investors; T-Mobile, held by T-Mobile International; and Orange. At December 31, 2003, Orange Nederland N.V. had a market share of approximately 10%, KPN Mobile 39%, Vodafone 24%, Telfort 12% and T-Mobile 15%, compared
to 8.6%, 42.1%, 26.3%, 10.9% and 12.1% at December 31, 2002 and 9%, 44%, 25%, 11% and 10% at December 31, 2001, respectively (source: Mobile Communications).
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In Romania, Orange Romania competes with three other operators. Orange Romania’s market share was 48% at December 31, 2003, 43.5% at December 31, 2002 and 44.0% at December 31, 2001. Its
main competitor is MobiFon/Connex, with a 48% market share at December 31, 2003 compared to a 53.1% market share at December 31, 2002 and 48% at December 31, 2001. Its second biggest competitor is Telemobile/Zapp (3% market share at December 31,
2003 compared to 1.4% market share at December 31, 2002 and 2% at December 31, 2001) and CosmoRom (2% market share at December 31, 2003 compared to 2% at December 31, 2002 and 6% at December 31, 2001) (source: Orange Romania estimate for 2003;
Mobile Communications for 2002 and 2001). MobilFon/Connex is owned by Telesystem International Wireless, Vodafone and other financial investors. Telemobile/Zapp is owned by Inquam, which is controlled by the investment fund Qualcomm. CosmoRom is
majority owned by Rom Telecom, the national Romanian telecom operator.
In Slovakia, Orange Slovensko’s current competitor is Eurotel, which is owned by Atlantic West and Slovak Telecom, which is in turn majority-owned by Deutsche Telekom. At December 31,
2003, Orange Slovensko’s market share was stable at approximately 60%, against approximately 40% for Eurotel, compared to 60% and 40% at December 31, 2002 and 56% and 44% at December 31, 2001, respectively (source: Orange Solvensko estimate for
2003; Mobile Communications for 2002 and 2001).
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In Switzerland, Orange Communications S.A. competes with other mobile network operators, including Swisscom Mobile, which is owned by Swisscom and Vodafone, and Sunrise, controlled by
TeleDanmark. At December 31, 2003, Orange Communications S.A.’s market share was approximately 18%, compared to approximately 62% for Swisscom Mobile and approximately 20% for Sunrise. At December 31, 2002, Orange Communications S.A.’s
market share was approximately 17%, compared to approximately 63% for Swisscom Mobile and approximately 20% for Sunrise. At December 31, 2001, Orange Communications S.A.’s market share was approximately 17%, compared to approximately 66% for
Swisscom Mobile and approximately 17% for Sunrise (source: Mobile Communications).
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In Egypt, ECMS (Mobinil) was the first wireless operator. At December 31, 2003, ECMS was the leader in terms of market share for both the prepaid and contract markets. ECMS’s only
competitor is Vodafone Egypt. At December 31, 2003, ECMS held approximately 52% of market share and Vodafone Egypt 48%. At December 31, 2002, ECMS held approximately 54% of market share and Vodafone Egypt 46% (source: ECMS’s estimate for 2003;
EMC World for 2002 and 2001).
4.5.2 W
ANADOO
Wanadoo
faces mainly local competitors in each of its European markets.
Internet Access
France
Wanadoo’s main competitors on the Internet access market in France are:
n
international Internet access providers, whether or not associated with telecommunications operators, such as AOL, T-Online (Club Internet), Tiscali and 9Telecom;
n
companies operating cable networks (Noos);
n
independent Internet access providers with national (Free) or local coverage;
n
market players that propose Internet access as a means of acquiring audiences associated with services such as banks and large retailers.
The five main players on the French market are Wanadoo, Free, AOL, Tiscali and Club
Internet and their market shares are, respectively, 34%, 16%, 15%, 13% and 13% (source: Idate 2003).
Most of Wanadoo’s main competitors have focused on broadband offers (mostly ADSL). Wanadoo was one of the first operators to propose an extension of its ADSL
range (128, 512 and 1,024 Kbit/s) to help move its customers and prospective customers beyond narrowband products by offering additional convenience in terms of speed and unlimited access.
United Kingdom
Wanadoo considers that its main competitors in the United Kingdom are AOL, BT (British Telecom), NTL (cable) and Tiscali, whose market
shares are estimated at 20%, 17%, 13% and 6% respectively (source: Idate 2003). Freeserve (Wanadoo) holds a market share of 21% (source: Idate 2003).
Spain
In Spain, Wanadoo has to face competition primarily from Terra/Telefonica and to a lesser extent
Ya.com
(T-Online), Arrakis (British Telecom) as well as
Tiscali (which took over AirTelnet in March 2003).
The Netherlands
The Netherlands has a relatively fragmented Internet market where
Wanadoo’s main competitors are KPN, Tiscali/World Online and Zon.
Portals
Wanadoo believes that it has a strong position in these markets.
Wanadoo estimated in 2003 that it held approximately 18% of the online advertising market in France, 12% in Spain and 5% in the United Kingdom and The Netherlands.
In each of its markets, Wanadoo must face numerous providers of global or local portal services, all of which
belong to one of the three main categories as follows:
n
the portals of other access providers:
i.e.
, in France, in particular AOL France, Club Internet and Free, and abroad, in particular: AOL, Terra (Spain), Planet Internet (The
Netherlands) and Tiscali;
n
the portals of general sites with a large audience and search engines: in particular Yahoo!, Microsoft/MSN, Google, as well as local players like Terra (Spain);
n
other medias such as newspapers, television, radio and other advertising media (advertising displays, etc.).
Directories
In France, Wanadoo is, through its subsidiary Pages Jaunes, the leader in the directories market (source: AMR International, fall 2003). On the printed directories
market, Wanadoo competes with several rival publishers, mostly in the regional directories market.
Regarding online directories, the competitors of “
Pages Jaunes.fr
” in France include, in particular, Iliad, Maporama,
1bis.com
(Planfax),
the French Post Office’s directory, Scoot, as well as the cityguides of Presse Quotidienne Régionale.
4.5.3 F
IXED
L
INE
, D
ISTRIBUTION
, N
ETWORKS
, L
ARGE
C
USTOMERS
AND
O
PERATORS
In this segment, competition concerns, on the one hand, fixed line telephony services
and, on the other hand, data transmission.
Fixed Line Telephony Services
France Telecom’s fixed line telephony services face strong and
increasing competition in France. France Telecom’s competitors on this market are international telecommunications operators and numerous fixed line telecommunications operators as well as cable operators. France Telecom also considers that a
large share of the calls that previously passed through the fixed line telephony networks, now go through wireless telecommunications networks. Despite this increase in competition, France Telecom still has a large market share in France. At
December 31, 2003, France Telecom considered that its market share, measured in terms of traffic using its networks, was 61.8% of the long distance traffic (national and international calls combined) of fixed lines, compared to 64.3% at December 31,
2002 and 64.6% at December 31, 2001.
Due to the introduction of the
preselection of carriers for local calls at the beginning of January 2002, France Telecom is also in competition in this market. This caused a drop in its market share of local calls which stood at 75.8% at December 31, 2003, compared to 80.9% at
December 31, 2002 and 96.8% at December 31, 2001. According to France Telecom, competitors thus took over all local traffic from customers who preselected an operator other than France Telecom for long distance calls.
France Telecom’s main competitors in the fixed line consumer market are Cegetel,
Tele 2 and LDCom (through 9Telecom in particular). On the business customers market, France Telecom also competes with other operators, mainly Cegetel, LDCom, MCI and Colt.
In 2003, Cegetel, which is part of the Vivendi Universal Group, absorbed Telecom Developpement, a subsidiary held in common between
SNCF and Cegetel, which was responsible for the network.
Télé2 France is a subsidiary held at more than 90% by Télé2 AB, of which one of the main shareholders is the Swedish group, Kinnevik. LDCom acquired, in 2002, multiple operators, including Kaptech, 9Telecom and
Belgacom France, as well as Siris, a French subsidiary of T-Systems, in 2003.
With the opening of the market, certain specialized operators have also emerged. Cable television network operators and Internet service providers may also prove to be regional competitors in the area of telephony services to residential
customers. Moreover, with technological innovations, France Telecom’s competitors may provide telecommunications services to their customers without using existing telephone lines, using instead cable lines, radio telephony, satellite or access
to electricity supply lines. These possibilities should have the effect of further stimulating competition.
Since January 1, 2001, France Telecom has been obliged to provide its competitors with separate access to lines that connect the end customer’s premises to the
France Telecom local switch, concentrator or exchange, at prices based on the cost of the service provided. At the end of 2003, following the signature of unbundling agreements with various operators, 397 distributors were available for unbundling,
in contrast to 128 distributors at the end of 2002 and 105 distributors at the end of 2001. Eleven operators were active in unbundling at the end of 2003, including, Colt, Easynet, Free and LDCom.
Data Transmission
Since January 1993, the data transmission services market has been open to competition in France. France Telecom competes with
AT&T, Cable & Wireless, Cegetel, Colt, Infonet, LDCom, British Telecom (BT), MCI (formerly Worldcom), Completel and
Easynet. France Telecom considers that the geographic coverage, large capacity and the technological strength of its Transpac network puts it in a good position with
respect to competitors on this market.
4.5.4 E
QUANT
Equant
operates in a very dynamic, highly competitive, fragmented market that is constantly changing. The wave of recoveries after the recent bankruptcies and the trend to consolidate are evidence that the telecommunications industry is in a transition
phase. The market in which Equant operates is undergoing changes, and suppliers have expressed a wish to orient their operations toward services with greater added value. Equant observed a change from the supply of basic communication services, as
the global provider of network services, to the supply of integration services, in order to harness value on the market.
Equant faces competition from four main types of businesses:
n
Providers of global services:
Equant’s competitors in the traditional network services market are BT Global Services and Infonet. Established providers of global services provide
a range of “data” services concurrent with their better established “voice” services, but are nevertheless very competitive on the high growth data transmission market. MCI is back on the market after its “Chapter 11”
bankruptcy proceedings.
n
The “carrier’s carrier”:
new entrants like Colt and Level 3 Communications have launched themselves on the market but do not necessarily offer end-to-end solutions.
These new entrants focus more on point-to-point services or IP and on wholesale bandwidth.
n
National voice & data providers:
in some of the countries in which Equant conducts its operations, it also has to compete with traditional operators. Some of these operators still
have a special regulatory status and still enjoy exclusive rights on the supply of certain services. Most of them have traditionally dominated their local market.
n
“New Generation” suppliers:
in the market for supplying applications and hosting, Equant competes with companies such as Corio, Akamai, Loudcloud or Exodus. Even if their
business model has not stabilized, most of these companies focus on the development of applications rather than on the supply of infrastructures.
Equant also competes with equipment manufacturers, software installers and developers focusing on data networks. Moreover, Equant competes with many of its
suppliers on the high growth outsourcing market. Equant considers that competitiveness in the data network services markets, integration and outsourcing markets depends a great deal on the capacity to offer a large range of reliable products and
services adapted to the needs of customers and on the existence of a structure offering customer support services. As the market becomes increasingly competitive, Equant finds that prices, provision of end-to-end solutions and the quality of
customer service play an increasingly important role.
Customers also
seek solutions that integrate design, installation, support and even the supply and distribution of equipment. The network equipment supply and services market is fragmented both geographically and through the segmenting effects of competition.
Equant’s main competitors in this area include IT services companies, IT manufacturers and network integrators such as AT&T Business Services, Electronic Data Systems Corporation, IBM, BT Global Services/Syntegra, NCR Corporation, Unisys
Corporation, VANCO, Nexagent and Getronics N.V. Competition in the supply of services is mainly price-driven, whereas competition in the supply of equipment is mainly governed by the capacity to provide additional services that include design,
installation and support services.
4.5.5 TP G
ROUP
Fixed Line Services
Telekomunikacja Polska S.A. (TP S.A.) is the largest
telecommunications services provider in Poland. Fixed line telephony remains the main source of the TP Group’s income, despite growth in the revenues of wireless and data transmission operations.
In the area of fixed line services, the opening up to competition was done in phases,
starting with domestic long distance communications in mid 2001 (selection and preselection of operators) and then international communications on January 1, 2003. Despite missing certain minor legislative components, the new Telecommunications Act
that came into effect in October 2003 introduced numerous changes, such as opening fixed line telephony calls to mobile telephones to competition, and requiring the unbundling of access to the local loop in favor of competitors.
In this context, according to the estimates of TP Group, its market share at December
31, 2003 was the following:
n
telephone lines: approximately 90%;
n
domestic long distance communications: approximately 86%;
fixed line communications toward mobile telephones: approximately 99%.
For fixed line services, the main competitors of TP Group were the following:
n
Dialog (subsidiary of KGHM, a company whose operations are based on the production of copper and whose capital is partially held by the Polish state);
n
Energis;
n
Netia, whose capital is held by financial investors;
n
Tele 2, a subsidiary of Tele 2 AB, which is among the principal shareholders of the Swedish group, Kinnevik.
As far as access lines are concerned, the main competitors are, according to the estimates of TP Group, Dialog and Netia, with a
market share of approximately 3% each. Tele2 became the most active operator in the acquisition of new customers in 2003, but the services that it proposes are principally low value added services offered to residential customers. Netia and Energis
focus on professional customers.
The Polish telecommunications market
is expected to consolidate in the future. Furthermore, fixed line services are in competition with wireless services, as in other European countries.
Wireless Services
Because the penetration of wireless communications in Poland is lower than the average for the European Union, TP Group believes that the potential for growth in terms of the number of users is signficant. According to TP
Group, the number of users increased by 3.4 million in 2003.
PTK
Centertel, which operates under the IDEA trademark, believes that it has become the second wireless operator in Poland in terms of the number of customers in 2003. At December 31, 2003, PTK Centertel’s market share in terms of the number of
customers was 33%, even though there is no significant difference between the three operators: PTC (49% owned by Deutsche Telecom, 51% owned by Elektrim Telekomunikacja) and Polkomtel (owned by Vodafone, TDC and Polish companies) with a market share
respectively of 36% and 31%, compared to 32%, 35% and 32.7% at December 31, 2002 and 27.8%, 37.7% and 34.4% at December 31, 2001, respectively (source: TP S.A. estimate).
PTK Centertel is the leader in net sales in subscriptions in 2003 (source: URTiP). PTK Centertel began its GSM operations in 1998, or
two years later than its competitors.
There are also companies (19 at
December 2003) who have obtained MVNO (mobile virtual network operator) authorizations. To date, none of them has begun wireless operations.
Internet Access
TP Group believes that it is the largest Internet services provider to residential customers and companies in Poland. TP Group began to offer narrowband Internet access in 1996 and launched a broadband Internet access service
in 2000 using HIS (“Home Internet Solutions”).
At December
31, 2003, TP Group’s market share in terms of traffic was approximately 92% compared to 96% at December 31, 2002 (source: estimate of TP Group).
Competition on the ADSL market has just begun. Dialog, the biggest independent fixed line telecommunications operator, began to offer ADSL services in November
2003.
There are also companies that provide access by radio broadcast
(for instance Tele2) and cable television operators (for instance Aster and UPC), in competition with TP Group on the Internet market.
4.6 RESEARCH AND DEVELOPMENT
The France
Telecom group has long considered research and development (“R&D”) to be of paramount strategic importance. It continuously strives to shorten the time-to-market for newly developed products through its customer-focused research and
development activities. Research and development teams work together with business units to develop targeted research projects.
France Telecom allocates considerable sums to finance its research and development. In 2003, investments in research and development, together with the personnel
costs and other operating and investment expenses related to research and
development, increased to
€
523 million (before
amortization) (
€
616 million in 2002 and
€
637 million in 2001) of which
€
468 million were attributable to France Telecom S.A. (
€
536 million in 2002 and
€
531 million in 2001), which is essentially the core of France Telecom’s R&D. Approximately half of these costs relate to personnel costs.
The decrease in research and development expenses in 2003 was the result of the significant efforts to streamline and organize the
project portfolio within the framework of the TOP Program, in close association with the operational divisions, and an increase in research and development productivity.
France Telecom currently employs approximately 3,000 engineers, scientists and researchers within France Telecom R&D, its research
and development unit. In addition to its facilities in France, at December 31, 2003, France Telecom has research laboratories in Boston (United States), London (United Kingdom), Warsaw (Poland), San Francisco (United States) and Tokyo (Japan).
R&D areas identified as strategic were organized into 13
“Skills Centers” in 2003 in order to facilitate access to these areas by the business units.
In addition to registering patents and creating value for intellectual property (see “– 4.7 Intellectual Property”), France Telecom is continuously
strengthening its involvement with innovative partners in France, the United Kingdom and Poland, as well as the United States and Asia.
Enhancement of services already provided by the France Telecom Group remains one of the most significant applications of R&D efforts. France Telecom
R&D’s proficiency in voice technology has greatly benefited the voice portal: natural language dialogue, improved synthesized voice and new functions such as direct customer-controlled services. A new conference call service for the general
public has also been launched.
New services using the Internet have
also been launched, including an enhanced range of connection kits and the connection of correspondents with presence and audio communication management. Considerable effort has been made in this field in particular, to encourage higher speed
services with access and to offer services deriving from the significant development of ADSL, such as providing Extense WiFi-Bluetooth mixed terminals, a television service over ADSL in partnership with TPS and a videoconferencing service for the
general public.
In the business services division, the work carried out
by the R&D unit has enhanced the range of services offered, such as setting up a unified VPN service, providing an increasingly high transmission rate for businesses, the Turbo DSL service for corporate customers, increasing the size of sites
that can be connected with the SMHD Giga service, and developing new ways of setting up optical connections (optic fiber blowing).
In the mobile division, in addition to the continuous enhancement of the services currently available (such as the opening of MMS and localization services),
intense activity is underway to prepare for the launch of the UMTS networks in the best possible conditions.
Finally, France Telecom R&D carries out significant activities to develop its “core” functions (address book, presence, reach, identity, payment
methods), which will enable it to further its strategy as an integrated operator placing the customer at the center of his personal communications universe.
In addition, TP Group, as the historic Polish operator, invests in research and development. The R&D department of TP Group is now one of the areas on which the
France Telecom Group’s research and development efforts are concentrated. Its principal activities include the trial of new equipment and new systems and quality control of networks. In 2003, its R&D efforts concentrated on both network and
service activities. In the field of networks, apart from strengthening the traditional areas (SS7 signaling, synchronous switching, network integration), significant advances were made in improving competency in the newest fields (IP, ADSL, NGN). An
essential activity consisted in the setting up of a Skills Center on SS7 signaling and on the Siemens Signaling Transfer Point as well as a Network Integration and Services Center at the TP Group’s R&D center (CBR).
In the field of services, R&D work was concentrated on switched telephone network
services (SMS from fixed lines, services over Intelligent Network (IN) and to the new IP and ADSL technologies (VoIP, Centrex IP, VoDSL, Content Delivery Network (or “CDN”)). A “Service Acceptability Lab” was set up at CBR to
study customer acceptability of products and services. Furthermore, two projects on integrated networks services enabled direct support to PKB (TP Group’s business division): the projects in the integrated networks and call center field were
carried out in close collaboration with the Fixed Line and Distribution division in France.
4.7 INTELLECTUAL PROPERTY
4.7.1 P
ATENTS
AND
S
OFTWARE
France Telecom placed greater emphasis on intellectual property, as illustrated by a significant increase in the number of new patent filings – 379 filings in
2003 for France Telecom S.A. alone (265 in 2002 and 230 in 2001), which is an increase of over 40%
compared to the previous year (15% between 2001 and 2002). These patents came primarily from France Telecom R&D (355 of the 379 new patent filings in 2003). At the
end of 2003, France Telecom S.A. had a total of 6,288 patents (obtained or filed), compared to 5,741 patents at the end of 2002. France Telecom also files software patents – 292 filings with the
Agence de Protection des Programmes
in
2003 by France Telecom S.A., compared to 225 in 2002 and 186 in 2001. Some of these patents and registered software programs are marketed in the form of licensing agreements or through patent pools, pursuant to a policy to leverage R&D results
externally. The portfolio of patents helps to protect the innovations made in the services or product offerings marketed by the divisions of the Group.
4.7.2 T
RADEMARKS
AND
D
OMAIN
N
AMES
France Telecom also holds intellectual property elements with great value, in the forms of trademarks and commercial names. These elements are presented below under
each company which holds the corresponding rights.
France Telecom
At December 31, 2003, France Telecom S.A. had a total of 3,800 French and foreign
registered trademarks. These include the name
“FRANCE TELECOM”
and the “
NUMERIS
” ampersand logo registered in most of the countries in the world, and many other trademarks registered in France and/or abroad, for
example “
MALIGNE
”, “
MALIGNE TV
”, “
MINITEL
”, “
N° AZUR
”, “
Nº. INDIGO
”, “
LISTE ROUGE
”, “
MON NUMERO PREFERE
”, many slogans
such as “
IL Y A UNE VIE APRES L’ACHAT
” or “
NOUS SERONS LA
”, as well as various logos. France Telecom S.A. has licensed the use of the
“FRANCE TELECOM”
trademarks and the ampersand logo to some
of its subsidiaries (
e.g.
, Orange, Wanadoo, Transpac and GlobeCast).
France Telecom S.A. has also registered a large number of domain names including “france-telecom” and “francetelecom” as generic domain names generally ending in “.com”, “.net”, “.org”,
“.info” and “.biz” and in France, in “.fr” and in most of the countries where France Telecom operates or plans to begin operating. France Telecom S.A. has also reserved a number of other domain names that often
correspond to registered trademarks such as “audiotel”, “minitel”, “bizao” “-12”, “netcompagnie” and “opentransit”. France Telecom places great emphasis on protecting its trademarks and
domain names, and plays an active role in defending them.
Orange
In the United Kingdom, the “Orange” brand has been developed by Orange UK, a
wholly-owned subsidiary of Orange, which has operated its wireless telecommunications network under the “Orange” brand since 1994. The wireless telecommunications operators authorized to use the “Orange” brand are cited in
“– 4.3.2.1 Orange – Licensing Agreements”.
Since
introducing its services in 1994 in the United Kingdom, Orange UK has made and continues to make substantial investments to develop the “Orange” brand (the principal components of which are the “ORANGE” name, the
“Orange” logo, the color orange and the slogan, “The future’s bright, the future’s Orange” in the United Kingdom, in France and abroad. These capital expenditures have made it possible to build up an extensive brand
portfolio, plus a portfolio of domain names including “
orange.com
”, “
orange.net
”, “
orange.co.uk
” and “
orange.fr
”. In addition, these expenditures have generated strong brand
awareness and recognition both domestically and internationally, and have enabled the company to build up a broad high-value customer base for the Orange brand.
Wanadoo
Wanadoo is the owner and has registered a number of trademarks and domain names for a broad range of products and services in France and abroad. Wanadoo is the
owner of such names as “
Wanadoo
”, “
Pagesjaunes.fr
”, “
Voilà
”, “
Goa
”, “
@près l’école
”, “
Mappy
”, “
Alapage
”
and “
Marcopoly
”.
Wanadoo has also registered a large
number of domain names, including “
wanadoo.fr
”, “
wanadoo.com
”, “
wanadoo.net
”, “
voila.fr
”, “
voila.com
”, “
voila.net
”, “
goa.fr
”,
“
goa.com
”, “
pagesjaunes.fr
”, “
mappy.fr
”, “
mappy.com
”, “
apreslecole.fr
”, “
apreslecole.com
”, “
apreslecole.net
”,
“
alapage.fr
”, “
alapage.com
”, “
alapage.net
”, “
marcopoly.fr
” and “
marcopoly.com
”.
Wanadoo has either registered or initiated the process to register a number of domain names for each of its websites in the countries
where it operates or may be planning to operate.
At the end of 2003, the TP Group held 86 trademarks. The most important are: “
tp
”, “
Infolinia 800
”,
“
Telepakiety
”, “
Telepunkt
”, “
globetroter
”, “
jestesmy z wami!
” and “
Neostrada
”.
The TP Group has registered more than 170 domain names. The principal domain name is “
telekomunikacja.pl
”. The other
major domain names are “
tp.pl
”, “
tp-ir.pl
”, “
jestesmyzwami.pl
”, “
telepunkt.pl
”, “
neostrada.pl
”, “
internetdsl.pl
”, and
“
telecompolska.pl
”.
4.8 SUPPLIERS
France Telecom obtains
telecommunications equipment from all the major international equipment manufacturers and believes it is not dependent on any one of these vendors.
Under the “Ambition FT 2005” Plan and the TOP operating performance improvement program, France Telecom introduced the “TOP Sourcing” project
throughout the Group in December 2002. This project, which is managed by the Executive Vice President for Sourcing, is designed to reduce total acquisition costs using a six-pronged strategy, as described below:
n
Consolidation of procurement volumes;
n
Assessment of the best price;
n
Globalization in terms of procurement;
n
Streamlining technical specifications;
n
Joint improvement of processes shared with suppliers;
n
Restructuring of supplier relationships.
The “TOP sourcing” program has been split into phases.
The first phase, from January to June 2003, covered 45% of total purchases. Priority was given to the procurement categories leading to the largest potential gains.
The principal purchasing categories in this phase are: fixed and mobile
handsets, routers, DSLAM, ATM networks, radio links, copper cables, intelligent network, switch maintenance, office equipment, servers, data storage, IT services, travel and hotels, vehicles, public relations agencies and purchases of advertisement
space, printing and paper and sales materials.
The examples below
indicate how specifications have been streamlined:
-
a reduction from 50 to 13 in the number of data storage configurations;
-
a reduction from 68 to 30 in the number of service provider profiles in the information system;
-
a reduction from 116 to 55 in the number of wireless models purchased.
Likewise, the restructuring of the supplier portfolio generated a 60% reduction in the number of suppliers consulted for all of the procurement categories
concerned.
The second phase from July 2003 to January 2004 covered 25%
of total procurement.
The principal procurement categories are:
BSS/interface, BAS, switching equipment, SDH, WDM, software, building maintenance and related services, call centers, consulting and audits, temporary work, transportation and storage.
At the same time, regular improvements have been recorded in procurement categories not included in the phases.
The estimated total impact of the Group’s new procurement policy in 2003 was at
least approximately
€
700 million in savings.
4.9 SEASONALITY
In general, the business
operations of France Telecom are affected by the following seasonal variations: revenues earned in the third quarter (ended September 30) are generally lower than in the other quarters of the year, due to the decline in telephone and Internet
traffic in the summer months.
Furthermore, in the markets where Orange
operates, the number of new customers for wireless telecommunications services is generally higher in the second half of the calendar year than in the first half, primarily because of the increase in sales during the Christmas season. For this
reason, revenues from equipment sales and flat-rate packages, as well as acquisition costs for equipment provided to customers and sales commissions, are higher in the second half of the calendar year than in the first half.
At
December 31, 2003, the tangible assets of the France Telecom group represented a total net book value of
€
30.6 billion, compared to
€
36.3 billion at December 31, 2002, and
€
31.7 billion at December 31, 2001. At December 31, 2003, the intangible assets of the France Telecom group included, first, net goodwill in the amount of
€
25.8 billion, compared to
€
27.7 billion at December
31, 2002 and
€
35.0 billion at December 31, 2001, and, second, other intangible assets composed primarily of licenses (
€
8.5 billion, compared to
€
9.3 billion at December 31, 2002 and
€
9.3 billion at December 31, 2001), trademarks (
€
4.4 billion, compared to
€
4.8 billion at December 31, 2002 and
€
5.0 billion at December 31, 2001), and market share (
€
3.2 billion, compared to
€
3.6 billion at December 31, 2002 and
€
2.7 billion at December 31, 2001).
Although none of these assets is in the public domain, the French Minister of the
Economy, Finance and Industry has the power to block or to impose conditions on any sale or transfer proposed by France Telecom of any portion of its telecommunications network infrastructure considered necessary for its public service mandate. This
procedure was used only once in 2001 for the sale of a network component in an overseas department, which at the time the Minister of the Economy, Finance and Industry had approved (see “Item 6. Directors, Senior Management and Employees –
6.3 Corporate Governance – Governmental and Parliamentary Oversight”).
Various fixed assets of the France Telecom group were pledged or given as collateral (see Note 28 of the Notes to the Consolidated Financial Statements).
4.10.1 N
ETWORKS
Over the
past twenty years, France Telecom believes that its network has become one of the most technologically advanced in the world. For voice services, it has fully digital circuit switching and international switching, fully digital local call switching
(consisting solely of second and third generation switching since November 2002), fully digital transmissions, national access to the Numeris ISDN network, a data packet-switching and Frame Relay network, a videotext network and an Internet access
network. Since 1999, France Telecom has been developing an Internet-wide protocol network designed primarily to route high-growth Internet traffic. Its High-Speed Multi-Site Service (HSMS) offers fiber connections of up to 2.5 Gbit/s among the
various sites of a single customer located in the same metropolitan region.
In 2003, the roll out of the ADSL network remained a major challenge for France Telecom, which invested over
€
200 million
to install DSLAM equipment in its distribution frames (network nodes to which customers are connected). At December 31, 2003, 79% of the French population was covered and 3.1 million customers were connected to broadband ADSL compared to 70% at
December 31, 2002 and 64% at December 31, 2001.
Data Transmission Networks
Fiber Optic Networks
With speeds of up to 10 Gbit/s, fiber optic cables surpass by far the capacity of
conventional copper lines or radio links. In 2003, France Telecom installed approximately 1,500 kilometers of fiber optic cables in its regional network in France (6,100 kilometers in 2002 and 5,400 kilometers in 2001).
The new high-dense wave division multiplexing technology is now deployed on long
distance networks to further increase transmission speeds up to a potential of 80 wavelengths per fiber. At December 31, 2003, 34 DWDM systems were installed in the long distance network in France (32 at December 31, 2002 and 30 at December 31,
2001) and 42 in the France Telecom European Backbone Network (46 at December 31, 2002 and 40 at December 31, 2001). Among these systems, 10 are dual-use and are used for both networks.
In addition, France Telecom offers direct fiber optic connections to business customers wishing high-speed services. At December 31,
2003, 10,748 customer distribution frames were connected by fiber optics to the France Telecom network (compared to 8,875 customer distribution frames in 2002 and 7,352 in 2001).
Synchronous Digital Hierarchy (SDH)
At December 31, 2003, France Telecom had installed on its long distance network in France over 239 synchronous digital hierarchy (SDH) transmission system links
at 2.5 Gbit/s (232 at December 31, 2002 and 152 at December 31, 2001). In Europe, the number of 2.5 Gbit/s SDH transmission system links was 113 at December 31, 2003 (compared to 108 at December 31, 2002 and 54 at December 31, 2001). The relatively
low-cost SDH technology can be used to create a simpler network that is easier to manage, along with increased reliability. In France, as a result of the use of a reserve network and local self-healing rings, the SDH optical network is fully
protected against single cable breakdowns. France Telecom continues to develop SDH networks by installing other SDH rings as well as low-cost point-to-point systems in the lower part of the network (Network Administration 155).
France Telecom is a leading player in the development of transmission technology via asynchronous transfer mode (ATM) technology. This
technology simultaneously transmits data signals, text, voice, images and multimedia between access points to the network at speeds of over 155 Mbit/s. With ATM technology, France Telecom can provide better local area network (LAN) connections,
better data transmission and a flexible bandwidth.
Since 1994, France
Telecom has deployed an ATM backbone network capable of routing high-speed services. At December 31, 2003, this network was composed of 259 sites (422 cross-connect units, compared to 423 cross-connect units at December 31, 2002 and 401
cross-connect units at December 31, 2001). It ensures end-to-end transmission of InterLan and MultiLan services, and the transmission service, Videodyn, which provides temporary television connections. It also receives ADSL access data flows and
delivers some of these flows to the IP network through a BAS interface.
Internet-Related Networks
IP Network Architecture
The France Telecom IP network architecture is built to handle a
growing demand for speed and to support high-speed technologies, primarily ADSL. In order to have the appropriate capacity and quality of transmission for the number of its customers and their needs, Wanadoo uses the France Telecom IP network.
The Internet customers of the France Telecom analog and digital
telephone network (Numéris) are connected through NAS (Network Access Server) installed throughout the country that carry modem connections of up to 56 Kbit/s and up to 64 Kbit/s for Numéris access. This network stopped growing in
2002. With Code 7 NAS technology, IP traffic can be routed at the local switch level, which optimizes transmission and switching costs.
ADSL customer websites are connected through DSLAM and BAS (Broadband Access Server) that offer an Internet to customer speed of 128 Kbit/s to 1 Mbit/s. For its
business customers, France Telecom also offers “
Turbo ADSL
” access at speeds of up to 2 Mbit/s on these DSLAM.
The NAS and BAS are connected to the Wanadoo platform and to the Internet network through the national IP transport network or the backbone network that carried
approximately 92 Gbit/s at the end of 2003, compared to 40 Gbit/s at the end of 2002 and 14 Gbit/s at the end of 2001. The IP network is being deployed by France Telecom technical crews, who provide 24-hour-a-day supervision seven days a week.
The France Telecom IP network is a scalable multi-access network
(Autonomous System 3215), capable of handling the growth in traffic and adapting to changes in technology, due to the expertise of France Telecom R&D, the France Telecom research and development unit that evaluates and tests new technologies
like the new super high-speed transmission technologies. The IP network, the design of which began in mid-1998, and the introduction of which was in February 1999, was significantly reinforced in the first half of 2000 to carry domestic IP flow and
interface with the worldwide Internet.
The France Telecom worldwide
Internet network (Autonomous System 5511) was built between 1997 and 1999 and connects the principal global Internet networks in different locations around the world. It is built around the latest IP switching and transmission technologies and
around the high-speed transmission networks built by France Telecom in Europe (European Backbone Network) and the United States (North American Backbone Network). Because it is built on super high-speed land-based and submarine transmission links
(several Gbit/s), it provides France Telecom customers with excellent Internet access.
Wanadoo Platform
The Wanadoo platform is
built on a modular, secure, segmented architecture using proven market technologies designed to adapt to the growth in the number of customers and uses. This is a true industrial tool that can be used to separate the functions of development,
validation and production, which in turn strengthens the quality of service offered to customers.
The production platform is supervised 24 hours a day seven days a week by a specially dedicated team. It is organized around the logic components of the Wanadoo
services: network access, portals and services (Operations Support System and Business Support System). They are connected by Ethernet switches and protected by firewalls that can prevent possible attacks. The platform is connected to access
networks (telephone network, Numéris, ADSL) through the France Telecom IP transport network.
This platform is composed of some 1,500 servers operating on Unix, Linux or Windows “server” versions hosting various services such as Web services,
search engines, communication services, games, personal pages, news and voice mail. This design can accommodate permanent increases in capacities and number of servers in anticipation of growth in the number of customers.
The voice mail system is based on Critical Path technology, a leader in the sector. The Operations Support System manages customer authentication and access to
services. It consists primarily of Radius Authentication Servers and a database containing customer data.
The real time technical management and authentication system have double protection (double mirroring) and use a database management technology and replications.
The Business Support System is at the heart of the business system. It is based on the Infranet software by Portal and an Oracle database. It handles the following functions: customer management, sales management, billing and accounts receivable.
Prior to the establishment of the Business Support System, different
modules processed subscriptions from different sales channels and fed the customer database. The Business Support System feeds the customer service information system, which enables telephone advisers to serve customers and initiate customer
follow-up. The Marketing and Sales Information System, which also receives data from the Business Support System, is used to analyze statistical data.
In addition, technologies relating to portals and other relevant content are an indication of the wealth of services offered by Wanadoo: search engines, on-line
encyclopedias, large, multi-player game platforms, mapping, telephone directories and specific regional services.
Finally, in the second half of 2001, Wanadoo initiated an international program to streamline and industrialize the most basic technical infrastructures used in its
operations. This approach offers a number of advantages:
n
it allows the company to rely on millions of customers in Europe in order to benefit from economies of scale for the services that justify it;
n
it accelerates the development of new services by reducing the number of infrastructures on which they are based; and
n
it facilitates international deployment by providing the company’s best technologies to all its companies and subsidiaries.
In 2003, this program optimized costs for the network, information system and
communications services, and should continue to do so in the years to come.
Wireless
Telecommunications Networks
“First generation” wireless
telephony networks, which were based on analog system technology, carried voice traffic only. “Second generation” networks, based on the GSM digital standard, carry data, SMS message communications, and narrow bandwidth communications.
This is sufficient for basic multimedia applications.
“Third
generation” wireless telephony networks should make it possible to offer fully interactive multimedia services at speeds of up to 384 Kbit/s, which would come close to those offered on fixed line networks. Improved coding and data compression
technologies will lead to better voice quality and more reliable data transmission. The Universal Mobile Telecommunications System, or UMTS, is the standard adopted in Europe for these third generation or “3G” networks.
In the meantime, improved wireless network data transport services will be available
to customers as a result of the introduction of technological innovations that will increase the speed and efficiency of existing GSM networks such as the General Packet Radio Service (GPRS). With this technology, most of the Orange Group operators
will be able to offer multimedia services, including basic video before “3G” services are launched.
International Network
Submarine Cables
In order to accommodate the increase in telecommunications traffic,
France Telecom invests in submarine cable systems. These investments may be made either by purchasing IRU (Indefeasible Rights of Use), which are acquired for a period often equal to the cable operating period, or by leasing wavelengths depending on
the expected return.
In November 2003, France Telecom added additional
capacities to the ECFS (East Caribbean Fiber System) and the Taino Carib system between Guadeloupe and the United States to keep up with the high-speed expansion in the French overseas departments of Guadeloupe and Martinique already served by the
cable Americas 2.
France Telecom is a major member of cable projects
such as: SAT-3/WASC/SAFE, the first submarine fiber optic cable connecting Europe to Africa and Asia (from Portugal to India and Malaysia by way of West Africa, South Africa and the islands of Reunion and Mauritius); Alpal 2 which connects Algeria
to Spain (Palma de Majorca); the TAT 14 transatlantic system that connects the United States to Europe and which alone provides a capacity 64 times greater than that offered by existing transatlantic submarine cables before it was commissioned;
Sea-Me-We3, the longest cable in the world connecting Western Europe to Southeast Asia, Eurafrica (between France, Portugal and Morocco); Ariane 2 (between France and Greece); Atlantis 2 (between
Western Europe, Africa and South America), Americas 2 (between Brazil and the United States); the Japan U.S. cables (connecting Japan and the West Coast of the United
States over a distance of 21,000 kilometers); and the APCN 2 (Asia Pacific Cable Network 2, connecting Singapore to Japan and serving the Philippines, Hong Kong, China, Taiwan and South Korea), which meet all the transmission needs generated by the
explosion in data and Internet traffic across the Pacific and in Asian countries.
Moreover, historically, the France Telecom cable fleet, through its subsidiary France Telecom Marine, handles the maintenance of submarine links in the North Atlantic and the Mediterranean, under the ACMA (Atlantic Cable
Maintenance Agreement) and MECMA (Mediterranean Cable Maintenance Agreement) maintenance contracts. Further coverage was added recently by Safe-Sat3 cables off the coast of southern Africa. In 2003, France Telecom Marine was able to renew the ACMA
and MECMA contracts that expired in late 2003 and early 2004 for periods of three and four years respectively. Recognized for the technical quality of its services, France Telecom Marine coordinated submarine cable repair operations after the May
22, 2003 earthquake in Algeria, the most extensive operation in the history of submarine cables.
Satellites
France Telecom is refocusing on its core business as a telecommunications services operator and has decided to sell its interests in satellite operators. Thus,
after selling its interest in satellite network operator Stellat to Eutelsat for a total of
€
181 million in September 2002, France
Telecom sold its entire stake (23.1%) in Eutelsat (in which it was the leading shareholder) for
€
447 million in April 2003. The
buyer is the company, Bluebirds, which is majority-controlled by the company, Eurazeo. As a result, France Telecom, which originally bought a 20% stake in Bluebirds, now indirectly holds 4.6% of Eutelsat. See “– 4.4 Divestitures”.
France Telecom also holds 4.23% of Intelsat’s capital, whose
worldwide satellite communications network carries a large number of intercontinental telephone links and transoceanic audiovisual transmissions.
France Telecom will continue to use the satellite infrastructure of these operators for its needs in terms of international links and for its telephone, data and
audiovisual transmissions. In addition, France Telecom will continue to operate its own telecommunications satellite network, Telecom 2, which currently includes four satellites until the end of their operational lives, forecast for between 2004 and
2006. France Telecom will determine, at the end of this period, the manner in which it will ensure its satellite transmission needs, which are currently in decline, by extending the life of the Telecom 2D satellite through an operational phase in
inclined orbit and by purchasing space on external satellite fleets. The Telecom 2 network is used to establish links for the general network with the French overseas departments and for the routing of audiovisual services marketed by its subsidiary
GlobeCast, which is one of the world leaders in providing these kinds of services.
France Telecom is a supplier of wireless satellite telecommunications services through its subsidiary France Telecom Mobile Satellite Communications. It markets mainly Inmarsat (International Maritime Satellite) services
especially designed for ships and aircraft, but which can also cover land-based telecommunications needs from highly isolated regions. France Telecom, which held 5% of Inmarsat’s capital sold its interest at the end of 2003. See “–
4.4 Divestitures”.
Finally, and most recently, satellite is an
effective means of supplementing existing high-speed Internet access offers throughout the country. Under its commitment to develop “High-Speed for All”, France Telecom is offering new high-speed satellite Internet access services in an
alternative product offering for areas currently with less coverage by ADSL connections. Distributed by the different France Telecom subsidiaries, this service is designed especially for professionals, businesses and local authorities and is
available throughout continental France.
European Backbone Network
(EBN)
At December 31, 2003, the France Telecom Pan-European
backbone network directly connected 37 cities, including seven in France, and was interconnected with the networks of France Telecom subsidiaries and partners. Its partners also connect their customers to the basic network through their local loops,
making connectivity a reality throughout Europe.
The EBN, a fiber optic
network, whose wavelength capacity which grew based on demand, is designed to carry unit flows of 2.5 to 10 Gbit/s on each line, with a capacity of as much as 1.2 Tbit/s with no additional cables required. The network guarantees connections of 45
Mbit/s to 10 Gbit/s and offers a number of advantages, such as 99.95% availability, centralized network management, and customer service available 24 hours a day. End-to-end infrastructure control also contributes to easier management and greater
simplicity by allowing access to international services without connecting through multiple operators.
North American Backbone Network
The France Telecom North American backbone network began operating in September 2000. It is a transmission network approximately 24,000 kilometers in length which,
since April 2002, has provided commercial connections for 15 major cities in North America. It is interconnected with the main international submarine cables and with the France Telecom European
backbone network through the TAT-14 (TransAtlantic-14) submarine cable. This secure backbone network, which has a capacity of up to 1.6 Tbit/s depending on demand,
carries all types of traffic – Internet, data, voice and multimedia.
With this network, France Telecom can meet the needs of the Group as a whole, especially in terms of high-speed Internet needs between the United States and Europe.
Equant also uses this transmission network as support for its broad range of products and services designed for multinational
corporations, especially for the following products: Equant IP VPN, Equant Internet Direct, Equant Frame Relay and Equant ATM.
This network also serves as a vehicle for a wide range of wholesale telecommunications sales services such as Open Transit Mobile, Open Transit Internet, Open
Transit Bandwidth and Open Transit Voice.
Designed mainly for Internet
traffic and data transmission which represent, in volume, most of the traffic between Europe and North America, the North American backbone network provided 12 10 Gbit/s lines at the end of 2003. With local supervision 24 hours a day, seven days a
week, this network allows France Telecom to provide detailed information to its customers in real time on the level of service offered.
TP Group
At December 31, 2003, the TP Group had approximately 11.1 million access lines in service (10.8 million at December 31, 2002 and 10.5 million at December 31, 2001). The number of ISDN channels increased to 1.06 million at
December 31, 2003, representing 9.5% of the total number of fixed lines of the TP Group.
4.10.2 R
EAL
P
ROPERTY
At December 31, 2003, the real property, including equipment considered as real assets, of France Telecom was recorded on its balance sheet (net book value) in the amount of approximately
€
5.9 billion, compared to
€
6.1 billion at December
31, 2002 and
€
6.3 billion at December 31, 2001. These properties are used to house telecommunications facilities, research centers,
customer service centers and commercial offices.
When France Telecom
was converted to a French corporation on December 31, 1996, all the assets of the former public operator France Telecom were declassified from the public domain and transferred to France Telecom S.A. For a description of the relations between France
Telecom and the French State, see “Item 6. Directors, Senior Management and Employees – 6.3 Corporate Governance – Governmental and Parliamentary Oversight”.
The real estate department, created in 1996, represents in France the “owner” within France Telecom. It distributes
properties among the different departments. These properties are billed based on market conditions, and unused properties are sold or, failing that, rented to third parties. France Telecom expects that a certain number of its properties will become
superfluous in the coming years. In November 2001, France Telecom signed a framework agreement for the sale of 473 properties for a total of
€
2.97 billion to two consortia of investors. At December 31, 2003, under this agreement and the amendments thereto, 409 of the 473 properties were sold for
€
2.6 billion. In June 2002, France Telecom signed a memorandum of understanding with another consortium of investors for the sale of an additional portfolio of 457
buildings for approximately
€
510 million. At December 31, 2003, under this agreement and the amendments thereto, 389 buildings were
sold for a total of
€
419 million.
Most of the buildings sold are rented by France Telecom.
With these disposals, the vast majority of the France Telecom negotiable real estate assets in France were sold.
Furthermore, Orange, Wanadoo and Equant essentially rent the buildings that are
necessary for their operations.
As for the TP Group, at December 31,
2003, Telekomunikacja Polska (TP S.A.) owned approximately 2,500 properties in Poland. The approximate total surface area of developed properties was 1.9 million square meters, and the surface area of undeveloped land was approximately 9.8 million
square meters.
4.11 LEGAL PROCEEDINGS
In the normal
course of business, France Telecom is involved in a certain number of judicial, arbitration and administrative proceedings.
Provisions are set aside to fund the expenses resulting from such proceedings only when they are probable and the amount can be quantified or estimated within a
reasonable range. If this is the case, the amount set aside corresponds to the lowest amount in the estimated range. The amount of the provisions is based on an assessment of the level of risk on a case-by-case basis, and does not initially depend
on the stage of the proceeding. However, events occurring during the proceedings may result in a reassessment of the risk.
With the exception of the proceedings described in Note 29 of the Notes to the Consolidated Financial Statements,
neither France Telecom nor any of its subsidiaries are parties to any suit or arbitration proceeding (and France Telecom is not aware of any proceeding of this nature planned by governmental authorities or by third parties) which the management of
France Telecom believes could reasonably have a significant negative effect on the Group’s earnings, business operations or consolidated financial condition. See “Item 5. Operating and Financial Review and Prospects – 5.7.1 Subsequent
Events”.
See Note 29 of the Notes to the Consolidated Financial
Statements and for risks related to legal proceedings, see “Item 3. Key Information – 3.3.4 Risk Factors Relating to Legal Proceedings”.
4.12 REGULATION OF FRANCE TELECOM
The
business climate in France and in the countries where France Telecom operates is becoming increasingly competitive and dynamic. France Telecom remains subject to a wide array of regulations that can have a major effect on the way it conducts its
activities. The regulations that are the most important for France Telecom are European regulations insofar as EU directives are the driving force behind the regulations of Member States (see “– 4.12.1 EU Regulations”), including
France (see “– 4.12.2 French Regulations”) and the United Kingdom (see “– 4.12.3 Regulations in the United Kingdom”).
For information regarding risks related to the regulatory framework applicable to France Telecom, see “Item 3. Key Information – 3.3.2 Risk Factors
Relating to the Telecommunications and Wireless Industries - Despite the current trend towards deregulation in France and other European countries, France Telecom continues to operate in highly regulated markets in which its flexibility to manage
its business is limited”.
4.12.1 EU R
EGULATIONS
Member States must comply with EU legislation when enforcing their own legislation.
The institutions of the European Union have adopted a number of directives establishing an open and harmonized telecommunications market, based on two separate and complementary processes—liberalization and compatibility.
An initial series of directives, adopted under Article 86 (3) (formerly 90 (3)) of the EC treaty on national monopolies, requires the deregulation of national telecommunications markets and the elimination of the monopoly rights of public operators
or operators licensed before January 1, 1998. A second series of directives, adopted under Article 95 (formerly 100(A)) of the EC treaty on reconciling the legal, regulatory and administrative law of the Member States, sets the conditions for
compatibility of access and the use of public telecommunications networks within Member States (“The Open Network Provision” or “ONP Directives”).
These regulations have been replaced by a new regulatory framework. The laws under this framework were passed in March 2002 and took
effect on July 25, 2003. This new regulatory framework, described below, confirms the deregulation process in the telecommunications sector and expands it to include the electronic communications sector as a whole, affirming a desire to reconcile
the specific regulatory framework with competition law. However, at December 31, 2003, France had only partially transposed the new regulatory framework into its domestic legislation.
Directives Governing the Deregulation of Telecommunications Services
The basic directive on the deregulation of telecommunications services was adopted on June 28, 1990. In order to complete the
liberalization process, a directive adopted on March 13, 1996 requires (i) full deregulation, effective July 1, 1996, of the use of alternative infrastructures (including telecommunications railway infrastructures) used to provide all
telecommunications services other than voice telephony, and (ii) the total deregulation of voice telephony and the public telecommunications infrastructure effective January 1, 1998 (subject to interim measures for some Member States, not including
France).
These successive directives were replaced by Directive
2002/77/EC of September 16, 2002, which repeats the prior provisions, adding essentially all electronic satellite communications services to the scope of the directive on deregulation. Directive 2002/77/EC was supposed to have been transposed into
domestic law before July 25, 2003.
Likewise, the directive on
establishing a common framework for granting licenses and general authorizations in the area of telecommunications services adopted on April 10, 1997, was replaced by Directive 2002/20/EC of March 7, 2002, the “Authorization” directive,
adopted on February 14, 2002, which was also to be transposed into domestic law before July 25, 2003. This directive repeals the individual licensing systems in favor of a general authorization system. Only allocations of rare resources (mainly
radio frequencies and numbering) will require an individual license. Although some Member States have not yet fully transposed the new directives of the European regulatory framework, most of the regulatory authorities are already applying the
principles of the “Authorization” directive in Europe. This is specifically the case with the ART in France which, in the summer of 2003, produced guidelines setting forth the use of regulations in France between July 25, 2003, the
transposition date for the directives under EU law, and the date these directives were actually transposed in France.
The Former European Regulatory Framework – the “Open Network Provision” on the harmonization of telecommunications services
For the Member States that have not yet transposed the new directives, but also as
long as the market analyses required by these directives and conducted by national regulatory authorities have not been completed (to date, only OFTEL has released
the results of its market analyses in the United Kingdom), the ONP provisions still represent the foundation for regulations in the telecommunications industry. They
are intended to bring about compatibility in technical interfaces, conditions of use and pricing principles throughout the European Union, and to guarantee objectivity, transparency and non-discrimination in access to the services provided under ONP
requirements. On June 28, 1990, at the time the first of the directives on liberalization was adopted, the European Union adopted an ONP “framework” directive on providing an open telecommunications network. It was followed by other
directives on leased lines in June 1992 and on voice telephony in December 1995. The ONP “framework” and ONP “leased lines” directives were revised on October 6, 1997 to adapt to full deregulation of the telecommunications
market.
The interconnection directive adopted on June 30, 1997 defines
the principles for pricing interconnection services and for charging the costs of universal service obligations, imposes special accounting requirements in order to avoid the artificial support of one activity by another by means of unfair crossed
subsidies, sets the principles for access to essential facilities (pipes, ditches, plants and buildings) and the assigning of telephone numbers, defines the role of national regulatory authorities and institutes a common dispute resolution
procedure.
Operators defined by national regulatory authorities as
exercising a “significant influence over a relevant market”, must offer an interconnection to other operators on a reasonable and non-discriminatory basis. Operators are assumed to exercise a significant influence if they have over a 25%
share of a particular telecommunications market in the geographic area in which they are allowed to operate. National regulatory authorities may, however, decide that an operator with a market share below 25% in the corresponding market has a
significant market influence or that an operator with a market share of over 25% does not. In either case, the decision of the national regulatory authorities must take into account the ability of the operator to influence market conditions, the
operator’s revenues compared to the size of the market, its control over access for end users, its access to financial resources and its experience in providing services and products on the market.
Furthermore, operators that are assumed to exert a significant influence over the
interconnections market (that is the combined interconnection market, including both wireless and fixed line networks) must:
n
bill interconnection charges on a cost basis in keeping with the principles of transparency. The burden of proof that the charges result from real costs, including a reasonable rate of return
on investments, falls upon the operator providing the interconnection to its facilities;
n
release an interconnection offer that must include a description of interconnection products and rates. Different interconnection rates can be set for different categories or different
operators if such differences can be justified objectively based on the type of interconnection provided and/or the terms for issuing national licenses. National regulatory authorities must ensure that such differences do not distort the
competition. They have the option of imposing changes on the reference interconnection offer if justified.
On February 26, 1998, the European Council adopted a directive replacing the December 1995 ONP directive on voice telephony in the context of full deregulation of
telecommunications infrastructures and services effective January 1, 1998. This directive establishes the features of a universal service applicable throughout the European Union.
On September 24, 1998, the European Council and the European Parliament adopted Directive 98/61 amending Directive 97/33 on
interconnection in order to provide for the portability of numbers and the preselection of a long distance carrier effective January 1, 2000. Recommendations on interconnection pricing, accounting separation, cost accounting, data packet-switching
and ISDN offers (integrated services digital network) were also adopted by the Commission.
In a judgment issued December 6, 2001, the European Communities Court of Justice ruled that France had failed to meet its obligations regarding the proper transposition of Directive 97/33 on interconnection and, more
specifically, had violated the regulations regarding the financing and calculation methods for universal service.
Order no. 2001-670 of July 25, 2001 amended the French Postal and Telecommunications Code to transpose the EC directives adopted in 1997 and 1998 after the French
law of July 26, 1996 on telecommunications regulations. The seven directives include Directive 97/33 on interconnection.
The French Minister of the Economy, Finance and Industry has set by decree the contributions by the different operators to universal service (see “–
4.12.2 French Regulations – Universal Service”) for the years 2000, 2001 and 2002 and adjusted the contributions set for the years 1997, 1998 and 1999, taking into account the foregoing decision by the European Communities Court of
Justice.
The New European Framework
The European Commission has undertaken a revision of the overall European legal
framework. Four directives, published in the EC Legal Gazette (the
Journal Officiel des Communautés Européennes
) on March 7, 2002, replaced the previous legal framework from July 25, 2003. A new “framework” directive
and several specific directives including an “Authorizations” directive described above, an “Access” directive, which essentially replaced the “Interconnection” directive, and which expands the scope to
include network access, and the “Universal Service” directive, which deals with matters of consumer protection, bolstering the powers of the national
regulatory authorities by giving them the option of overseeing pricing and by expanding their investigative powers over the accounts of the company responsible for universal service. The new European regulatory framework is also based on a decision
adopted in March 2002 relating to the management of radioelectronic frequencies. In addition, a directive on the processing of personal data and privacy protection in the electronic communications sector was adopted on July 12, 2002. The stated goal
of these changes is to introduce a new more flexible system suited to a deregulated market that will stimulate competition and, in particular, provide high-speed Internet access. The new legal system should be less restrictive and leave more room
for the free play of competition. One of the guidelines adopted by the European Commission is to define significant market influence based on market analysis guidelines and calculation of power over the market. Thus, the 25% market share threshold
will be replaced by a market analysis equivalent to the one conducted by competition authorities to determine whether or not there is a dominant position on a given market. The regulatory authorities will also be able to find that several operators
are “jointly” in a dominant position. This dominant position will not be based on market share held, but rather on an analysis by the market regulatory authority concerned and on an evaluation of the competitive nature of the market, in
accordance with the concept of joint domination. Under the new system, when a regulatory authority finds that an operator is dominant, either alone or jointly, the authority is allowed to impose the appropriate regulatory requirements in relation to
the size of the market concerned.
However, proof of joint dominance
must be rigorously proven, as demonstrated by the overturning of the Commission’s decision by the European Communities Court of First Instance in the case of Airtours v. First Choice.
UMTS
On December 14, 1998, the European Parliament and the Council of Ministers adopted decision no. 128/99/EC relating to the coordinated introduction in the
European Union of third generation mobile telecommunications services (UMTS). The purpose of the decision was the rapid and coordinated introduction of mutually compatible UMTS networks and services within the European Union. The decision called for
Member States to take all necessary steps to allow the gradual coordinated introduction of UMTS services in their countries before January 1, 2002 and to implement a UMTS licensing system before January 1, 2000. The decision also called for Member
States to see to it that UMTS services are provided on compatible frequency bands in compliance with common standards. UMTS licenses granted to new entrants had to allow roaming within the European Union. Member States also were required to
encourage operators to negotiate roaming agreements with each other to ensure homogenous coverage throughout the European Union.
Legislation Governing Competition
European Community competition law has three main components. The first component consists of Articles 81 and 82 of the EC treaty (formerly Articles 85 and 86).
They prohibit all unfair trade practices intended to or having the
effect of restraint of trade within the European Union or affecting trade among Member States. Articles 81 and 82 apply to all companies, both public and private, and hence to France Telecom. Article 81 prohibits agreements among companies in
restraint of trade within the European Union, and Article 82 prohibits the abusive use of a dominant position held by any company in a substantial part of the common market.
As an example, under Articles 81 and 82, the European Commission Competition Office opened an inquiry on July 27, 1999 into the
telecommunications industry, notably roaming services, the supply and pricing of leased lines and the supply and use of local loop access. On December 11, 2002, the Commission decided to close the industry inquiry on leased lines, in that, in three
years, the price of international leased lines had dropped considerably throughout the European Union. The investigation into the supplying of local loop access, as applied to France, ended in a decision by the European Commission (on July 16, 2003)
condemning Wanadoo Interactive for abuse of dominant position in the form of predatory pricing on the high-speed Internet access market. Wanadoo Interactive filed an appeal with the European Communities Court of First Instance on October 2, 2003,
the outcome of which is not yet known. Regarding roaming services, the European Commission is still analyzing documents it collected in July 2002 during an on-site audit at the Orange registered office.
A reform in the enforcement of Articles 81 and 82 will take effect on May 1, 2004 (the
European Union expansion date). On that date, the national competition authorities and the national courts will directly enforce Articles 81 and 82, if any unfair trade practices affect trade among Member States. Furthermore, the voluntary
notification system of corporate agreements to the Commission will disappear. A system of legal exception will apply to the agreements. The European Commission will refocus on the most serious violations. In addition, it will formalize its
cooperation with national authorities and courts dealing with matters of competition (“European competition network”) and it will have more extensive investigative powers.
The second component of European Community competition law is the control of mergers, subject to the mandatory notification system
under regulation 4064/89. Following public hearings starting in late 2001, a new set of European regulations will go into effect on May 1, 2004. It will introduce a change in the assessment test for merger operations (the merger will be
reviewed from the standpoint of “significant infringement of competition” and no longer from the standpoint of “the creation or strengthening of a
dominant position”) and will further strengthen the powers of the Commission. Conditions with regards to timing will also be more flexible.
The third component of European Community competition law concerns the rules on assistance granted by European Union Member States, described in Articles 87 and 88
of the EC treaty (formerly Articles 92 and 93). Article 87 of the EC treaty prohibits (subject to certain exceptions) assistance granted by European Union Member States or using their resources that affects trade among Member States, or that
distorts or threatens to distort competition. Article 88 of the EC treaty calls for the European Commission to enforce Article 87 of the EC treaty, and grants the authority to the European Commission to investigate and rule on the compatibility with
Article 87 of the EC treaty of the measures constituting State assistance.
On January 30, 2003, the European Commission notified the French State that an investigation was being opened on possible assistance from the French State to France Telecom. See Note 29 of the Notes to the Consolidated Financial Statements.
4.12.2 F
RENCH
R
EGULATIONS
The French legal and regulatory system described below should have been updated before July 24, 2003 in order to comply with the directives of March 2002 (see “– 4.12.1 EU Regulations – The New European
Framework”). To date, most of the updates have not been implemented. However, several laws now being drafted or recently adopted reflect the new European regulations,
i.e
.:
n
French law no. 2003-1365 of December 31, 2003 relating to telecommunications public service obligations and to France Telecom, transposing primarily the new European regulations on providing
universal service, also aimed at amending the status of France Telecom so that the French State is no longer required to own at least the majority of its capital;
n
a bill relating to confidence in the digital economy, transposing the “Electronic Commerce” directive as well as the provisions of the new framework in terms of personal data
protection. This bill is before the Parliament and may be enacted in the first months of 2004;
n
a bill relating to electronic communications and audiovisual communications services, aimed at transposing the remainder of the new European framework. It may be enacted by order some time
during the first half of 2004;
n
guidelines adopted by the Ministry of Industry and the ART on July 17, 2003 in order to specify the legal framework applicable in the major regulatory areas for the period between July 25,
2003 and the time the transposition laws are enacted.
Legal Framework
(before transposition of the new directives)
The French
telecommunications regulatory system was completely reformed by French law no. 96-659 of July 26, 1996 (Telecommunications Regulatory Act, the “LRT”), the general objective of which was to create a framework for a fully competitive
telecommunications market, to ensure the provision of universal service, and to establish an independent regulatory authority. These objectives partially reflected initiatives to deregulate telecommunications by the European Union which will
continue to influence French regulations in the future. In accordance with these objectives, the LRT created the ART. The LRT was implemented through a series of detailed regulatory measures (decrees or orders) covering specific areas. The LRT
established the principle of licensing based on specifications (
cahier des charges
) to perform the activities governed by Articles L. 33-1 (establishment and operation of public telecommunications networks) and L. 34-1 (providing public
telephone service). The
cahier des charges
detail the obligations that apply to the service or network in question. The general conditions for the two principal types of
cahier des charges
have been defined by decree. The LRT also
requires France Telecom to provide certain public services. More specifically, France Telecom must (i) provide certain basic telephone services throughout France (“universal service”), (ii) provide access to the integrated service digital
network (ISDN), leased lines, packet data switching, advanced voice telephone services and telex (the “mandatory services”), and (iii) perform a certain number of public interest missions in the areas of defense, security and public
research. These missions must be performed in accordance with the detailed provisions stipulated in
cahier des charges
adapted to the company, adopted by Decree no. 96-1225 of December 27, 1996 (the “Specifications”). In 2001, the
LRT was supplemented by Order 2001-670 of July 25, 2001 adapting the French Intellectual Property Code and the French Postal and Telecommunications Code to European Community law. This order completed the transposition of the European
“ONP” directives (see “– 4.12.1 EU Regulations”) organizing the harmonized deregulation of the telecommunications sector.
Among the modifications made by this order, the most significant include:
n
the clarification of the conditions under which an operator may be considered a significant market player, and in which markets. Although the LRT did not specify a pertinent
market, four clear markets were defined: (i) the public fixed line telephony market; (ii) the leased lines market; (iii) the public wireless telephony market; and (iv) the domestic interconnection market. In addition, the 25% market share threshold
above which an operator is presumed to have a
significant influence is an adjustable one. The ART may decide, after consulting the French Competition Council (
Conseil de la concurrence
), that an operator
holding less than 25% of the market share is a significant player, while deciding, on the other hand, that an operator holding more than 25% of the market share is not a significant player;
n
the easing of verification procedures of conformity for terminal equipment for telecommunications by replacing the approval system with a simplified evaluation system in accordance with
essential requirements. The authorization procedure for placing telecommunications terminals on the market,
i.e.
, approval of the terminal to be delivered by the ART, was eliminated. Equipment may now be freely placed on the market as long as
it has received an approval of conformity by its manufacturer or by a recognized authority that is charged with setting the applicable norms and verifying conformity;
n
the confirmation of France Telecom as a universal service operator for directories and telephone information services and the disbanding of the independent organization that previously
established and updated directories and telephone information. It provides for the publication of a decree that specifies the terms for implementing directories and universal information services (see “– Universal Service”);
n
the clarification and strengthening of the ART’s intervention authority, which provides specifically for official authority to define the terms or conditions of interconnection and
access as well as the ability to set deadlines for negotiations in these matters.
Finally, certain activities of France Telecom are subject to specific regulations other than the ART. These include cable and radio broadcast operations.
Moreover, as a result of the recommendations of the French
Inter-ministry Committee on the development of the territory dated December 13, 2002, legislative changes have been proposed under the draft legislation on confidence in the digital economy to allow local authorities “to perform the functions
of operators” in accordance with conditions to be defined. This possibility is a response to governmental concerns about the development of telecommunications with two priorities—the coverage of “white zones” (zones not covered
by the wireless telephony operators) and access to high-speed Internet.
Thus, in July 2003, wireless operators signed a national convention with the French State, elected representatives and the ART to program the extension of coverage in the country to the “white zones”. The sites in question will be
covered either using the local roaming technology (a single operator operates the site and welcomes the subscribers from the other two), or using the pooling of infrastructures technique (a common pylon supports the facilities of the 3 operators).
The legislative and regulatory framework will change again with the
transposition of the directives of March 7, 2002 (see “– 4.12.1 EU Regulations – The New European Framework”), particularly the adoption of the provisions stipulated in the draft legislation on electronic communications and
audivisual communication services discussed above.
Moreover, guidelines
were adopted on July 17, 2003 by the French Ministry of Industry and the ART to specify the legal framework to be applied to the principal regulatory areas (
i.e.
, licenses, fees, frequencies and numbering, the obligations of powerful
operators with respect to interconnection and access, rate authorization, the supply and financing of universal services and dispute resolution) during the transition period (the period between July 25, 2003 and the date of full transposition of the
directives). These guideliness ensure continuity for the existing obligations, including interconnection and unbundling, and the approval of an interconnection catalogue is maintained for 2004. However, it recognizes the liberalization of the
licensing system for new entrants.
Regulatory Authorities
Under the LRT, regulatory functions are divided between the minister responsible for
telecommunications and the ART. The ART, which commenced operations on January 1, 1997, is a regulatory body independent of the government, with its own staff and its own budget funded partly by fees paid by operators and partly from state funds.
The ART has five members who cannot be removed prior to the expiration of their terms. The chairman and two other members are appointed by the government, and one is appointed by the president of each house of parliament (the
Sénat
and
the
Assemblée Nationale
). A full term for a member of the ART is six years.
The ART monitors operators’ compliance with applicable legislative and regulatory provisions under the French Postal and Telecommunications Code and their licenses. The ART can punish failure to meet these obligations by
suspending the operator’s license, reducing the period of validity by up to one year, or by revoking it outright. It can also levy fines of up to 5% of the operator’s annual revenues.
The ART reviews applications for licenses to set up and operate public networks on
behalf of the minister responsible for telecommunications as well as license applications to provide telephone service to the public. It also reviews applications for the licenses needed to provide public services using radio frequencies. See
“– Licensing”. Starting on July 25, 2003, the system relating to authorizations was modified and the ART implemented a mechanism of prior declaration that applies to
operators of networks that are open to the public and to providors of telephony service to the public that have not already obtained an individual authorization
pursuant to Articles L. 33-1 and L. 34-1 of the French Postal and Telecommunications Code, and this will apply until the adoption of the bill relating to electronic communications. Operators will therefore obtain a receipt from the ART that will
give them the rights and obligations associated with the authorization system.
Each year, after notice from the
Conseil de la concurrence
, the ART draws up the list of operators that exert a significant influence on a given market (public fixed line telephony service, leased lines, public wireless telephony
service, or the national interconnection market). The process of designating operators with a significant influence with respect to interconnection and access was revised in 2003 in order to ensure the maintenance of obligations in 2004 until the
adoption of the new laws pursuant to the “Access” directive that calls for the maintenance of obligations applicable before its effective date, as long as the national regulatory authority has not conducted market analyses and made
corresponding decisions.
With respect to interconnection, according to
the process revised in 2003 for the year 2004, the ART determines which fixed line operators must publish a technical and rate catalogue (“interconnection catalogue”). This catalogue must receive prior approval from the ART. Pending the
market analysis and the definition of corresponding obligations as stipulated by the “Access” directive, the minister responsible for telecommunications and the ART renewed the process for approving the interconnection catalog under the
current system inasmuch as this system ensures the continuity of the existing framework and has been endorsed by all operators. Furthermore, the interconnection Decree no. 97-188 of March 3, 1997 provides an interconnection advisory committee within
the ART. The committee is primarily composed of licensed operators and chaired by the ART, which determines membership and procedures. This committee has since met regularly. Pursuant to Article L. 36-8 of the French Postal and Telecommunications
Code, should there be a refusal to provide interconnection, a breakdown in business negotiations or a disagreement concerning the signature or execution of an interconnection contract or access to a telecommunications network, a disagreement on the
conditions for supplying telecommunications services via the cable network, a disagreement on the possibilities and conditions of shared usage of rights of way and easements or on the sale of lists for universal directories, either party may refer
the dispute to the ART. Moreover, since the order of July 25, 2001, the ART has decision-making power under the terms of Article L. 36-8 to define the terms or set the specific conditions of an interconnection agreement and to set the deadlines for
the negotiation of such agreements. Under this same order, and following the publication of the universal directory decree of August 1, 2003, it can now, as stipulated in Article L. 33-4 of the French Postal and Telecommunications Code, be
petitioned under Article L. 36-8 to settle disputes related to the technical and financial terms for the sale of subscriber lists for publishing a universal directory or providing universal information service. With respect to unbundled access to
the local loop, the ART has the authority to modify the reference offer to access France Telecom’s local loop pursuant to the EU regulation of December 18, 2000.
The ART is responsible for implementing and managing the numbering plan, for allocating those band frequencies it has been assigned,
for participating in the preparation of technical standards and for supervising the network interface declarations.
The numbering and use of frequencies are subject to payment of an annual fee, pro-rated on the basis of the first and last years of allocation in the case of
frequencies.
The ART is responsible for issuing opinions on proposed
laws, decrees or regulations relating to the telecommunications sector and for participating in their implementation. Together with the Minister of the Economy, Finance and Industry, and after consulting the ART, the minister responsible for
telecommunications approves the rates for universal service and those for services for which there is no competition in the market. This procedure was revised in July 2003, and new Article L. 35-2 of the French Postal and Telecommunications Code, as
modified by the law of December 31, 2003, will not be applicable until after publication by decree, which will determine the terms and conditions of its application and will set forth the conditions according to which the prices and the quality of
universal service will be verified. In the absence of the decree, France Telecom remains subject to the obligations of price control that were applicable before the law of December 31, 2003, as provided for by this law.
The ART determines the amount of net contributions of operators and the sums due by
the operators’ fund responsible for universal service obligations. The minister responsible for telecommunications designates the operators responsible for the three components of universal service covering all of the national territory
(quality telephony service at a reasonable price, universal information service, universal directory in electronic and paper forms and access to public telephone booths on the public domain). However, before the designation of the operator(s)
responsible for universal service at the public bidding process planned for December 31, 2004 at the latest, France Telecom continues to fulfill the public interest obligations that are applicable to it according to the applicable conditions before
the promulgation of the law of December 31, 2003 (see “– Universal Service”).
Since January 1, 1997, the
Agence Nationale des Fréquences
(“ANFR”) has been responsible for planning, managing and monitoring the usage of radio frequencies and for coordinating the establishment of
certain radio transmission facilities. The frequency spectrum is divided among eleven oversight authorities: government ministries, the ART and the
Conseil Supéreur de l’Audiovisuel
(“CSA”). The ART and the CSA have the authority to redistribute the frequency bands over which they have control to users. The use of frequencies by
telecommunications operators, including France Telecom, requires a usage fee. The ANFR is an administrative agency of the French government. Its board of directors is composed of representatives of radio frequency users such as certain ministries
(for example, Defense or Foreign Affairs), the CSA and the ART and individual members of the industry chosen for their areas of expertise.
Licensing
The LRT stipulated that, although the telecommunications business could be operated on a free and open basis, a certain number of its activities had to be licensed. Thus, it required that any applicant that wanted to establish
and operate a public network and provide public telephone service had to obtain a license from the minister responsible for telecommunications.
The future transposition of the “Authorization” directive into domestic law should, however, considerably modify this licensing system insofar as this
directive stipulates that an individual license will no longer be required to enter the market. In principle, the existing licenses had to be adapted to the new framework as of July 25, 2003.
Article 17 (§ 1 and § 2) of the “Authorization” directive does,
however, provide for a transitional phase that allows the national regulatory authorities to extend the licenses existing on July 25, 2003 until April 24, 2004 so long as they are not incompatible with the objectives of the “Authorization”
directive in force since July 25, 2003.
Pending the adoption of the law
transposing the “Authorization” directive, and in order to comply immediately with the objectives contained in this directive, the July 25, 2003 guidelines stipulate that the minister responsible for telecommunications and the ART may no
longer require that operators obtain an individual license as of that date. This new rule will also apply to those operators that filed a license application before July 25, 2003, but had not yet received a response by then.
However, to ensure to operators without a formal license the security required in
terms of the legal status of their activities, the ART has implemented a mechanism of prior declaration that is to be applied until the adoption of the electronic communications bill or any other legal text transposing certain provisions of the
aforementioned directives. Thus, the operators will be issued a receipt by the ART that will enable them to assert rights (interconnection, rights-of-way and others) and to know their financial obligations (taxes, contribution to universal service,
etc
.) under the licensing plan.
The ART published the terms of
the general transitional licensing system on September 16, 2003. These terms also defined the practical rules for allocation of numbering and frequency resources.
During the transitional period, the general obligations in force that are compatible with part A of the annex to the
“Authorization” directive will continue to apply to operators, whether they already have an individual license or are filing their declaration after July 25, 2003.
The LRT stipulates that each license granted to public network operators or to those providing public telephony service had to include
specifications (
cahier des charges)
defining the obligations for the network or service in question, and which contain a set of model clauses set by decree. The general obligations that continue during the transitional phase may, for example,
govern the integrity of the public network that ensures communications, the confidentiality of communications, defense and public safety requirements (wiretaps), universal service (only relevant to France Telecom at present and until December 31,
2004 at the latest), the information needed to compile directories (subject to the protection of persons), interconnection, and the payment of taxes and license fees.
Until that date, licenses were issued by the minister responsible for telecommunications for a period of 15 years. These licenses were
renewable and were granted for payment of an initial filing fee, and then annual fees for management and monitoring, plus, if applicable, specific fees for the allocation of numbers and frequencies. As soon as an individual license is no longer
required to enter the market, the filing fee will no longer be justified under the “Authorization” directive. On the other hand, the annual management and monitoring fees will continue to be justified and, therefore, collected.
France Telecom was granted an operator’s license for public networks and to
provide public telephone service under a ministry order dated March 12, 1998 (as amended by an order dated September 27, 2002 and by an order dated November 8, 2002). As indicated by the guidelines published by the ART, over the transition period,
the general applicable obligations that are compatible with Part A of the annex to the “Authorization” directive continue to be applicable to France Telecom.
With respect to mobile telephones, France Telecom operated its GSM 900/1800 wireless network and provided public telephony services
under a license granted on March 25, 1991 and extended to the 1800MHz band on November 17, 1998. Since August 17, 2000, following the spin-off of France Telecom’s wireless activity, Orange France has operated the same network and provides the
same services under a new license issued to Orange France under the same terms and conditions, which expires on March 25, 2006. In compliance with the terms of the license, the conditions for renewing the license, like those for SFR, were defined in
March 2004. The license issued to France Telecom has been canceled. The license granted to Orange France contains, among other provisions, obligations in terms of
network coverage. The new conditions approved by the French government in March 2004 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 ART to ensure wireless coverage for all French towns and villages. The license may be modified by the minister responsible for telecommunications, in particular, on the basis of recommendations from the ART.
The operation of certain independent networks that provide telecommunications services
to one user or to a closed group of users must be licensed by the ART. Other types of independent networks are established freely. Pursuant to the “Authorization” directive, the guidelines of the ART, as well as the latest communication of
the ART “relating to the practical terms and conditions of the general authorization system and the attribution of numbering and spectrum resources”, entities that wish to develop, as a multi-GFU (closed group of users, or
groupe
fermé d’utilisateurs
), activities that are similar to those formerly authorized pursuant to Article L. 33-2 of the French Postal and Telecommunications Code, are invited to declare their activity as an independent network. The ART
made a declaration form available to these entities wishing to develop independent networks which will allow the ART to identify the entity making the request and to check the independence of the declared networks.
The licenses granted by the ART to independent networks until now will remain valid
according to their terms, and until the intervention of the implementing law. Pursuant to the regulatory system that is currently applicable to independent networks, operators who declare these types of networks after July 25, 2003 are not subject
to the payment of fees. However, an operator of an independent network is subject, as are all frequency users, to the payment of those corresponding fees.
Special Status of France Telecom S.A.
Under the LRT, France Telecom is subject to the legislative and regulatory regime that generally applies to all telecommunications operators. Furthermore, certain
provisions of the LRT expressly apply only to France Telecom. The monopoly of France Telecom ended on January 1, 1998. Finally, France Telecom is subject to obligations stipulated by the legislation governing state-owned companies.
The LRT requires France Telecom to perform certain public service missions pursuant to
the detailed conditions defined in a
cahier des charges
(Decree no. 6-1225 of December 27, 1996). The essential element of France Telecom’s public service obligations is the provision of universal service. See “– Universal
Service”. The LRT designated France Telecom as the public operator responsible for universal service, while reserving the possibility that operators from the private sector may provide universal service in the future. In addition to universal
service, France Telecom was required by the LRT to provide, throughout France, the following services: ISDN services, leased lines, packet-switched data transmission, enhanced voice telephony and telex service (the “mandatory services”).
Finally, like other operators, France Telecom is also required to carry out missions in the telecommunications field in the areas of national security, public research and higher education.
Rates for universal service and for services for which there is no effective
competition are subject to ministerial approval, after consultation with the ART.
France Telecom had to budget at least 4% of its unconsolidated annual revenues to research and development under its
cahier des charges
of December 27, 1996.
The December 27, 1996
cahier des charges
authorized the minister responsible for telecommunications to oppose any sale or
contribution by France Telecom of any part of the telecommunications network infrastructure needed to properly execute its obligations defined by this
cahier des charges
.
The law of December 31, 2003 relating to telecommunications public service and to France Telecom profoundly changed the context. All
of the provisions of the LRT that attributed public service missions to France Telecom were repealed. Also, the law of December 31, 2003 repealed the former provision that called for France Telecom to be subject to a
cahier des charges
,
implicitly repealing the cahier des charges. However, the provisions of the LRT relating to universal service and mandatory services and the
cahier des charges
remain applicable to France Telecom until the new procedure provided for by the
law to designate the operator(s) responsible for universal service is implemented (see “– Universal Service”).
Universal Service
Universal service within the framework of the LRT
The LRT
provides for access for everyone to quality telephone service (referred to as “universal service”) at a reasonable price and the availability of special rate schedules for users with special needs, notably because of income level or
disability, whatever their geographic location. Universal service includes telephone service to anyone requesting it, transmission of voice telephone calls, providing directory assistance and a subscriber directory in both printed and electronic
forms, service for public pay phones throughout France and free transmission of emergency calls. The government must deliver a report to the
parliament every four years containing proposals, if applicable, that reflect technical developments and societal needs. The report also can include new areas of
universal service and revisions to mandatory services.
Under the terms
of the LRT, France Telecom is the public operator responsible for providing universal service. France Telecom must provide universal service (see “– Special Status of France Telecom S.A.”) without discrimination based on geographic
location. No other operator may be required to assume the obligations of universal service, but any operator that has the capacity to provide the service nationwide can request to provide universal service. The obligation to carry emergency calls
free of charge applies to all providers of public telephony services.
As a provider of universal service, France Telecom is required to maintain an accounting system that determines the costs chargeable to compliance with its universal services obligations. The LRT requires that the accounting system be
audited by an independent agency appointed by the ART.
The LRT
instituted, through implementing decrees, two specific mechanisms to distribute the costs of providing universal service among all telecommunications operators. These mechanisms do not cover the cost of free transmission of emergency calls, which is
directly assumed by public telephone service providers. Since January 1, 2000, the supplemental interconnection fee requirement has been eliminated, and the only mechanism to distribute the net cost of providing universal service is the Universal
Service Fund. Every operator is required to contribute in proportion to its share of traffic, and is entitled to compensation from the Fund for all costs resulting from preferential rates applied to certain categories of customers. The minister
responsible for telecommunications sets the amount to be contributed to this Fund by the operators, by determining the net costs of the universal service they are required to provide. In addition, France Telecom is compensated for the cost of
providing public pay phones, universal service in terms of directory and information assistance and, since January 1, 2001, the cost of required geographic balancing.
Each year the minister responsible for telecommunications sets the net cost for providing universal service by order, based on the
recommendations of the ART using a methodology, the broad outlines of which are set by decree and detailed in the decisions of the ART. As the principal universal service provider, France Telecom is a net recipient of funds from the financing
mechanism. The final amounts for 1997, 1998 and 1999 were revised following an order from the European Communities Court of Justice on December 6, 2001 which found that France was not in compliance with EC provisions for financing universal service.
The ART proposed new assessments for universal service to the minister
responsible for telecommunications who made them official in an order dated July 11, 2002. The net cost for universal service was fixed at zero euros for 1997,
€
275 million for 1998 and
€
111 million for 1999.
The final net cost for universal service for 2000, the year when another operator,
Kertel, proposed subsidized rates, was set at
€
129 million. The final cost for 2001 was set at
€
142 million. The net budgeted cost for 2002 was assessed at
€
297 million.
Two decrees were adopted in 2003.
One dated August 1, 2003, concerns the universal directory and sets forth the procedure for operators to compile lists and to provide these lists to the publishers of universal directories and to those who provide universal information services.
The other, dated April 10, 2003, relates to financing the service and
introduces some changes in the methods for computing the cost of universal service in order to factor in all of the requests of the European Communities Court of Justice contained in its decision “C-146/00” dated December 6, 2001
(accounting for intangible benefits, revenues relating to the “
liste rouge
”,
etc.
). It also eliminated the elements that had become obsolete, such as additional compensation, and modified the method for calculating the
budgeted cost for universal service by replacing the budget forecast with an interim assessment made on the basis of the last known final evaluation.
Universal service within the framework of the law of December 31, 2003
French law no. 2003-1365 of December 31, 2003 governing the public service obligations for telecommunications and France Telecom modified the framework applying to
universal service for telecommunications.
Pursuant to Article L. 35-1
of the French Postal and Telecommunications Code, universal service is defined as providing the following to all:
n
quality telephone service at an affordable price that carries voice telephone calls, facsimile messages and data messages at sufficient speeds to access the Internet, from or to subscription
points, as well as transmission of emergency calls without charge. The rate terms for this service include maintenance for one year, and limited service in the case of non-payment;
n
information services and a subscriber directory in both printed and electronic form;
access to public pay phones installed in public areas;
n
special measures for disabled end users to ensure both equal access to the aforementioned services and the affordable nature of these services; the technical and pricing terms for the
universal service factor in the specific difficulties of certain categories of persons, notably because of their income level, and prohibit any discrimination based on geographic location.
An implementing decree will specify the enforcement procedures for Article L.35-1 of
the French Postal and Telecommunications Code and the content of each of the components of universal service.
France Telecom is no longer named the public operator responsible for universal service. Henceforth, pursuant to Article L. 35-2 of the French Postal and
Telecommunications Code, any operator willing to provide universal service throughout French territory, with the capacity to do so, may be charged with providing one of the following components of universal service: quality telephone service at an
affordable price with the aforesaid characteristics, an information and directory service and access to public pay phones. The operators responsible for these components are appointed at the end of a public bidding process. If the process is not
successful, the minister responsible for telecommunications will designate the operator with sufficient capacity to provide the service in question nationwide.
An implementing decree will define the conditions for the application of Article L.35-2 of the French Postal and Telecommunications Code and will establish the
conditions under which the rates and quality of the universal service will be monitored.
Pursuant to Article L. 35-3 of the French Postal and Telecommunications Code, the financing of universal service is still provided by the Universal Service Fund. The operator that is required to provide the universal service
will be entitled to a payment as soon as the net costs that can be charged to the required universal service represent an excessive charge. The net costs chargeable to the universal service obligations are valued on the basis of an appropriate
accounting kept by the operators responsible for these obligations. These operators are audited at their expense by an independent body appointed by the ART. The market advantage derived by the operators with these obligations is factored into the
net costs.
It should be noted that the net costs may not exceed the
commitments made in the bidding process.
The law of December 31, 2003
modifies the formula for allocating the net cost for universal service among the operators by opting for a contribution pro-rated on the basis of the revenues earned from telecommunications services (excluding sales revenues for interconnection and
access, and for services provided or invoiced on behalf of third parties). Operators whose revenues are below a threshold that will be set by a decree countersigned by the
Conseil d’Etat
(the French administrative supreme court) will be
exempt from a contribution to finance universal service. If an operator agrees to provide universal services under the technical and pricing terms specified for the categories of subscribers mentioned in Article L. 35-1, or one of the elements in
the directory or information service offer, the net cost of this service is deducted from its contribution. The aforementioned modifications will apply as of the final net cost for 2002 that must be determined before November 2, 2004. The ART
determines the amount of operators’ net contributions and the amounts owed by the fund to operators with universal service obligations.
The aforementioned decree adopted by the
Conseil d’Etat
will establish the procedures for implementing Article L. 35-3 of the French Postal and
Telecommunications Code.
Pursuant to Article L. 35-7 of the French
Postal and Telecommunications Code, the French government must report to the Parliament every three years on the implementation of its provisions relating to Chapter III, Title I of Volume II of the French Postal and Telecommunications Code relating
to public service obligations.
Article 9 of the law of December 31,
2003 provides that, until one or more operators are named responsible for universal service following the bidding process stipulated in Article L. 35-2 of the French Postal and Telecommunications Code, and no later than December 31, 2004, France
Telecom will continue to fulfil the public service obligations for which it was responsible under the earlier terms and conditions. It also stipulates that France Telecom remains subject to price controls.
Interconnection
The operator of any public telecommunications networks exerting significant influence on the market for fixed line telephony and
leased lines must publish, in detail, the technical and pricing terms on which it will provide interconnection services and must honor requests for interconnection presented by other public network operators and by public telephone service supplies,
under objective, transparent and non-discriminatory conditions. As a result, France Telecom is required to provide interconnection to its competitors on the same terms as those offered to its subsidiaries. Requests for interconnection may not be
refused if they are justified based on the applicant’s needs and the operator’s ability to meet those needs. Interconnection requests are governed by an agreement between the parties, which must comply with the requirements of the LRT and
its implementing decrees and a copy of which must be filed with the ART. The ART has the power, after consultation with the
Conseil de la concurrence
(the French competition regulatory body), to require modification of an interconnection agreement in the interest of fair competition
or inter-operability of telecommunications services. Finally, in the case of an interconnection dispute, any party may request arbitration by the ART. Its decisions are binding on the operators although the operators retain a non-suspensive right of
appeal.
Within the framework revised in 2003 for the designation of
operators having a significant influence over the market, four relevant markets have been defined: (i) the fixed line telephony market; (ii) the leased lines market; (iii) the public wireless telephony market, and (iv) the domestic interconnection
market. The constraints established by the ART differ depending on the market category in question. Public network operators exerting significant influence over the fixed line or leased line markets must publish a detailed technical and rate
schedule (“interconnection catalog”). These terms are subject to prior approval by the ART. The ART is responsible, after consultation with the
Conseil de la concurrence
, for determining which operators are subject to this
requirement. Any operator with a market share exceeding 25% in a relevant market is presumed to have a significant influence. The 25% market share threshold above which an operator is presumed to have a significant influence is flexible. The ART may
decide, after consultation with the
Conseil de la concurrence
, that an operator with less than a 25% market share exerts a significant influence, and conversely, may also determine that an operator with more than 25% does not have a
significant influence (see also section “– 4.12.1 EU Regulation – The New European Framework”). In addition to their obligation to meet interconnection needs, these operators must also honor justified requests for special access.
On July 24, 2003, the ART published the list of powerful operators for
the year 2004. In continental France, Orange France and SFR were designated as powerful operators on the retail wireless telephony market and on the domestic interconnection market. France Telecom was designated as exerting a significant influence
on the market for public fixed line telephony service.
France
Telecom’s interconnection terms effective as of January 1, 1998 have been published in a catalog containing the principal interconnection rates, the list of interconnection access points, the conditions for connection of third-party network
operators to these access points, the support services provided by France Telecom, the terms and conditions that applied to the selection of the carrier (call-by-call or preselection), the leased line interconnection to other operators and an offer
of partial leased lines and end links.
The interconnection rates of an
operator deemed to have significant influence on the fixed line telephony market must reflect the relevant costs. In its decision no. 02-1027 of November 5, 2002, the ART established the long-term average incremental costs as a benchmark for France
Telecom’s interconnection rates by replacing the relevant average book costs used until then.
On November 13, 2003, the ART approved France Telecom’s 2004 interconnection catalog (decision no. 03-1231). The catalog’s rates are based on the
long-term average incremental costs. The principal changes involve a change in the mechanism for invoicing on behalf of third parties (rate reassessment and extension of the system to send a reminder letter starting in June 2004), financial
penalties on the maximum time period for activating preselection and delivery of end lines, and a reduction in some deadlines for delivering interconnection resources. The ART wanted the technical and pricing terms for transit indicated in the 2003
catalog to be maintained, pending completion of the market analysis process and a formal decision on this point.
Unbundling of the Local Loop
The local loop is the network’s physical copper line circuit that connects the main cross-connect box with the end point located on the customer’s
premises.
In October 1999 in France, the ART published the results of a
public hearing on fostering competition in the local telephony services market. The ART noted, in particular, the importance of unbundling the local loop in light of the growing demand for broadband data services.
A decree dated September 12, 2000 (“decree relating to the local loop”)
requires dominant operators (currently only France Telecom) to honor reasonable requests for access to their local loop infrastructure. This decree, which opens the local loop to competition, became effective on January 1, 2001.
On December 18, 2000, the European Parliament and European Council adopted a
regulation on unbundled access to the local loop. This regulation requires that all operators with significant influence in the provision of fixed line public telephone networks provide fully unbundled or shared access to the local copper loop by
December 31, 2000.
Access to the local loop means either:
n
the incumbent operator provides access to all frequency widths in the copper metallic part of its network (full unbundled access to the local loop); or
n
the incumbent operator makes the “high” frequency band of the copper loop available to the third-party operator, while the low frequency band (telephone service) continues to be
managed by France Telecom (shared access to the local loop).
Pursuant to the local loop decree, access to the local loop also includes associated services, such as the supply
of the information necessary to implement access to the local loop, an offer to co-localize the equipment on France Telecom’s premises and an offer to allow the connection of this equipment to the networks of those requesting access. Access to
the local loop will be provided pursuant to a private contract (
convention de droit privé
), which must be forwarded to the ART within ten days of its signature.
Pursuant to the local loop decree, rates for unbundled access to the local loops must be oriented towards costs. The network
components must be valued on the basis of their average long-term incremental costs. Pursuant to Article D. 99-24 of the French Postal and Telecommunications Code, the ART established the nomenclature for pertinent costs and published the
calculation method for average long-term incremental costs in a decision dated October 31, 2000.
The regulation adopted by the European Parliament and European Council on December 18, 2000 grants the ART the power to impose modifications on France
Telecom’s reference offer for unbundled access to the local loop. The ART has exercized this power on several occasions.
France Telecom has formed two appeals before the
Conseil d’Etat
. One appeal is against ART decision no. 01-355 dated February 8, 2001 and decision no.
01-258 dated March 2, 2001 and the other appeal is against decision no. 02-323 dated April 16, 2002 requiring France Telecom to modify its reference offer. These appeals do not have a suspensive effect.
In a decision dated April 23, 2003, the
Conseil d’Etat
partially rejected
the appeal formed by France Telecom against ART decision no. 01-135 dated February 8, 2001. The
Conseil d’Etat
decided to suspend its decision on the issue relating to the amount of rates and service access fees and cancellation fees, to
await the results of expert findings that strive to “estimate the time necessary to conduct technical and administrative operations that would be justified by demand for unbundled access to the local loop or the cancellation of this
access” and to “evaluate, abiding by principles related to rates and taking into account the costs cited in the arguments of the present decision and taking into account available accounting data as of February 8 and March 2, 2001, the
hourly cost of France Telecom personnel used for these operations.”
Since that time, other offers have been published by France Telecom. The latest was published on December 12, 2003.
Rate Policy for Fixed Line Telephony
France Telecom’s rates for the services included in universal service (see “– Universal Service”) are governed by special regulatory
requirements under the December 27, 1996
cahier des charges
. These requirements stipulate that the rate policy concerning universal service must be set by a multi-year contract between France Telecom, the minister responsible for
telecommunications and the Minister of the Economy, Finance and Industry. As of this date, the implementation of the LRT has resulted in the signature of a rate agreement adopted in late 1997. For a description of France Telecom’s rate policy
for fixed line telephony, see “– 4.3.2.3 Fixed Line, Distribution, Networks, Large Customers and Operators – Telephone Communication and Subscription Offers and Rates”.
With respect to fixed line telephone calls made to mobile telephones, the ART hosted a
round table discussion in early 1999 with the three principal French wireless operators: Orange France, SFR and Bouygues Telecom. The meeting was held to discuss the prices for calls made from fixed line telephones to mobile telephones.
On November 16, 2001, the ART published decision no. 01-970 and decision no. 01-971
concerning the level of Orange and SFR call charges and set a maximum price for 2002, 2003 and 2004. Price cuts for completing calls from these wireless operators were defined in specific terms: 15% in 2002, 15% in 2003 and 12.5% in 2004. The ART
made these price cuts official through its decisions to validate the rate proposals made by Orange and SFR.
Prior to November 1, 2000, the rates for calls made to mobile telephones from a fixed line telephone were set by the wireless operator. Since that date, the rates
for calls made to mobile telephones from a fixed line telephone have been set by the fixed line operator. Following this decision, and because of the reduction in call termination rates (the price that the fixed line operator pays to the wireless
operator to complete the call on the wireless network), France Telecom lowered the rates for calls for the end customer and proposed a number of pricing options. See “– 4.3.2.3 Fixed Line, Distribution, Networks, Large Customers and
Operators – Telephone Communication and Subscription Offers and Rates”.
Numbering
The attribution of a numbering resource is
still subject to an individual decision made by the ART, according to the terms provided for by the rules relating to the national numbering plan (decision no. 98-75, dated February 3, 1998) that have remained intact given their compatibility with
the “Authorization” directive.
Nevertheless, in order to take
the new system of declaration into account, when an operator whose activities are subject to this system, wishes to request numbering resources, it must provide the receipt of declaration or the reference number of the authorization decision.
For activities that are not subject to this declaration system, the attribution of numbering resources remains
subject to the system in effect before July 25, 2003.
The ART
establishes and administers the national numbering plan which guarantees users equal and easy access to the different telecommunications networks and services and equivalent numbering formats. The ART initiated an inquiry to modify the rules for
managing numbering as set forth in decision no. 98-75 of February 3, 1998, particularly with respect to assigning 3BPQs. This consultation has not yet been the subject of an inquiry report by the regulator, and has not modified the rules relating to
the national numbering plan.
Since January 1, 1998, the operators
required to publish an interconnection catalog (in reality, France Telecom alone) are required to allow their customers to select a long distance carrier on a call-by-call basis by entering an assigned numeric prefix when calling. Seven long
distance carriers, including France Telecom, were assigned a one-digit prefix. The ART could, however, recover several of these prefixes in 2004 and initiate a consultation to determine their usage (reassignment, opening new tranches of short
numbers,
etc
.). The other operators have a four digit prefix.
Since January 17, 2000, subscribers can opt to preselect their long distance operator. This allows them to access their operator’s network without having to use a one-digit prefix. Preselection of operators was expanded to include
calls to mobile telephones in November 2000 and has been extended to local calls since early in 2002, at the choice of the carrier operator.
Since November 13, 2003, France Telecom has been marketing the “Keep your number” service throughout continental France. This service allows residential,
professional or business customers to keep the use of their fixed geographic number(s) in the event of an address change within the same “basic numbering zone”. This rate is billed at
€
20.90 excluding VAT (
€
25.00 including VAT) per
number maintained on single analog lines,
€
40.00 excluding VAT (
€
47.84 including VAT) per number maintained on groups of analog lines or Numéris access and
€
80.00 excluding VAT (
€
95.68 including VAT) to
maintain numbers on Numéris Duo or Numéris Itoo access.
Number portability for mobile telephones has been available since June 30, 2003.
UMTS Licenses
The procedure for awarding UMTS licenses
in France was described in the notice relating to “the terms and conditions for awarding licenses to introduce third-generation wireless systems in France” from the Ministry of the Economy, Finance and Industry, which was published in the
French
Journal Officiel
on August 18, 2000. Only Orange France and SFR submitted applications and were awarded UMTS licenses by the French government. Of the four UMTS licenses, two remained unallocated at that time.
In October 2001, the French State decided to reschedule the payment of the UMTS
license fees. The original
€
4.955 million, payable in several tranches, was replaced with the following payment schedule:
n
a lump-sum license fee of
€
619 million, which was paid by Orange France
and SFR in September 2001; and
n
an annual license fee of 1% of UMTS sales.
On December 29, 2001, the Minister of the Economy, Finance and Industry held a second bidding process for two additional UMTS licenses (see the notice published in
the French
Journal Officiel
on December 29, 2001). The deadline for bidders to file was May 16, 2002. Only Bouygues Telecom submitted a bid and was awarded a UMTS license by an order on December 3, 2002. At the time of this award, the
government modified the
cahier des charges
for Orange France’s UMTS license.
Each of the three licenses is awarded for a period of 20 years and each operator will receive the same number of frequencies,
i.e.
, 2 x 15MHz in the paired bands and 5MHz in the non-paired bands.
Furthermore, the bid specifications contained a certain number of specific minimal
obligations for coverage:
n
after two years, at least 25% of the population must have access to voice transmission services and 20% of the population must have access to data transmission services;
n
after eight years, at least 80% of the population must have access to voice transmission services and 60% must have access to data transmission services.
UMTS operators that do not have a GSM network may complete their network coverage,
during the first few years of deployment, as a result of national roaming between GSM and UMTS networks. They will also be able to access existing sites in the same manner as their competitors.
For information regarding risks specifically related to UMTS licenses, see “Item
3. Key Information – 3.3.1 Risk Factors Relating to France Telecom’s Business - The high cost of UMTS licenses, and investments and expenses necessary for the success of this technology, could adversely affect France Telecom’s
business, financial condition and results of operations”.
Rights of Way and
Easements
Public network operators benefit, on an equal basis, from
a right of way over public roads, in consideration for a fee paid to the public domain manager under a highway permit, and provided that this right of way is not incompatible with the normal
allocation of the public domain. Where they enjoy easements on private property they must obtain permission from the competent local authority and, if necessary,
compensate the owners.
An operator who already benefits from a right of
way or an easement may have to accept shared use of its existing facilities with other operators, to the extent that this use does not compromise, in the case of France Telecom, its own public service mission. Any disputes resulting from this
situation may be submitted for arbitration to the ART, which must hold a public hearing for all interested parties. These operators may also benefit, under certain conditions and with the permission of the competent authority, from radio frequency
easements to guarantee the optimal transmission of electromagnetic signals.
Limitations on Foreign Investments
Under the LRT,
licenses covering the operation of public networks which involve the use of electromagnetic frequencies may not be granted to a company in which more than 20% of the share capital or voting rights are held, directly or indirectly, by foreign
nationals or foreign companies. A license already granted to a company that later becomes controlled under the aforementioned conditions will be revoked. These limitations do not apply to ownership by individuals or legal entities from a Member
State of the European Union, or a party to the agreement on the European Economic Space, or to states with which France has entered into reciprocity agreements.
Coordination Between the Regulatory Authorities and Competition Authorities
French competition law prohibits the abuse of a dominant market position and the distortion of competition through collusion by market
participants in a particular market. Since full deregulation of telecommunications services on January 1, 1998, France Telecom is subject to these regulations in all of its businesses. The LRT provides that the Chairman of the ART must refer any
unfair competition practices in the telecommunications market of which he has knowledge to the French
Conseil de la concurrence
. The Chairman may also seek an opinion from the
Conseil de la concurrence
on all other matters within its
jurisdiction. The
Conseil de la concurrence
notifies and may seek the opinion of the ART on any matters referred to it that are within the ART’s jurisdiction.
4.12.3 R
EGULATIONS
IN
THE
U
NITED
K
INGDOM
Overview
France Telecom is engaged in various business activities in the United Kingdom. These consist mainly of wireless communications via Orange, worldwide IP and data transfer services via Equant, and Internet access following
Wanadoo’s acquisition of Freeserve. The developments discussed below primarily concern wireless telephony.
The operation of a wireless telecommunications network and the provision of wireless telecommunications services in the United Kingdom are regulated by the 1984
Telecommunications Act, the 2003 Communications Act, and the 1949 and 1998 Wireless Telegraphy Act (WTA). The Director General of Telecommunications was responsible for telecommunications regulations pursuant to the Telecommunications Act and the
Communications Act, and also directed the Office of Telecommunications (OFTEL), the telecommunications regulatory authority. The powers of the Director General of Telecommunications were transferred to the Office of Communications (OFCOM) on
December 29, 2003. As of that date, OFCOM’s board has been responsible for regulating telecommunications in the United Kingdom. On December 29, 2003, the responsibilities of the Radiocommunications Agency, which was responsible for awarding and
regulating the use of frequency spectrums under the WTA, were also transferred to the OFCOM.
The operation of a wireless telecommunications network requires a license under the WTA. Orange UK has obtained the relevant licenses to operate GSM and UMTS networks. Orange offers public wireless telephony services to its
customers pursuant to the General Condition of Entitlement (GCOE) under the Communications Act. Freeserve and Equant are also licensed under the GCOE to provide telecommunications services to their customers.
In addition to applicable legislation in the United Kingdom and the terms and
conditions of the licenses granted to France Telecom, United Kingdom telecommunications policy is also contained in a number of United Kingdom Government announcements and White Papers, and OFTEL advisory documents and statements. It is also subject
to European legislation. The United Kingdom has transposed, or is transposing, all relevant EU telecommunications legislation.
OFTEL Market Studies
Under the new European regulatory framework implemented in the United Kingdom via the Communications Act of July 17, 2003, the national regulatory authorities in
the European Union are required to conduct market studies. These studies are designed to assess whether certain players are exercising a significant influence on the market and, if this is the case, to define the obligations
ex ante
to be
imposed on these players. In anticipation of the future regulatory framework, OFTEL launched several market studies
in the spring of 2003, two of which concern the wireless telecommunications market. A third market study on international roaming is pending, since a European
Commission inquiry on roaming is now in progress.
In its study of the
market for wireless calls, the OFTEL concluded that no wireless operator in the United Kingdom exerted a significant influence on the market, either separately or jointly. As a result of these conclusions, the OFTEL terminated any obligations
ex
ante
that applied to Vodafone and O2, previously considered as exerting a significant influence on the market. Thus, Vodafone and O2 will no longer be required to provide wireless communication time to independent providers.
In its study on wireless call termination rates, the OFTEL published its preliminary
conclusions in May 2003 in a consultation report. The OFTEL concluded that all wireless operators in the United Kingdom exert a significant influence on the market with respect to termination rates for 2G voice calls. Consequently, the OFTEL is
proposing a reduction in the Retail Price Index (“RPI”) rates of 14% RPI over three years for Orange and T-Mobile and 15% for Vodafone and O2. This proposal follows the recommendations issued by the Competition Commission after its study
in 2002. The OFCOM plans to update this market study and implement the regulations in early 2004.
Creation of OFCOM
On December 12, 2000,
the United Kingdom Government published a Telecommunications White Paper which included measures to change the regulatory framework of the telecommunications industry. In response to the converging nature of telecommunications, broadcasting and
Internet services, the United Kingdom Government proposed that the five sector-specific regulatory bodies (OFTEL, Radiocommunications Agency, Independent Television Commission, Broadcasting Standards Commission and the Radio Authority) covering
these markets be consolidated into one regulatory body for the communications sector: the Office of Communications, or OFCOM. The primary objectives were: 1) to make the United Kingdom the most dynamic and competitive communications and media market
in the world; 2) to ensure universal access to a choice of diverse and high quality services; and 3) to safeguard the rights of citizens and consumers. The Communications Act, enacted on July 17, 2003, defines the regulatory framework of the British
communications markets as of July 25, 2003. The principal mission of OFCOM is to protect the interests of citizens and consumers by fostering competition. On December 29, 2003, OFCOM became the national regulatory authority in the telecommunications
industry after the dissolution of the OFTEL and the Radiocommunications Agency.
Under the new regulatory framework, the individual operating licenses granted under the Telecommunications Act were abolished and replaced by the GCOE, which applies to all telecommunications service providers under the Communications Act.
However, the licenses and principal obligations contained in the GCOE largely reflect those previously contained in the licenses.
Spectrum Allocation
Like the other wireless network operators in the United Kingdom, Orange UK has obtained licenses under the WTA that permit operators to establish and use sending
and receiving stations for wireless transmissions in the operation of their mobile networks. WTA licenses allocate portions of the radio frequency spectrum to each wireless network operator.
T-Mobile (formerly One2One) and Orange UK each received 2 x 30MHz from the 1800MHz
spectrum to operate a second generation network (GSM). Vodafone and O2 UK (formerly BT Cellnet) each received 2 x 17.5MHz in the 900MHz spectrum of GSM digital networks, and another 2 x 5.75MHz in the 1800MHz spectrum. Vodafone and O2 UK
relinquished 2 x 4MHz of the 900MHz spectrum by shutting down operations on their analog networks.
The United Kingdom Government adopted the WTA of 1998 to allow it to set spectrum fees at a rate above the administrative cost of managing that spectrum and to
allow for spectrum auctions for future services, including UMTS. The United Kingdom Government has confirmed that the existing four wireless operators will not be subject to auctions for the continued use of their current second generation spectrum
allocations.
Orange UK is one of five wireless operators licensed to
provide third generation wireless services in the United Kingdom using the UMTS spectrum. The other licensees are Vodafone, O2 UK, T-Mobile and Hutchison 3G. The licenses were allocated by competitive bidding in 2000. Orange UK, O2 UK and T-Mobile
have each been allocated 2 x 10MHz and 1 x 5MHz of the UMTS spectrum. Vodafone has been allocated 2 x 15MHz and Hutchison 3G has been allocated 2 x 15MHz and 1 x 5MHz of the UMTS spectrum. Hutchison 3G announced the launch of commercial third
generation services in the spring of 2003.
Orange UK’s WTA
licenses specify the principal technical requirements with which Orange UK must comply, including, among other obligations, the management of the sites from which radio frequencies are emitted and the use of approved equipment. Inspection
obligations are also stipulated. The operation of wireless telecommunications stations can be restricted or the stations can be closed down on a temporary or permanent basis by the Secretary of State for Trade and Industry if Orange UK violates its
license or if undue interference is created. Orange UK may also be required to modify or restrict its use or
permanently close down radio equipment in the interests of long-term spectrum planning or in the event that a state of emergency is declared. Orange UK’s 1800MHz
WTA license remains in effect until Orange UK surrenders it, subject to changes or revocation by the Secretary of State for Trade and Industry.
Following public hearings held by the Radiocommunications Agency on the policy issues surrounding the use of license-exempt spectrums for public telecommunications
services, the British government enacted the Wireless Telegraphy (Exemption) Regulation 2003, which became effective on February 12, 2003. This regulation establishes a frequencies spectrum that is not licensed for commercial public access services
such as WLANs and Bluetooth, and allocates additional bands for wireless equipment and broadband nomads. Orange UK believes that, with the adoption of an appropriate regulatory framework, the roll out of such technologies using license-exempt
spectrums will complement the services offered over its UMTS spectrum.
Interconnection Policy
Wireless systems must connect
with the telecommunications systems of other public telecommunications operators, both fixed line and wireless, in order to complete calls that do not originate or terminate on their systems. Operators’ rights and obligations to interconnection
are governed by the Communications Act which transposes the EU “Interconnection” directive. If, after negotiation between the parties, certain interconnection terms cannot be agreed on by the operators, the Director General of
Telecommunications (now OFCOM) may be asked to determine such terms. In addition, OFCOM has the power to review the terms of an interconnection agreement on his own initiative.
The OFTEL has determined that British Telecom and Kingston Communications (Hull) Limited exert a significant influence in the fixed
line and leased line markets in which they operate. The OFTEL has also held that British Telecom exerts a significant influence on the domestic interconnection market. British Telecom and Kingston Communications (Hull) Limited are also subject to
certain additional obligations. No wireless operators have been determined to exert a significant influence in the national market for interconnection and so the principles of transparency and cost orientation do not apply to the four wireless
operators in the United Kingdom market. However, as noted above, the OFTEL has proposed that price controls be imposed on the wireless interconnection rates of the four operators.
Interconnection Agreement with British Telecom
Orange UK first entered into an Interconnection Agreement with British Telecom in July 1993.
Under the Interconnection Agreement, Orange UK and British Telecom are obligated to interconnect their respective telecommunications
systems and keep them interconnected. Orange UK was also required to order from British Telecom, which was required to provide, enough interconnection circuits to handle projected or actual traffic. British Telecom and Orange UK must make a
reasonable effort to provide sufficient switching capacity to handle the traffic volumes on each interconnection path and to guarantee that the call completion rates at peak usage periods do not fall below those normally encountered in Orange
UK’s system. The interconnection agreement also provides for the leasing of fixed lines from British Telecom.
Orange UK has negotiated, or is currently negotiating, with other public telecommunications operators for direct interconnection if and when justified by call
traffic. Such connections would reduce the need to route calls through British Telecom.
Price Regulation
Wireless telecommunications rates in
the United Kingdom are not generally subject to the prior approval or review by regulatory authorities. Only British Telecom, as the dominant fixed line operator with a significant influence on the market because of its former monopoly, is limited
by retail price restrictions imposed by OFCOM.
Portability of Wireless Numbers
Telephone number portability permits customers to keep their
telephone numbers when changing telecommunications operators. Since January 1, 1999, all holders of wireless public telecommunications operator licenses have been obliged to provide and have offered portability of mobile telephone numbers on
request, subject to certain conditions. In October 2001, a new industry number transfer procedure was adopted by the OFTEL, reducing the standard transfer time from 28 calendar days to seven calendar days. The OFTEL announced on December 20, 2002
that it intended to work with the telecommunications industry to improve the system of wireless number portability, in particular when a network is forced to cease operations.
Competition Act
The United Kingdom Government enacted a new Competition Act, which came into force on March 1, 2000. It grants powers to the industry-specific regulators and to the
Director General of Fair Trading for the prohibition of anti-competitive agreements, concerted practices and abuses of a dominant position.
The Competition Act gives the Director General of Telecommunications (and eventually OFCOM’s Board) powers
that may be exercised simultaneously with the Director General of Fair Trading concerning “commercial activities relating to telecommunications”. One effect of the Competition Act is that third parties appearing before the United Kingdom
courts can bring enforcement actions directly against telecommunications operators that violate the prohibitions, and seek damages, rather than having to wait for the Director General of Telecommunications to adopt a final order to enforce the
conditions of the operators’ license, as is the case under the Telecommunications Act.
The Enterprise Act was promulgated on November 7, 2002. Among other things, this act introduces several changes to the body of competition law with respect to merger rulings. In addition, the law allows a certain number of
representative consumer organizations to file “super complaints” with the Office of Fair Trading, asking it to investigate any characteristic or any group of characteristics of a United Kingdom market that appears to be sufficiently
harmful to the interests of consumers. To date, no consumer organization has been appointed for this purpose by the Secretary of State. The Department of Trade and Industry is responsible for establishing the criteria for appointment and beginning
the nominations in 2003, at a date to be determined by the British government.
E-money Regulations
The Financial Services and Markets
Act of 2000 (Regulated Activities) Amendment Order 2002, which entered into force on April 27, 2002, stipulates that providing electronic money services is a regulated activity that is to be licensed by the Financial Services Authority (FSA).
Discussion continues in the United Kingdom and the European Union in order to clarify to what extent wireless services fall under the definition of electronic money for the purposes of regulatory supervision.
4.12.4 O
THER
E
UROPEAN
R
EGULATION
As of December 31, 2002, France Telecom was operating in 15 European countries other than France, ten of which are EU member states. France Telecom closely follows
the national legislation and regulations that these countries are now adopting to transpose the European directives to ensure that these transpositions reflect the spirit of the new directives, or the steady elimination of industry regulation ex
ante.
The France Telecom group operates in two of the ten countries
that will be joining the European Union on May 1, 2004 as part of its expansion. The first is Poland (through its shareholding in TP Group and PTK Centertel) and the other is Slovakia (through Orange S.A.’s shareholding in Orange Slovensko). In
addition, at its meeting in Copenhagen on December 12 and 13, 2002, the European Council confirmed its intention to admit Bulgaria and Romania to the Union in 2007. In Romania, Orange has a majority shareholding in the wireless telephony operator,
MobilRom. The candidate countries are obliged to adhere to a program of rapid liberalization in the telecommunications sector, in order to meet the criteria for admission to the European Union.
On April 1, 2002, the Polish telecommunications act established the URTiP as the
industry’s regulatory authority. The URTiP designated TP Group, the traditional operator, as a “dominant” player in the market, which creates obligations for TP Group, which are still being negotiated, notably with respect to
interconnection. Amendments to the 1998 Telecommunications Act transposing the European Union’s regulatory framework took effect on October 1, 2003. The international telecom market has been entirely deregulated since January 1, 2003. As part
of the EU’s expansion, Poland did not negotiate a transition period with the EU in the telecommunications area. This means that when it gains membership on May 1, 2004, it will implement the new European directives and bring its own national
laws into compliance.
4.13 INSURANCE
France has adopted an
insurance plan to cover its principal risks. This insurance plan has been underwritten by major insurance and reinsurance providers to cover the risk of damages to physical assets, operating losses, transport and legal liability for third party
damage linked to France Telecom’s services and corporate purposes, incurred by third parties, including customers.
There was a major premium increase in 2003 due to stricter underwriting terms imposed by the insurance and reinsurance markets.
The cost of covering France Telecom S.A. in 2003 amounted to approximately
€
40.4 million,
€
38.8
million of which was for insurance premiums. This compares with a cost of approximately
€
29.3 million in 2002 and approximately
€
20.4 million in 2001. This cost in 2003 breaks down by risk category as follows:
n
liability coverage: approximately
€
16.2 million;
n
auto insurance coverage:
€
5.5 million;
n
damage to assets and operating losses: approximately
€
18.7 million.
In addition to the costs paid by France Telecom S.A. are those paid by the subsidiaries covered by the Group’s
insurance policies. This amount totaled approximately
€
13.8 million in 2003 (up from
€
9.9 million in 2002 and
€
6.7 million in 2001).
These policies are being gradually extended to cover the Group’s
French and foreign subsidiaries, with the notable exception of Orange UK and Equant, which both have their own coverage. The purpose is to equalize risk coverage and streamline risk management as well as to control the corresponding insurance costs.
Since the end of 2002, given the state of the markets for insurance and
reinsurance in this area, the Group self-insures its poles and open-wire lines for its telephone network against the risks posed by natural disasters.
These policies reflect the nature of the risks incurred by France Telecom and are in line with the accepted terms and conditions for groups of similar size and
similar business activities worldwide, particularly with respect to guaranty limits.
France Telecom carries insurance against civil liability risks incurred from the use of substances or products that pose environmental hazards as discussed in ”– 4.14 Environmental Policy”. The risks due to the
use of CFCs, Halon and PCBs are covered under the current plan, with the exception of PCBs, which have been excluded from France Telecom S.A.’s plan since April 2003. The Group did not file any claims against the insurance policies in question
with respect to these risks.
France Telecom believes it maintains a
level of self-insurance that is appropriate for the risks it encounters. Over the past eight years, the number of accidents affecting the above-ground network of France Telecom S.A. has not, on average, exceeded
€
14.4 million per year, except for exceptional disasters in terms of frequency and intensity. For example, in 2000, the damage relating to the December 1999 wind storms
amounted to
€
150 million.
In addition, within the framework of its risk management policy, France Telecom regularly identifies risks relating to its activities through site visits in tandem
with its internal engineering services and those of its principal insurers. This type of risk management allows France Telecom to detect potential risks and evaluate them to ensure that the insurance coverage in place continues to be appropriate.
4.14 ENVIRONMENTAL POLICY
France Telecom believes that its activities as a telecommunications operator present no major risks for the environment. In fact, the operations of France Telecom
do not use any production process that seriously threatens rare or non-renewable resources, natural reserves (water, air), or biodiversity.
However, to meet the needs of its activities and, in particular, to operate its telephone switching centers, France Telecom does use certain facilities, products or
substances that could present risks for the environment, which are subject to specific environmental regulations that, in particular, govern Classified Facilities for the Protection of the Environment (the
Installations Classées pour la
Protection de l’Environnement
or “ICPE”), as well as the emission and disposal of waste products. These risks, which are continually the subject of in-depth study by France Telecom, have led the Group to adopt action and
prevention programs.
At December 31, 2003, France Telecom identified
approximately 2,450 Classified Facilities in France that are subject to declaration and 13 facilities that are subject to authorization because of the co-existence on these sites of several air conditioned facilities and/or battery charging
stations. Files on all of the Classified Facilities have been filed with various French Prefects and a maintenance program has been initiated to ensure compliance with environmental legislation.
A process to identify and evaluate the risks presented by the industrial sites was
completed in 2003. It also included slightly fewer than 2,000 other sites that, although they are not subject to the Classified Facilities regime, include a hydrocarbon tank.
France Telecom believes that its facilities are generally in compliance with environmental regulations. Any costs that may be
necessary to bring them into compliance are not likely to have a significant impact on France Telecom’s financial position.
Some of France Telecom’s facilities include or use products or substances that may present significant environmental risks. This is the case for the CFCs
contained in the cooling systems for the telephone switching centers, or the halon in the fire extinguishers. Some electric transformers also contain PCBs, the gradual elimination of which is scheduled to occur by 2007 in accordance with current
legislation.
The programs to eliminate gases and toxic substances
(CFCs, Halon, PCBs), along with other action plans, have been covered by a master agreement signed in 2002 with the French Environmental and Energy Control Agency (the
Agence de l’environnement et de la maîtrise de
l’énergie
or “ADEME”). This constitutes a guarantee of their compliance with regulations.
France Telecom believes that the costs related to the implementation of these programs are not likely to have a significant impact on its financial position.
However, accidents related to these products or substances could result in substantial negative consequences.
The activities of France Telecom generate the following principal waste products, for which France Telecom monitors
and controls the elimination procedure: electric and electronic equipment at the end of life or coming from telephone switching centers, batteries and accumulators, cables and treated wood poles. Twelve channels have been established to manage
wastes and used products. In each channel, processes have been defined for reusing, recycling and recovering materials or eliminating them using controlled industrial processes. For each category of wastes, a process of collection, followed by
recycling or elimination has been implemented, most often through contracts with qualified outside service providers.
A special program has been initiated to ensure that the procedures for the collection and recycling of electrical and electronic equipment after use comply with the
DEEE European Directive, which should be transposed into French law in the first half of 2004.
France Telecom believes that the costs for the implementation of these programs are unlikely to have a significant impact on its financial position.
France Telecom’s activities require the use of thermal installations such as
boiler rooms and generators, which result in emissions of CO
2
and greenhouse gases. After determining total energy use in 2002 (electricity and fuels) and after consolidating the management tools in 2003, an energy saving program will be
initiated in 2004. With this action, France Telecom plans to contribute to limiting the production of greenhouse gases.
France Telecom believes that the costs for the implementation of these programs are unlikely to have a significant impact on its financial position.
Aerial poles and telephone lines have an impact on landscapes. France Telecom is
contributing to the funds necessary to bury these telephone lines in accordance with the legislation in force on classified and protected sites and in cooperation with the local and national authorities responsible for natural and cultural heritage.
These operations have led to the elimination in France of 34,000 poles and 1,400 km of cable.
France Telecom believes that the costs for the implementation of this program are unlikely to have a significant impact on its financial position.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.1 OVERVIEW
Evolution of the Group
A global telecommunications operator, France Telecom operates in France and
internationally in each of the following areas of activity: fixed line telephony, wireless telephony, Internet and data transmission services for businesses. France Telecom currently serves 117.1 million customers worldwide.
In recent years, the European market for telecommunications has grown rapidly as a
result of the culmination of a number of factors: the globalization of trade, the increasing consolidation of European markets, the rapid growth of wireless telephony, the advent and growth of the Internet and the development of data exchange.
Within this framework and in an increasingly competitive environment,
from 1999 to 2002 France Telecom pursued a strategy for the development of new services and accelerated its international development through external growth with the goal of reaching critical mass in high growth markets on the European level,
particularly in the wireless and Internet markets. France Telecom’s strategy is reflected in the change in composition of its revenues: in 1996, fixed line telephony in France (excluding the Internet) represented 67% of France Telecom’s
consolidated revenues, while in 2003 it represented only 29%.
These
strategic investments could not, for the most part, be financed through equity, leading to a significant increase of France Telecom’s debt.
Through the launch of the “Ambition FT 2005” Plan at the end of 2002, the success of the parts of this plan aimed at refinancing the Group’s debt,
the strengthening of shareholders’ equity and the positive results of the TOP Program in 2003, the Group was able to loosen its financial limitations and pursue significant debt reduction.
This allowed the Group to fully dedicate itself to the development of its strategy as
a global operator, through the launch of growth initiatives and by anticipating changes in the telecommunications industry.
The telecommunications market is undergoing a transformation. Customers now dispose of a broad selection of communication tools with highly developed options for
use, but offers made to customers remain fragmented. Indeed, the world of telecommunications continues to be divided into distinct networks and services (fixed line, wireless, Internet). The goal of a global operator such as France Telecom is to
place the customers’ concerns at the forefront of its services, in order to offer an integrated universe of communication, regardless of the handset or network used.
To achieve this, France Telecom intends, in particular, to rely upon its portfolio of key assets.
France Telecom possesses a full portfolio of activities (fixed line, wireless,
Internet) which address all types of customers (consumers, small – and medium – sized businesses and multinational corporations) and uses (personal, home, professional) in a majority of environments (home, office, travel, mobility). These
activities provide the Group with optimal advantages to provide customer satisfaction and to develop comprehensive offers.
Business Segments
In order to better reflect the Group’s evolution and the structure of its operations among its various activities and subsidiaries, France Telecom has identified, starting from the first six months of 2003, the following
six business segments:
-
The “Orange” segment, which includes mobile telephone services worldwide, in France and in the United Kingdom, as contributed to Orange S.A. in 2000, including Orange plc from its
date of acquisition by France Telecom at the end of August 2000.
-
The “Wanadoo” segment, which includes Internet access services, portals, e-Merchant sites and directories, organized under Wanadoo S.A. since 2000.
-
The “Fixed Line, Distribution, Networks, Large Customers and Operators” segment, which includes the fixed line services of France Telecom, mainly in France, in particular fixed line
telephony, services to operators, business services, cable TV, commercial agencies, the sale and rental of equipment, as well as support functions (including research and development services, logistics and purchasing) and the information system
division.
-
The “Equant” segment, which includes the activities of the new Equant, created following the merger with Global One on July 1, 2001, in the field of worldwide services of data
transmission to businesses.
-
The “TP Group” segment, which includes since April 2002, TP S.A., the historic Polish operator and its subsidiaries, the main one being PTK Centertel for wireless activities.
The “Other International” segment, which includes other subsidiaries in the rest of the world, whose main activities include fixed line telephony outside France and certain mobile
activities of the France Telecom Group that were not contributed to its subsidiary, Orange S.A.
Compared to the former segmentation (“Orange”, “ Wanadoo”, “Fixed line, voice and data services – France”, and “Fixed line,
voice and data services – Outside France”), the change mainly consisted of reallocating entities of the segment formerly named “Fixed line, voice and data services – Outside France” to the following new segments:
“Equant”, “TP Group” and “Other International”, in order to allow for a better understanding of the Group’s results of operations from its worldwide services of data transmission to businesses and as a
telecommunications operator in Poland. These activities represent important strategic positions for the Group’s configuration otherwise fulfilled through its listed subsidiaries.
France Telecom’s segments evolve to reflect changes in its activities and organization.
Orange
, France Telecom’s mobile telecommunications business, contributed
35.5% of the France Telecom group’s consolidated revenues in 2003, up from 33.0% in 2002 and 31.4% in 2001. The increase in this contribution is mainly due to the acquisition of Orange plc in 2000 and organic growth at Orange. Orange’s
revenues consist of network revenues (revenues from voice, data and SMS generated through the use of the wireless network and including both the traffic generated by its own customers and those of other roaming operators on its network) as well as
the revenues generated by the sale of equipment and other sources of revenue (such as portals, content, publicity, sales of handsets and accessories and brand licensing fees). Orange’s strategy is to increase all revenues, and in particular
revenues from “non-voice” services, such as SMS, which have increased significantly over the last three years. Orange’s operating expenses include, in particular, the cost of acquiring customers and increasing their loyalty to the
Orange brand. In most countries where Orange operates, the customer acquisition costs have diminished, while the customer retention costs have risen, reflecting the evolution of the Orange strategy towards a policy focused on clients (with
subscription plans) who generate significant revenues rather than on the acquisition of new customers. As Orange UK’s revenues and costs are in pound sterling, exchange rate fluctuations have a significant impact on these amounts as reported in
euro by France Telecom. To a lesser extent, Orange’s international activities, particularly in Egypt and Romania, are also subject to exchange rate fluctuations. In order to ensure its future growth using new technologies, Orange invested
significantly to obtain licenses for UMTS services. Orange estimates that it will make investments in its network in order to roll out UMTS services over the coming years.
Wanadoo
, France Telecom’s Internet business for the general public, which also includes online and paper directories,
contributed 5.4% of the France Telecom group’s consolidated revenues in 2003, up from 4.1% in 2002 and 3.4% in 2001. This business has mainly grown organically, although Wanadoo has made several significant acquisitions in 2002 and 2001,
including the U.K. operator, Freeserve, the directories publisher, QDQ Media, and the Internet services provider, eresMas, in Spain. Wanadoo’s revenues are generated by Internet access fees, revenues from advertising on Wanadoo’s portals
and in its directories, and e-merchant sales. Revenues vary as a function of the number of active customers, in particular broadband customers and customers with subscription plans, and the total number of active users, whether or not Wanadoo
customers. Operational profitability is increasing, in a context marked by Wanadoo’s efforts to sustain its growth by acquiring new clients and promoting the upgrading of clients to paid access plans and broadband.
Fixed Line, Distribution, Networks, Large Customers and Operators
constitutes
the core of France Telecom’s business as the historical fixed line operator in France. It contributed 41.8% of the France Telecom group’s consolidated revenues in 2003, down from 44.3% in 2002 and 50.2% in 2001. Revenues in this segment
are mainly derived from (i) fixed line traffic (subscriptions and customers’ telephone communications, online services, payphone and card services), (ii) Internet access (low speed access through the switched telephone network, high speed ADSL
access), (iii) data services for businesses (data networks and leased lines), (iv) marketing of equipment for fixed and wireless services, (v) cable television and (iv) operators’ services (national interconnection in France, services to
international operators). The revenues vary due to the impact of several market trends, the most important of which are increased competition from other fixed line service providers, regulatory changes and the expansion of services offered. These
trends have resulted in lower communication rates, in particular, for long-distance calls, decreased volumes of traffic for local and long-distance calls and, since January 1, 2001, unbundling of the local loop. The negative impact of these trends
has been partially offset by increased revenues from subscriptions to newer services, such as telephone communications with low speed Internet access, today replaced by wholesale sales of ADSL services to Internet access providers. The revenues of
this segment can be categorized according to three markets (general public, businesses and operators), each with different development characteristics, which facilitate an understanding of the evolution of overall revenues. As a result of the
modernization of the network and a policy of streamlining and optimization boosted by the TOP Program, investment expenditures for this segment have significantly decreased over recent years. The focus has been on the areas of growth (Internet,
broadband, ADSL). However, the investments are increasing to ensure the continued development of ADSL networks. France Telecom’s goal is to provide ADSL coverage for 95% of the population in France by 2005.
Equant
contributed 5.0% of the France Telecom group’s consolidated revenues in 2003, in contrast to
6.1% in 2002 and 5.0% in 2001. France Telecom acquired a majority stake in Equant in 2001 through, first, the sale by France Telecom of Global One Communications World Holding BV and Global One Communications Holding BV to Equant in exchange for
Equant shares and, second, through the exchange of France Telecom shares for Equant shares held by SITA (a Belgian conglomerate grouping together aerial businesses which were previously shareholders of Equant). Equant’s revenues are derived
mainly from network revenues (network contracts signed with direct or indirect clients for data transmission and network support services attached to those contracts) and integration services (support activities, network engineering, and
installation services and maintenance of the network equipment). Equant recently announced a growth strategy focused on the development of integrated communications services for multinational corporations. Most of Equant’s revenues and costs
are in U.S. dollars and therefore exchange rate fluctuations have a significant impact on these amounts as reported in euro.
TP Group
, comprehensively consolidated since April 1, 2002, contributed 9% of the France Telecom group’s consolidated revenues in 2003, in contrast to
7.4% in 2002. TP Group is the historic telecommunications operator in Poland and has become an integrated operator with significant wireless activities undertaken through PTK Centertel, and has an Internet presence through TP Internet. Revenues in
this segment are mainly derived from fixed line traffic, although the percentage of revenues from wireless activities, ADSL usage and data transmission has increased. As an integrated telecommunications operator, TP Group’s revenue generation
is similar to that of France Telecom’s fixed line activities and its Orange and Wanadoo segments. As TP Group’s revenues are in Polish zloty, exchange rate fluctuations impact these amounts as reported in euro.
Other International
contributed 3.3% of the France Telecom group’s
consolidated revenues in 2003, in contrast to 5.0% in 2002 and 10.1% in 2001. Revenues in this segment are mainly derived from fixed line traffic, in particular from Uni2 in Spain, and vary due to the same types of market trends that affect France
Telecom’s fixed line activities in France. Revenues in this segment are affected by exchange rate fluctuations, since certain subsidiaries of this segment report their revenues and incur costs in currencies other than the euro.
As a result of the development of activities such as wireless communications and
general public Internet, in France and abroad, in addition to the improvement of performance and the streamlining of costs (essentially through the TOP Program applied in 2003), France Telecom improved its operating profitability during the period
from 2001 to 2003, and in particular in 2003. This is measured by the ratio of operating income before depreciation and amortization over total revenues and it has evolved, as indicated in the table below, both at the Group level, and at the level
of each segment.
Year ended December 31,
Operating income before depreciation and amortization / Revenues
2003
2002
(historical)
2001
(historical)
France Telecom (consolidated group)
37.5
%
32.0
%
28.6
%
Orange segment
(1)
36.7
%
30.1
%
21.8
%
Wanadoo segment
(1)
13.3
%
4.4
%
(4.1
)%
Fixed Line, Distribution, Networks, Large Customers and Operators
(1)
34.9
%
31.2
%
32.2
%
Equant segment
(1)
9.9
%
6.3
%
(7.4
)%
TP Group segment
(1)
44.7
%
41.8
%
—
Other International segment
(1)
37.5
%
32.3
%
33.1
%
(1)
Segment data is presented before inter-segment eliminations.
Organization of this Operating and Financial Review and Prospects
The subsequent sections of this Section 5.1, “Overview”, present (i) the principal operating results and the principal net income and debt figures for the
Group for the period presented, (ii) a discussion of the results in 2003 of the Ambition FT 2005 plan, and (iii) a discussion of anticipated trends.
The following sections of this Item 5, Operating and Financial Review and Prospects, present (i) a comparison of the 2003 and 2002 periods at the Group and segment
levels, (ii) a comparison of the 2002 and 2001 periods at the Group and segment levels, (iii) an analysis of the Group’s financial debt, capital resources and liquidity, (iv) a presentation of the Group’s contractual obligations and
off-balance sheet arrangements, (v) critical accounting policies and estimates under French GAAP, (vi) certain complementary information, including events subsequent to period-end and information regarding implementation of International Financial
Reporting Standards, (vii) information relating to U.S. Generally Accepted Accounting Principles and (viii) non-GAAP financial measures and a glossary of terms.
This section contains forward-looking statements about France Telecom (within the meaning of Section 27A of the U.S. Securities Act of
1933 or Section 27E of the U.S. Securities Exchange Act of 1934). Although France Telecom believes its
expectations are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties. Important factors that could cause
actual results or performance to differ materially from the results anticipated in the forward-looking statements include, among other things, the success of the “Ambition FT 2005” Plan, including the “15 + 15 + 15” plan and the
TOP Program, France Telecom’s other strategic, financial and operating initiatives, changes in economic, business and competitive markets, risks and uncertainties attendant upon international operations, technological trends, exchange rate
fluctuation and market regulatory factors. See “Item 3. Key Information – 3.3 Risk Factors” and the “Cautionary Statement Regarding Forward-Looking Statements”.
5.1.1 A
CTIVITY
AND
O
PERATING
P
ROFITABILITY
OF
THE
G
ROUP
5.1.1.1 P
RINCIPAL
OPERATING
RESULTS
The following table sets forth France Telecom’s revenues, operating income before depreciation and amortization and before amortization of actuarial
adjustments in France Telecom’s early retirement plan (“operating income before depreciation and amortization”), operating income and operating income before depreciation and amortization less CAPEX (investments in tangible and
intangible assets excluding UMTS/GSM licenses) for the years ended December 31, 2001, 2002 and 2003.
For further information regarding France Telecom’s use of the measures, “operating income before depreciation and amortization less CAPEX” and
“CAPEX”, see “– 5.9 Non-GAAP Financial Measures and Financial Glossary – Use of Non-GAAP Financial Measures”.
Revenues, operating income, operating income before depreciation and amortization less CAPEX and changes in working capital requirements (trade) are management
indicators which France Telecom uses to evaluate the Group’s and its divisions’ operating performance and on which it bases the performance reviews of Group executives and division managers. The measure operating income before depreciation
and amortization less CAPEX is calculated to permit better evaluation of the efforts of operating divisions on the basis of investments in tangible and intangible assets excluding investments in UMTS and GSM licenses and investments financed through
capital leases “investments in tangible and intangible assets excluding UMTS/GSM licenses” or “CAPEX”.
The following table sets forth the principal operating results for France Telecom for the years ended December 31, 2003, 2002 and 2001 (see Note 4 of the Notes to
the Consolidated Financial Statements).
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2001
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
historical
on a
comparable
basis
(unaudited)
historical
Revenues
46,121
44,609
46,630
43,026
3.4
%
(1.1
)%
Operating income before depreciation and amortization
(1)
17,303
14,305
14,917
12,320
21.0
%
16.0
%
Operating income
9,554
6,568
6,808
5,200
45.5
%
40.3
%
CAPEX
(1)
5,086
6,950
7,441
8,091
(26.8
)%
(31.7
)%
UMTS/GSM licenses
0
134
134
873
–
–
Operating income before depreciation and amortization less CAPEX
(1)
12,217
7,355
7,475
4,229
66.1
%
63.4
%
Average number of employees (full-time equivalent)
221,657
246,251
240,145
206,184
(10.0
)%
(7.7
)%
(1)
See “– 5.9 Non-GAAP Financial Measures and Financial Glossary – Use of Non-GAAP Financial Measures”.
Following changes in the method of payment to distributors in 2003 aimed at adapting
to market practice, certain commissions are now comparable to discounts and are consequently recorded as net from revenues. A presentation net from revenues was also adopted for the audiotel revenues of TP Group. Lastly, a change in method was
implemented in 2003 for the inclusion of revenues from the sale of advertising in electronic directories, which are now spread over the duration of the advertisement posting. The overall impact of these changes on revenues in 2003 amounted to
negative
€
127 million.
On a historical basis, France Telecom’s consolidated revenues decreased to
€
46.1 billion for the year ended December 31, 2003, a decrease of 1.1% compared to the year ended December 31, 2002. The change in revenues on a historical basis was marked by (i) the negative effect of
exchange rates, which amounted to a loss of
€
2.0 billion between these two periods and (ii) the effect of the
€
1.5 billion growth in wireless and Internet activities, partially offset by the decrease in revenues for fixed line telephony in France.
The changes in the scope of consolidation affecting the Group’s revenues between 2002 and 2003 were almost entirely offset (an overall increase of
€
40 million), since the effects of the consolidation of TP Group since April 1, 2002 and eresMas since November 1, 2002 were virtually absorbed by the sales of TDF on December 13, 2002, Casema on January 28, 2003, CTE Salvador
on October 22, 2003 and the transfer of ownership of the FTM Lebanon network to the Lebanese Government as of August 31, 2002.
Operating income before depreciation and amortization grew 16.0% between 2002 and 2003, mainly as a result of the strong increase in operating income before
depreciation and amortization of high growth operations (wireless, Internet, worldwide data transmission services for businesses), the growth of fixed line services in France and the consolidation of TP Group (the Polish operator TP S.A. and its
subsidiaries), partially offset by the sale of TDF. The operating income before depreciation and amortization margin increased from 32.0% at December 31, 2002 to 37.5% at December 31, 2003.
Operating income showed growth of 40.3% over the same period, reflecting the combined
effects of an increase in operating income before depreciation and amortization and a decrease in depreciation and amortization relating to (i) the effects of changes in the scope of consolidation, principally the sales of TDF and Casema, (ii) the
effect of exchange rates and (iii) the decrease in tangible and intangible investments, particularly relating to fixed line services in France. The margin of operating income to revenues increased from 14.6% in 2002, to 20.7% in 2003.
Operating income before depreciation and amortization less CAPEX grew 63.4% as a
result of growth in operating income before depreciation and amortization and the significant decrease in investments in tangible and intangible assets excluding licenses (a decrease of 31.7%), principally recorded in the “Orange” and
“Fixed Line, Distribution, Networks, Large Customers and Operators” segments.
n
Figures on a comparable basis
In this “Overview” section and in the comparison of the 2003 and 2002 periods at the Group and segment levels, figures on a comparable basis at constant
exchange rates are set forth for 2002 through operating income before depreciation and amortization, in order to provide a basis of comparison with the results at December 31, 2003. To this end, the actual results of the financial year ended
December 31, 2003 are retained, while the results for the corresponding period of the previous year have been adjusted to reflect changes in the scope of consolidation and eliminate exchange rate effects by applying the average exchange rate used
for the income statement for 2003 to the results for 2002.
We believe
that this comparable basis presentation, which complies with guidance issued by the French regulator, the
AMF
, allows for a more meaningful analysis of changes across periods, by permitting an analysis that isolates changes in results due to
underlying business drivers from the effects of changes due to exchange rate fluctuations and variations in the scope of consolidation.
For information regarding risks related to exchange rates, see “Item 3. Key Information – 3.3.3 Risk Factors Relating to Financial Markets – France
Telecom’s business may be affected by fluctuations in exchange rates”.
The principal variations in the scope of consolidation were:
n
Entry in the scope of consolidation:
-
full consolidation of TP Group as of April 1, 2002, with effect from January 1, 2002 on a comparable basis; and
-
full consolidation of eresMas from November 1, 2002, (rebranded Wanadoo Espana on January 1, 2003, following the merger), with effect from January 1, 2002 on a comparable basis.
n
Withdrawals from the scope of consolidation:
-
sale of TDF on December 13, 2002, with effect from January 1, 2002 on a comparable basis;
-
transfer of ownership of the FTM Lebanon network to the Lebanese government from August 31, 2002, with effect from January 1, 2002 on a comparable basis;
-
sale of Casema on January 28, 2003, with effect from February 1, 2002 on a comparable basis; and
-
sale of the indirect holding of CTE Salvador on October 22, 2003, with effect from November 1, 2002 on the results on a comparable basis.
The following table sets forth the means of calculation, using historical figures, of figures on a comparable basis
for 2002.
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Revenues
Operating income
before
depreciation
and
amortization
Operating
income
CAPEX
Operating
income before
depreciation
and
amortization
less CAPEX
Average
number of
employees
2002 figures on a historical basis
46,630
14,917
6,808
7,441
7,475
240,145
Entry into the scope of consolidation:
TP Group
1,218
511
230
156
354
12,260
eresMas
59
(39
)
(60
)
5
(44
)
0
Withdrawals from the scope of consolidation:
TDF
(695
)
(286
)
(163
)
(138
)
(148
)
(4,379
)
FTM Lebanon
(250
)
(115
)
(80
)
(8
)
(107
)
(405
)
Casema
(186
)
(75
)
17
(67
)
(8
)
(673
)
CTE Salvador
(64
)
(21
)
(8
)
(11
)
(10
)
(511
)
Other variations
(2)
(54
)
(2
)
8
(5
)
5
(186
)
Exchange rate variations
(3)
(2,049
)
(585
)
(184
)
(423
)
(162
)
2002 figures on a comparable basis
44,609
14,305
6,568
6,950
7,355
246,251
(1)
Contributive figures.
(2)
Including the effects of other changes in scope of consolidation and the change in method of accounting linked to treatment of revenues of online directories
(3)
Impact of the difference between the exchange rate at December 31, 2002 and December 31, 2003.
The details of exchange rate effects included in the calculation of figures on a comparable basis are as follows.
(
€
millions)
Variations on a comparable basis (unaudited)
Currency
Revenues
Operating income
before
depreciation and
amortization
Operating
income
CAPEX
Operating income
before depreciation
and amortization
less CAPEX
U.S. Dollar
USD
(611
)
20
139
(91
)
110
Zloty
PLN
(586
)
(245
)
(110
)
(150
)
(95
)
Pound (Sterling)
GBP
(572
)
(127
)
(42
)
(106
)
(21
)
Pound (Egyptian)
EGP
(180
)
(89
)
(51
)
(31
)
(58
)
Other currencies
(100
)
(144
)
(120
)
(45
)
(98
)
Exchange rate variations
(2,049
)
(585
)
(184
)
(423
)
(162
)
On a comparable basis, revenues
increased 3.4% for the period ended December 31, 2003, mainly due to increases in wireless activities, notably internationally, and Internet activities, partially offset by a decrease in revenues from fixed line services in France.
Operating income before depreciation and amortization increased 21.0% and operating
income increased 45.5%, highlighting the Group’s improved operating profitability. This growth resulted mainly from increases in wireless activities, Internet, and international activities, as well as from savings realized in the main segments,
in particular fixed line services in France.
Thus, by focusing on
growth sectors and continuing management improvements, the Group’s operating income before depreciation and amortization margin increased from 32.1% at December 31, 2002 on a comparable basis, to 37.5% at
December 31, 2003. The margin of operating income to revenues increased from 14.7% in 2002, on a comparable basis, to 20.7% in 2003.
Resulting from the combined effect of an increase in operating income before
depreciation and amortization and a decrease of investments in tangible and intangible assets, operating income before depreciation and amortization less CAPEX rose 66.1%.
5.1.1.2 P
RINCIPAL
NET
INCOME
AND
DEBT
FIGURES
The following table sets forth the principal figures relating to net income for the France Telecom group for the years ended December
31, 2003, 2002 and 2001, and the discussion that follows presents a summary of the changes in related line items from the income statement as well as the change in net financial debt.
(
€
millions)
Year ended December 31,
2003
2002
2001
historical
historical
Operating Income
9,554
6,808
5,200
Current Income from Integrated Companies
5,365
2,687
787
Net Income/(loss) from Integrated Companies
6,710
(12,809
)
(2,316
)
Net Income/(loss) of Consolidated Group
3,728
(20,906
)
(8,994
)
Net Income/(loss)
3,206
(20,736
)
(8,280
)
Interest expense net (not
including interest expense for the perpetual bonds redeemable for shares (“
titres à durée indéterminée remboursables en actions
”)) was
€
3,688 million for the year ended December 31, 2003 compared to
€
4,041 million for the year earlier period. In addition, interest expense for the perpetual bonds redeemable for shares (“
titres à durée indéterminée remboursables en actions
”)
issued in connection with the MobilCom settlement was
€
277 million for 2003.
Foreign exchange gain/(loss) net recorded a loss of
€
25 million for 2003 compared to a gain of
€
136 million for 2002.
The loss recorded from
actuarial adjustments in France Telecom’s early retirement plan was
€
199 million for 2003 compared to a loss of
€
216 million for 2002.
Current income from integrated companies was
€
5,365 million for 2003, compared to
€
2,687 million for 2002.
Other non-operating income/(expense) amounted to a total expense of
€
1,119 million for 2003, compared to an expense of
€
12,849 million for 2002. For the year December 31, 2003, this item included disposal gains of
€
333
million, mainly related to sales of holdings of Telecom Argentina, CTE Salvador (an indirect holding), Inmarsat and Sprint PCS and real estate disposals. However, the main elements contributing to this post in 2003 were non-operating expense for the
year which mainly consisted of restructuring costs at Orange and Equant, an adjustment of the provision for the Kulczyck put option, the depreciation of Noos, a cash payment for the perpetual bonds redeemable for shares, losses on the repurchases of
France Telecom S.A. and Orange notes, and expenses in connection with sales of receivables.
In 2002, this item reflected mainly exceptional provisions and amortizations relating principally to MobilCom, NTL, Wind, a provision for the Kulczyck put, restructuring costs (including for Orange), and the depreciation of
assets in the Ivory Coast. Other provision movements included, in particular, provisions of
€
212 million for Dutchtone,
€
192 million for Uni2,
€
145 million for Intelig,
€
132 million for Connect Austria and
€
52 million relating to the sale of Casema shares. Other non-operating income/(expenses) in 2002 also included disposal gains and losses of
€
941 million (principally TDF, Panafon and TPS).
Income taxes for 2003 amounted to a gain of
€
2,591 million compared to a loss of
€
2,499 million in 2002. The amount of income tax recorded for the year
ended December 31, 2003 mainly reflected the exceptional deferred tax asset resulting from the operational reorganization of Orange of
€
2,684 million, offset by a deferred tax loss of
€
798 million recorded in 2003, as well as the reversal of a
provision for the France Telecom S.A. consolidated tax group of
€
1,100 million.
Employee profit sharing amounted to an expense of
€
127 million in 2003, compared to an expense of
€
148 million in 2002.
Net income from integrated
companies was
€
6,710 million for 2003, compared to a loss of
€
12,809 million for 2002.
For 2003, equity in net income from affiliates amounted to a loss of
€
168 million, compared to a loss of
€
367 million for the year earlier period.
Goodwill amortization charges (excluding exceptional amortization) amounted to an
expense of
€
1,677 million in 2003, as compared to an expense of
€
2,352 million in 2002. This decrease was due to exceptional provisions for amortization of goodwill taken at December 31, 2002 and the decline of the pound sterling.
In 2003, following a review of the value of goodwill, provisions for exceptional amortization were recorded mainly
for Freeserve (United Kingdom), QDQ Media (Spain), Mauritius Telecom (Mauritius), and BITCO (Thailand) and amounted to a total expense of
€
1,137 million. In 2002, provisions for exceptional amortization of goodwill involving Equant, OCH (Switzerland), and JTC (Jordan), amounted to a total expense of
€
5,378 million.
Net income of the consolidated group was
€
3,728
million for 2003, compared to a loss of
€
20,906 million in 2002.
Net income after minority interests in 2003 was
€
3,206 million, compared to a loss of
€
20,736 million in 2002.
At December 31, 2003, France Telecom’s net financial debt (gross borrowings net
of cash and cash equivalents and marketable securities – see Note 16 of the Notes to the Consolidated Financial Statements and “ – 5.4.1.1 Schedule of Net Financial Debt”) was
€
44,167 million, compared to
€
49,329 million at June
30, 2003 and
€
68,019 million at December 31, 2002. The amount of debt reduction therefore amounted to
€
23,852 million compared with the level at December 31, 2002, largely due to the capital increase of
€
14,852 million carried out in the first six months of 2003, the
€
6,372 million in net cash generated by operating activities, less net cash used in investing activities (“free cash flow”)
1
excluding asset disposals generated (see “ – 5.4.2 Liquidity” and
“– 5.9 Non-GAAP Financial Measures and Financial Glossary – Financial Glossary”), the
€
3,046 million in gains on
sales of investments, and the
€
1,517 million related to the positive effect of exchange rate fluctuations on debt in foreign
currency.
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 – France Telecom may not be able to reduce its debt. If it is unable to reduce its indebtedness, France
Telecom’s cash flow may be insufficient to meet its financing needs and its ability to invest in the development of its business may be reduced”.
Net cash provided by operating activities was
€
11,322 million in 2003, compared to
€
11,839 million in 2002. Net cash used in investing activities was
€
3,737 million in 2003 compared to
€
11,514 million in 2002. Net cash used in financing activities was
€
6,868 million in 2003 compared to
€
194 million in 2002.
5.1.2 T
HE
“A
MBITION
FT 2005” P
LAN
5.1.2.1 T
HE
PRINCIPLES
On December 4, 2002, France Telecom launched the “Ambition FT 2005” Plan, which is centered primarily around the “15+15+15” plan:
n
more than
€
15 billion in net cash provided by operating activities less
net cash used in investing activities to be generated by the TOP Program and allocated to debt reduction. The results of this program are described in further detail below (see “– 5.1.2.2 Results of the ‘TOP’ Operational
Improvements Program”);
n
€
15 billion in additional equity, with the participation of the French
State in its capacity as shareholder pro rata to its shareholding interest,
i.e.
, approximately
€
9 billion. A share capital
increase of over
€
14.8 billion (net of expenses related to the issuance and commissions) was completed during the first six months
of 2003;
n
€
15 billion in refinancing of the France Telecom Group’s debt.
Between December 2002 and February 2003, France Telecom refinanced over
€
14 billion of its debt (issuances of bonds in December 2002
amounting to
€
2.8 billion and again in January and February 2003 amounting to
€
6.4 billion, in addition to the implementation in February 2003 of a new line of credit amounting to
€
5 billion).
These three initiatives were implemented in parallel, with the objective of achieving, by 2005, a ratio of net financial debt to operating income before
depreciation and amortization of between 1.5 and 2 giving the Group greater strategic and financial flexibility by the end of 2005. At December 31, 2003, this ratio was 2.55, compared to 4.56 at December 31, 2002.
1
The amount of free cash flow put towards debt reduction takes into account the investment of liquidities in SICAV (see “– 5.4.2 Liquidity” and
5.1.2.2 R
ESULTS
OF
THE
TOP
OPERATIONAL
IMPROVEMENTS
PROGRAM
The following table shows the reductions achieved in operating expenses before depreciation and amortization and before amortization
of actuarial adjustments in the early retirement plan (“operating expenses before depreciation and amortization” or “OPEX”; see “– 5.9 Non-GAAP Financial Measures and Financial Glossary – Financial Glossary”)
and investments in tangible and intangible assets (excluding UMTS/GSM licenses) (“CAPEX”) between 2002 and 2003, in the context of the implementation of the TOP Program.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(1)
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
OPEX
(2)
(28,818
)
(30,305
)
(31,713
)
1,487
2,895
CAPEX
5,086
6,950
7,441
(1,864
)
(2,355
)
Operating income before depreciation and amortization less CAPEX
12,217
7,355
7,475
4,863
4,742
Changes in working capital (trade)
(3)
(1,278
)
(992
)
(1)
The calculation, using figures on a historical basis, of figures on a comparable basis is set forth above and below.
(2)
OPEX is equal to the sum of costs of goods and services sold, selling, general and administrative expenses and research and development expenses, as presented by destination on the income
statement. These expenses are also followed on the basis of type of expense, as detailed below.
(3)
Changes in working capital (trade) is discussed below. See “– 5.4.2.1 Net Cash Provided by Operating Activities”.
TOP projects crossed from the launch stage to the roll-out stage. After priority given
to projects delivering rapid results in the first quarter of 2003, the gradual restructuring of principal procedures delivered its first results and is being integrated at all levels of the organization to improve operating performance in a
continuing manner.
The results achieved from the TOP Program during
2003 exceeded targets. These results should permit the acceleration of debt reduction for the Group, while reinforcing its growth.
France Telecom affirms its goal to generate more than
€
15 billion of free cash flow
over the period 2003-2005, through the TOP Program. In 2003, France Telecom generated more than
€
6.4 billion in free cash flow excluding asset disposals
(see “– 5.4.2 Liquidity”), compared to an initial goal of more than
€
3 billion raised to more than
€
4 billion excluding
asset disposals.
n
Changes in operating expenses before depreciation and amortization
See “– 5.2.1.2 From Revenues to Operating Income Before Depreciation and Amortization – Operating Expenses Before Depreciation and Amortization
Excluding Personnel Costs”.
Operating expenses before depreciation
and amortization by type of expense is an alternative presentation to operating expenses as they are presented on the income statement by destination (cost of services and products sold, selling, general and administrative expenses and research and
development expenses) – see Note 5 of the Notes to the Consolidated Financial Statements for information regarding how these presentations inter-relate. Following the implementation of the FT Ambition Plan 2005 plan, management follows Group
operating expenses before depreciation and amortization by type of expense. As a result, the discussion of Group 2003 and 2002 results focuses on operating expenses before depreciation and amortization by type of expense, while the discussion by
segment focuses on operating expenses before depreciation and amortization by destination.
Between 2002 and 2003, operating expenses before depreciation and amortization decreased
€
2,895 million.
On a comparable basis, the gains recorded for operating expenses before
depreciation and amortization for the same period were approximately
€
1,487 million.
In 2003, operating expenses before depreciation and amortization amounted to
approximately
€
28.8 billion, compared to
€
30.3 billion in 2002 on a comparable basis, or approximately 62.5% of revenues compared to approximately 67.9% for the year earlier period, an improvement of over 5 points.
The transformation in procedures and
the effects of the TOP Sourcing Program (contractual renegotiations and reduction in the number of suppliers) particularly benefits operating expenses before depreciation and amortization through improvement in the selection of expenses and pooling
of resources among the France Telecom Group’s divisions. Gains in operating expenses before depreciation and amortization were mainly drawn from:
-
the first results of the actions taken by “saving trackers” for the streamlining and improved allocation of general expenses, resulting in a modification of the approach to
expenditure in the long-term and to a reduction in expenses relating to off-site transport, business travel and expenses relating to studies and fees;
-
the implementation of new operational processes and the internalization of certain activities leading to an improvement in the operational processes relating to the maintenance and use of
networks; and
-
the restructuring of costs related to communication around advertising and a streamlining of expenses related to sponsorship.
Gains in operating expenses before depreciation and amortization were mainly derived
from external purchases, which experienced a significant decrease during the years amounting to
€
18.0 billion in 2003, compared to
€
19.0 billion in 2002 on a comparable basis, representing a gain of
€
969 million. Among these, savings in consulting/advisory related expenses amounted to approximately
€
444 million and communications and advertising gains amounted to
€
107 million in 2003.
n
Changes in progression of investments in tangible and intangible assets excluding licenses (“CAPEX”)
Between 2002 and 2003, investments in tangible and intangible assets excluding
licenses decreased
€
2,355 million.
On a comparable basis, the gain in investments in tangible and intangible assets excluding licenses recorded for the same period was
€
1,864 million. This reflected better selectivity in investments in tangible and intangible assets, the effects of the TOP Sourcing Program and support for
growth sectors.
The principal contributors to the reduction of
investments in tangible and intangible assets were:
-
the “Orange” segment for 42%;
-
the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment for 40%;
-
the “Equant”, “TP Group” and “Other International” segments for a total of 16%; and
-
the “Wanadoo” segment for 2%.
Orange’s investments in tangible and intangible assets excluding licenses decreased as a result of the delay of investments in the UMTS network due to the
insufficient maturity of the market for the launch of the 3
rd
generation. A “CAPEX sharing” project was commenced in order to increase the pooling of assets for investments in areas such as information systems and billing. The
decreases in the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment corresponded to the decrease in expenditure in areas such as the switching and transmission capacities of the network in France.
However, in line with the TOP Program, and in order to accelerate productivity and
improve the selectivity of investments, expenses for investments in tangible and intangible assets excluding licenses increased in areas with strong growth potential. This was particularly the case for investments related to broadband. Investments
in the ADSL network increased 31% for the Group in 2003 compared to 2002 on a comparable basis, whereas the production of ADSL lines reached 3.1 million in 2003.
As a result, the level of the Group’s investments in tangible and intangible assets excluding licenses is aimed at ensuring
long-term growth in growth markets.
n
Operating income before depreciation and amortization less CAPEX
Operating income before depreciation and amortization less CAPEX increased
€
4,742 million between 2002 and 2003.
The results achieved under the TOP Program exceeded targets.
On a comparable basis, operating income before depreciation and amortization less CAPEX increased over 66% (approximately
€
4,863 million) to
€
12.2 billion at December 31, 2003 compared to
€
7.4 billion at December 31, 2002. This improvement of
€
4.9 billion was due to an increase of approximately
€
1.5 billion in revenues, approximately
€
1.5 billion for operating expenses before depreciation and amortization gains and approximately
€
1.9 billion in gains in investments in tangible and intangible assets excluding licenses.
For information regarding risks related to the TOP Program, 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”.
France
Telecom’s objectives for 2004-2005 are supported by the growth initiatives implemented by the Group (the “Top Line” program).
The strong results of the TOP Program (see “– 5.1.2.2 Results of the ‘TOP’ Operational Improvements Program”) were partnered with the
implementation of growth projects in order to provide benefits in all the different markets in which the Group is present. Approximately 40 growth initiative projects specific to different divisions of the Group have been launched, notably aimed at
reinforcing the Group’s positions in its existing activities and fully optimizing growth drivers in order to develop new opportunities. In this perspective, France Telecom is especially committed to developing broadband services, business
services, inter-operability and convergence between its fixed, wireless and Internet activities. Simultaneously, 15 group-wide initiatives will allow for increased synergies within the Group and the development of new services. These initiatives are
intended to support the Group’s medium-term growth and to permit additional margins of flexibility by relying upon innovation and cooperation between all of the Group’s activities and upon the significant role of industrial partnerships
and research and development.
France Telecom confirms its objectives
through 2005:
-
revenue growth of 3% to 5% on a comparable basis in 2004 and 2005;
-
operating income before depreciation and amortization of more than
€
18
billion in 2004;
-
a target ratio for operating income before depreciation and amortization to revenues of 40% in 2005; and
-
a ratio of investments in tangible and intangible assets excluding licenses to revenues between 10% and 12% in 2004 and 2005. Investments in tangible and intangible assets excluding licenses
should be more than
€
16 billion for the period from 2003 to 2005.
Nonetheless, the Group’s main objectives remain debt reduction and operational
improvement with the TOP Program. Within this framework, 25 new projects will be launched in 2004. These objectives are:
-
the reduction of net financial debt, such that the ratio of net financial debt to operating income before depreciation and amortization is between 1.5 and 2 in 2005;
-
continued operational improvement;
-
restimulation of growth; and
-
the use of surplus cash to reduce debt, as well as to restimulate organic growth and renew a policy of making distributions to shareholders beginning in 2004. France Telecom does not
currently envision any major cash acquisitions or significant share repurchases.
In addition, research and development expenses for the Group (research and development costs excluding depreciation and amortization, and investments in research
and development – related tangible and intangible assets) amounted to 1.1% of revenues in 2003 and should reach 1.3% in 2004.
The development strategy for France Telecom’s “Home services”, which are centered on satisfying residential and corporate customers’ needs for
innovative and easy-to-use services, is based on the rapid development of broadband.
To this end, with respect to ADSL, the goal for France is to have 90% of telephone lines able to be connected to ADSL by the end of 2004 and 95% able to be connected to ADSL by the end of 2005 (compared to 79% at the end of
2003). Total investments in ADSL will be increased to
€
700 million for the period 2003 through 2005. Moreover, France Telecom’s
goal is to have total ADSL access in France reach 4.5 million subscribers at the end of 2004 (compared to 3.1 million at the end of 2003) and to have revenues from ADSL greater than
€
1 billion in 2004 (compared to
€
744 million in
2003).
As a result of the investments, France Telecom’s goal is to
start the widespread use of 2Mbit DSL for individual customers and to launch in 2004:
n
ADSL television in Paris in the second quarter;
n
non-PC videophony in the second quarter of 2004;
n
the interoperability of videophony in the second half of 2004.
These offerings will be completed in 2005 through a DSL video offering abroad. In regards to the services aimed to provide customers with improved ease of use,
France Telecom’s goal is to launch:
seamless fixed-line and wireless messaging (“Home” and “Personal”);
n
interoperability of Wanadoo and Orange instant messaging.
-
in the first half of 2005:
n
complete interoperability of contact lists.
-
in the second half of 2005:
n
contact lists based on presence.
In February 2004, Orange announced the commercialization of third generation wireless services during the second half of 2004 in approximately 20 cities in France
and the United Kingdom.
Moreover, Wanadoo announced on February 11,
2004, the date on which it published its 2003 results, its goals for 2004 as follows: “In light of these encouraging results, Wanadoo can confidently set ambitious targets for 2004: one million additional broadband customers, 10 to 15% growth
in consolidated revenues, an operating income growth rate two times greater than revenues growth rate.”
In addition, Equant announced on February 12, 2004, the date on which it published its 2003 results, its goals for 2004 as follows: “The environment for
corporate business solutions is expected to remain challenging in 2004, particularly in the first half of 2004. As announced at the beginning of the year, Equant will actively pursue its expansion into integrated networks and IT solutions. As a
global company, Equant is impacted by currency fluctuations and in 2004 will drive its operations towards a small increase in its annual revenue, an increase in its operating income before depreciation and amortization, share remuneration plan,
restructuring and integration, and a positive operating free cash flow”.
See “Cautionary Statement Regarding Forward-Looking Statements”.
The
comparison of the 2003 and 2002 periods in this section is broken down into three main parts : (i) a presentation of Group revenues through operating income, with a discussion of Group capital expenditures and financial investments, (ii) an analysis
by segment of principal operating income figures and investments in tangible and intangible assets and (iii) a presentation of Group operating income through net income.
5.2.1 F
ROM
R
EVENUES
TO
O
PERATING
I
NCOME
AND
C
APITAL
E
XPENDITURES
AND
F
INANCIAL
I
NVESTMENTS
OF
THE
G
ROUP
Following the launch of the “Ambition FT 2005” Plan on December 4, 2002 (see section “– 5.1.2 The ‘Ambition FT 2005’ Plan”),
France Telecom set targets related in particular to the TOP operational performance improvement program, of which the anticipated results have led the Group to analyze operating expenses before depreciation and amortization on the basis of type of
expense: (i) external purchases, other expenses (operating expenses before depreciation and amortization excluding personnel costs) and (ii) personnel costs.
The following table sets forth the progression from revenues to operating income and details, by type of expense, France Telecom’s total operating expenses.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues
46,121
44,609
46,630
3.4
%
(1.1)
%
OPEX excluding personnel costs
(19,579)
(20,701)
(21,677)
(5.4)
%
(9.7)
%
Personnel costs
(9,239)
(9,603)
(10,036)
(3.8)
%
(7.9)
%
Total OPEX
(1)
(28,818)
(30,305)
(31,713)
(4.9)
%
(9.1)
%
Operating income before depreciation and amortization
17,303
14,305
14,917
21.0
%
16.0
%
Depreciation and amortization (excluding goodwill)
(7,538)
(7,537)
(7,910)
0.0
%
(4.7)
%
Amortization of actuarial adjustments in the early retirement plan
(211)
(199)
(199)
6.0
%
6.0
%
Total operating expenses
(36,567)
(38,041)
(39,822)
(3.9)
%
(8.2)
%
Operating income
9,554
6,568
6,808
45.5
%
40.3
%
Operating costs/revenues
79.3
%
85.3
%
85.4
%
(1)
As described in 5.1.2.2. above, beginning in 2003, management follows operating expenses before depreciation and amortization on the basis of type of expense, rather than by destination. The
relationship between the presentation by type of expense and presentation by destination is set forth in Note 5 of the Notes to the Consolidated Financial Statements.
The following table sets forth for 2002, the calculation, using figures on a historical basis, of figures on a
comparable basis for the Group’s 2002 operating expenses.
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
OPEX less
personnel costs
Personnel costs
Depreciation and
amortization
provisions
Amortization of
actuarial
adjustments in the
early retirement
plan
2002 figures on a historical basis
(21,677
)
(10,036
)
(7,910
)
(199
)
Changes in the scope of consolidation and others
(133
)
80
(28
)
0
Exchange rate variation
(2)
1,109
353
401
0
2002 figures on a comparable basis
(20,701
)
(9,603
)
(7,537
)
(199
)
(1)
Contributive figures.
(2)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
5.2.1.1 R
EVENUES
The
following table presents for 2003 and 2002, the contributive revenues of each of the Group’s segments (excluding intra-group revenues).
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Orange Segment
16,393
14,793
15,410
10.8
%
6.4
%
Wanadoo Segment
2,470
1,961
1,935
26.0
%
27.7
%
Fixed Line, Distribution, Networks, Large Customers and Operators Segment
19,297
19,902
20,637
(3.0
)%
(6.5
)%
Equant Segment
2,283
2,371
2,842
(3.7
)%
(19.7
)%
TP Group Segment
4,158
4,104
3,471
1.3
%
19.8
%
Other International Segment
1,520
1,478
2,335
2.8
%
(34.9
)%
Total Group revenues
46,121
44,609
46,630
3.4
%
(1.1
)%
Following changes in the method
of payment to distributors in 2003 aimed at adapting to market practice, certain commissions are now comparable to discounts and are consequently recorded as net from revenues. A presentation net from revenues was also adopted for the audiotel
revenues of TP Group. Lastly, a change in method was implemented in 2003 for the inclusion of revenues from the sale of advertising in electronic directories, which are now spread over the duration of the advertisement. The overall impact of these
changes on revenues in 2003, amounted to negative
€
127 million.
France Telecom’s revenues for 2003 were
€
46.1 billion, a decrease of 1.1% on a historical basis compared to 2002. Changes in revenues on a historical basis were affected by the negative impact of exchange rate fluctuations, which amounted to
€
2.049 billion. In addition, the changes in the scope of consolidation were limited to an impact of
€
40 million: the impact of the sales of TDF on December 13, 2002, Casema on January 28, 2003, CTE Salvador on October 22, 2003 and the transfer of ownership of
the FTM Lebanon network to the Lebanese Government as of August 31, 2002 were more than offset by the consolidation of TP Group since April 1, 2002 and eresMas since November 1, 2002.
On a comparable basis, France Telecom’s revenues increased 3.4% in 2003 compared to 2002, reaching
€
46.121 billion. The increase in consolidated revenues was due to growth at Orange (10.8% on a comparable basis), which represented 35.5% of the overall revenues
for 2003 and the double-digit growth of Wanadoo’s activities (26.0% on a comparable basis). These increases offset the decline in revenues from the domestic fixed line business (a decline of 3.0%). Regarding international activities,
TP Group’s business increased (1.3% on a comparable basis) and Equant’s global services revenues decreased slightly (a decline of 3.7% on a comparable basis).
The total number of customers of France Telecom and its controlled companies was 117.1 million at December 31,
2003, an increase of 4.8% on a historical basis and 7.0% on a comparable basis, compared to 2002. The number of new subscribers acquired in 2003 amounted to 7.7 million on a comparable basis and were mainly derived from wireless services, which had
6.4 million new active customers in 2003, and Internet activities, which had 0.8 million new customers during 2003. The number of customers in fixed line telephony increased by 0.4 million, mainly in Poland.
The following table sets forth, for the periods ended December 31, 2003 and 2002, the
Group’s revenues by segment, before inter-segment eliminations.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Orange France
7,983
7,651
7,651
4.3
%
4.3
%
Orange UK
5,819
5,418
5,961
7.4
%
(2.4
)%
Rest of World
4,315
3,574
3,657
20.7
%
18.0
%
Inter-segment eliminations
(176
)
(180
)
(184
)
2.2
%
4.3
%
Orange Segment
17,941
16,463
17,085
9.0
%
5.0
%
Access, Portals and Merchant
1,708
1,209
1,199
41.3
%
42.5
%
Directories
918
869
880
5.6
%
4.3
%
Inter-segment eliminations
(9
)
(5
)
(4
)
(80.0
)%
(125.0
)%
Wanadoo Segment
2,617
2,073
2,075
26.2
%
26.1
%
Subscription fees
4,106
4,034
4,034
1.8
%
1.8
%
Calling services
3,964
4,365
4,365
(9.2
)%
(9.2
)%
On line services and Internet access
973
852
852
14.2
%
14.2
%
Other consumer services
2,260
2,417
2,433
(6.5
)%
(7.1
)%
Consumer services
11,304
11,669
11,685
(3.1
)%
(3.3
)%
Fixed line telephony
3,327
3,531
3,527
(5.8
)%
(5.7
)%
Business networks
2,526
2,406
2,385
5.0
%
5.9
%
Other business services
842
851
1,648
(1.0
)%
(48.9
)%
Business services
6,695
6,788
7,560
(1.4
)%
(11.4
)%
Domestic interconnection
1,206
1,261
1,261
(4.3
)%
(4.3
)%
International operators services
574
610
610
(5.8
)%
(5.8
)%
Other services
1,586
1,508
1,509
5.2
%
5.1
%
Carrier services
3,367
3,378
3,379
(0.3
)%
(0.4
)%
Other revenues
395
453
440
(12.8
)%
(10.2
)%
Fixed Line, Distribution, Networks, Large Customers and Operators Segment
5.2.1.2 From Revenues to Operating Income Before Depreciation and Amortization
Operating Expenses Before Depreciation and Amortization Excluding Personnel Costs
Operating expenses before depreciation and amortization excluding personnel costs amounted to
€
19,579 million in 2003, compared to
€
21,677 million
on a historical basis and
€
20,701 million on a comparable basis in 2002. The breakdown of such expenses by item is as follows:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
External purchases
(1)
(18,012
)
(18,981
)
(19,992
)
(5.1
)%
(9.9
)%
Of which:
– Purchases of equipment and merchandise
(3,559
)
(3,460
)
(3,620
)
2.9
%
(1.7
)%
– Studies, fees, sub-contracting (excluding information technology)
(1,135
)
(1,579
)
(1,640
)
(28.1
)%
(30.8
)%
– Advertising, promotions, sponsoring and brand and sponsoring communication
(1,063
)
(1,170
)
(1,232
)
(9.1
)%
(13.7
)%
– Information systems
(699
)
(837
)
(837
)
(16.4
)%
(16.4
)%
– Part-time and receptions
(366
)
(607
)
(661
)
(39.7
)%
(44.7
)%
Other expenses
(1,567
)
(1,721
)
(1,685
)
(8.9
)%
(7.0
)%
OPEX excluding personnel costs
(19,579
)
(20,701
)
(21,677
)
(5.4
)%
(9.7
)%
(1)
Net of capitalized personnel costs
On a historical basis, operating expenses before depreciation and amortization excluding personnel costs decreased 9.7% between December 31, 2002 and December 31,
2003, as compared to a slight decrease in revenues of 1.1%. This decrease in expenses reflected mainly changes in scope of consolidation, resulting principally from the sales of TDF and Casema, the transfer of ownership of the FTM Lebanon network to
the Lebanese Government, as well as the effects of exchange rates amounting to over
€
1 billion (see the table in “–
5.1.1.1 Principal Operating Results” which sets forth for 2002, the means of calculation, using historical figures, of figures on a comparable basis).
In comparison to the figures on a comparable basis at December 31, 2002, recalculated to adjust for the effects of scope of consolidation and exchange rates,
operating expenses before depreciation and amortization excluding personnel costs decreased 5.4%, as compared to a slight increase in revenues of 3.4% for the same period. The principal savings are derived from the “Fixed Line, Distribution,
Networks, Large Customers and Operators” and “Equant” segments.
One of the TOP Program’s objectives is the reduction of external purchases (see “– 5.1.2.2 Results of the ‘TOP’ Operational Improvements Program”). External purchases decreased significantly by 9.9% on a
historical basis and 5.1% on a comparable basis.
Personnel Costs
Personnel costs included in the calculation of operating income before depreciation
and amortization at December 31, 2003 are net of capitalized personnel costs. Personnel costs amounted to
€
9,239 million in 2003 and
€
10,036 million on a historical basis and
€
9,603 million on a comparable basis in 2002.
The following table presents the calculation of personnel expenditures and personnel costs:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2003/2002
historical
historical
Wages and salaries
(6,986
)
(7,535
)
(7.3
)%
Social charges
(2,471
)
(2,705
)
(8.7
)%
Total personnel expenditures
(9,457
)
(10,240
)
(7.6
)%
Capitalized personnel costs
( 1)
408
431
(5.3
)%
Payroll taxes and other
(190
)
(227
)
(16.3
)%
Total personnel costs
(9,239
)
(10,036
)
(7.9
)%
(1)
Capitalized personnel costs correspond to personnel expenditures included in the cost of assets produced by France Telecom.
The analyses below are based upon personnel expenditures. The following table sets
forth personnel expenditures, which does not include statutory employee profit sharing or charges relating to discounting or changes in actuarial assumptions relating to the early retirement plan:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2003/2002
historical
historical
Personnel expenditures
France Telecom S.A.
(5,436
)
(5,577
)
(2.5
)%
Domestic subsidiaries
(1,191
)
(1,401
)
(15.0
)%
Total France
(6,627
)
(6,978
)
(5.0
)%
International subsidiaries
(2,830
)
(3,262
)
(13.2
)%
Group Total
(9,457
)
(10,240
)
(7.6
)%
Year ended December 31,
Variations
2003
2002
2003/2002
historical
historical
Average number of employees (full-time equivalent)
Personnel expenditures decreased 7.6% between 2002 and 2003.
France Telecom’s average number of full-time equivalent employees decreased by
18,488 employees, a 7.7% decrease between 2002 and 2003, while the number of employees at December 31, 2003 decreased 10.3% to 25,050.
Excluding the effects of changes in the scope of consolidation, which accounted for a decrease of 8,908 employees (in particular, 4,429 employees at TDF, 2,976
employees at CTE Salvador and 731 employees at Casema), the number of employees at December 31, 2003 decreased by 16,142 employees, from 234,665 at December 31, 2002, to 218,523 at December 31, 2003. Of this decrease, 7,747 employees were located in
France (of which 7,500 were employees with permanent contracts (CDI)) and 8,395 were located internationally (of which 5,400 were employees with permanent contracts (CDI)).
This decrease is in line with the estimate of 22,000 employee departures, whether through natural attrition or related to the early
retirement plan, between 2003 and 2005. The departures fall within the framework of an agreement for employment and skills management signed in June 2003 with four labor unions. Over 700 employees have volunteered to leave the company to join the
public sector. This trend is expected to accelerate during 2004 as a result of recent legislative changes favoring the integration of France Telecom’s public sector employees into other state organizations and defining a structure for financial
assistance in their mobility.
Restructuring measures at Equant led to a
decrease in headcount and a significant decrease in the need for temporary and external personnel.
External hiring was slowed dramatically during the first half of 2003 in France. It was limited to 1,060 employees, of which 770 employees were hired to support
sales teams and research and development.
The use of additional
part-time employees (short-term contracts and temporary workers) was significantly reduced. At December 31, 2003, the Group had employed approximately 3,500 fewer employees on short-term contracts and during the course of the year used approximately
3,300 fewer temporary employees on average.
n
France Telecom S.A.
The average number of employees of France Telecom S.A. decreased 5.5% between 2002 and 2003. The decrease was due mainly to employee departures linked to France
Telecom’s early retirement plan. Since the implementation of the early retirement plan in September 1996, 26,011 employees have chosen to accept early retirement under the plan (excluding other pre-existing early departure programs), including
4,413 employees in 2003.
France Telecom S.A.’s personnel
expenditures decreased 2.5% between 2002 and 2003. This decrease was due mainly to a reduction in headcount, partially offset by the increase in salaries due to general public sector measures, as well as the increase in the base salaries of
employees under a collective bargaining agreement and the increase in provisions in respect of profit sharing (a new agreement for 2004).
n
Subsidiaries in France
The 19.0% decrease in the average number of employees of subsidiaries in France between 2002 and 2003 was mainly due to the sale of TDF.
The variation in personnel expenditures in the French subsidiaries was mainly due to
changes in headcount.
n
International subsidiaries
The 7.6% decrease in the average number of employees of international subsidiaries between 2002 and 2003 was principally the result of reductions in headcount at TP
Group, Equant, CI Telecom and JTC (in addition to changes in the scope of consolidation relating to the sale of Casema and CTE Salvador).
On a comparable basis, personnel expenditures for international subsidiaries decreased 13.2% primarily due to the following:
-
the positive exchange rate effects of Equant, TP Group and Orange partially offset by the impact of the full consolidation of TP Group (which was only consolidated for nine months in 2002);
and
-
a volume effect corresponding to the reduction in average headcount at a constant scope of consolidation, in particular TP Group (a decrease of 14,031 in the average number of full-time
equivalent employees) and Equant (a decrease of 2,018 in the average number of full-time equivalent employees).
5.2.1.3 O
PERATING
INCOME
BEFORE
DEPRECIATION
AND
AMORTIZATION
The France Telecom Group’s operating income before depreciation and amortization amounted to
€
17,303 million at December 31, 2003 compared to
€
14,917 million at December 31, 2002, representing an increase of 16.0%.
On a comparable basis, operating income before depreciation and amortization amounted to
€
14,305 million, at December 31, 2002, resulting in an increase of 21.0% in 2003.
5.2.1.4 F
ROM
OPERATING
INCOME
BEFORE
DEPRECIATION
AND
AMORTIZATION
TO
OPERATING
INCOME
Depreciation and amortization (excluding goodwill)
Depreciation and amortization (excluding goodwill) decreased 4.7%
on a historical basis between 2002 and 2003 amounting to
€
7,538 million in 2003 compared to
€
7,910 million a year earlier.
This decrease was due primarily to the impact of positive exchange rate variations on depreciation and amortization in the Polish zloty, U.S. dollar and pound
sterling, amounting to
€
401 million.
Changes in the scope of consolidation had a negative impact on depreciation and amortization (excluding goodwill) amounting to
€
29 million. The impact of the consolidation of TP Group over the full year 2003, compared with only nine months in 2002 (a loss of
€
281 million), was offset by the decreases resulting from withdrawals from the scope of consolidation, including the sale of TDF (
€
123 million), the sale of Casema (
€
92 million) and
the transfer of ownership of the FTM Lebanon network to the Lebanese Government (
€
34 million).
Depreciation and amortization (excluding goodwill) reflected the impact of reductions
in investments in tangible and intangible assets for the fixed line telephony business in France.
On a comparable basis, depreciation and amortization (excluding goodwill) remained stable. The decrease in depreciation and amortization (excluding goodwill) in the
“Fixed Line, Distribution, Networks, Large Customers and Operators” segment was offset by increases in the “Orange” segment, particularly in France.
Amortization of actuarial adjustments in the early retirement plan
At December 31, 2003, the amortization of actuarial adjustments in France Telecom’s early retirement plan amounted to a net
charge of
€
211 million, compared to a charge of
€
199 million at December 31, 2002, both on historical and comparable bases.
5.2.1.5 O
PERATING
INCOME
Operating income for the France Telecom Group amounted to
€
9,554 million at December 31, 2003, compared to
€
6,808 million a year earlier, an increase of 40.3%. This increase reflected primarily the improvement in operating income before
depreciation and amortization between the two periods, in addition to the significant decrease in depreciation and amortization (excluding goodwill).
On a comparable basis, operating income before depreciation and amortization amounted to
€
6,568 million in 2002, resulting in an increase of 45.5% in 2003.
5.2.1.6 C
APITAL
EXPENDITURES
AND
FINANCIAL
INVESTMENTS
The following table sets forth capital expenditures and financial investments in 2003 and 2002:
(
€
millions)
Year ended December 31,
2003
2002
Investments in tangible and intangible assets excluding UMTS/GSM licenses
(1)
5,086
7,441
Investments in UMTS and GSM licenses
0
134
Financial investments
(2)
237
2,228
(1)
See Note 4 of the Notes to the Consolidated Financial Statements.
(2)
Excluding the repurchase of treasury shares and net of cash acquired.
Investments in tangible and intangible assets excluding UMTS/GSM licenses (CAPEX)
Investments in tangible and intangible assets excluding UMTS/GSM licenses decreased significantly between 2002 and 2003, a decrease of 31.7% on a historical
basis and 26.8% on a comparable basis.
changes in the scope of consolidation, such as the sales of TDF and Casema;
-
fluctuations in exchange rates, mainly for the Polish zloty, pound sterling and U.S. dollar; and
-
savings following the implementation of the TOP Program (see “– 5.1.2.2 Results of the ‘TOP’ Operational Improvements Program”), in particular the effects of the
“TOP Sourcing” Program (the new Group purchasing policy), greater selectivity relating to investments in tangible and intangible assets and support of growth areas.
At December 31, 2003, investments in tangible and intangible assets excluding UMTS/GMS
licenses amounted to
€
5,086 million compared with
€
7,441 million at December 31, 2002 on a historical basis and
€
6,950 on a comparable
basis. The breakdown of these investments by segment is presented in the following table.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Orange Segment
2,362
3,142
3,281
(24.8
)%
(28.0
)%
Wanadoo Segment
76
107
108
(29.0
)%
(29.6
)%
Fixed Line, Distribution, Networks, Large Customers and Operators Segment
1,356
2,097
2,243
(35.3
)%
(39.5
)%
Equant Segment
248
327
392
(24.2
)%
(36.7
)%
TP Group Segment
883
1,051
1,045
(16.0
)%
(15.5
)%
Other International Segment
183
246
396
(25.6
)%
(53.8
)%
Inter-segment eliminations
(22
)
(20
)
(24
)
(10.0
)%
8.3
%
Total Group CAPEX
5,086
6,950
7,441
(26.8
)%
(31.6
)%
The “Orange” and
“Fixed Line, Distribution, Networks, Large Customers and Operators” segments provided the most significant gains. Investments in tangible and intangible assets excluding UMTS/GSM licenses were allocated to growth areas (such as ADSL) to
ensure the long-term growth of the Group’s leading activities.
The
following table sets forth a breakdown of investments in tangible and intangible assets.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
CAPEX
5,086
6,950
7,441
(26.8
)%
(31.6
)%
Of which:
- 2
nd
and 3
rd
Generation wireless radio equipment
1,826
2,133
2,178
(14.4
)%
(16.2
)%
- Information systems
1,168
1,506
1,493
(22.5
)%
(21.8
)%
- Other networks
657
1,156
991
(43.2
)%
(33.7
)%
- ADSL
244
186
187
30.9
%
30.5
%
Investments in tangible and
intangible assets excluding UMTS/GSM licenses are described further below (see “– 5.2.2 Analysis of Operating Income and Investments in Tangible and Intangible Assets by Segment”).
In 2002, the Group’s investments included
€
134 million for the
acquisition of the following wireless licenses:
-
€
53 million for an additional payment for a GSM license in the Ivory Coast
(“Orange” segment);
-
€
35 million for the acquisition of a UMTS license in Slovakia
(“Orange” segment); and
-
€
46 million for the acquisition of a GSM license in Mali (Ikatel)
(“Other International” segment).
Financial Investments
n
At December 31, 2003, net cash used in financial investments (excluding repurchases of treasury shares) amounted to
€
237 million, and principally included the following:
-
The acquisition of 0.24% of Orange’s capital following a tender offer for, followed by a compulsory purchase of Orange shares for
€
161 million.
Further to a public exchange offer, France Telecom acquired, on October 24, 2003, 604,463,050 additional Orange shares (12.49% of the capital), raising its interest
to 4,758,984,293 shares, representing around 98.78% of Orange’s capital and voting rights. In exchange for those Orange shares, France Telecom delivered 95,363,219 existing France Telecom shares and issued 170,600,523 new shares (see Note 25 of
the Notes to the Consolidated Financial Statements). The exchange ratio being 11 France Telecom shares for 25 Orange shares, the acquisition cost represents
€
5,652 million (or
€
2,026 million for exchange Treasury shares and
€
3,625 million for newly issued shares), based on France Telecom’s closing share price of
€
21.25, on October 16, 2003, the date on which the French Financial Markets Council (
Conseil des Marchés Financiers (CMF)
) published the results of the
exchange offer
.
On November 20, 2003, 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 in Orange, at a price of
€
9.50 per Orange share. The tender offer was not extended into the United States and cannot be accepted by holders resident there. Under the compulsory purchase
procedure, France Telecom undertook to purchase all Orange shares not tendered into the original public offer (see Note 28 of the Notes to the Consolidated Financial Statements). The timetable for the tender offer as initially set by the
CMF
provided for a tender offer closing date of December 3, 2003 and the commencement of the compulsory purchase on December 4, 2003. The Association for the Defense of Minority Shareholders (“ADAM”) 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
notice accepting France Telecom’s tender offer followed by a compulsory purchase of the outstanding shares in
Orange, as well as the approval (
visa
) by the
Commission des opérations de bourse
(COB) of the information memorandum relating to this offer. ADAM also applied for a stay of execution in relation to the
CMF’s
decisions. Further to these applications, the
Autorité des Marchés Financiers
(AMF) – the French stock exchange regulatory authority which replaced the COB and the CMF – decided to extend the tender offer procedure
period until the Paris Court of Appeals has issued its decision. Therefore the compulsory purchase – which was due to commence on December 4, 2003, the day after the planned closing of the tender offer – has been postponed. See
“– 5.7.1 Subsequent Events”. At December 31, 2003 France Telecom had acquired 16,915,370 shares under the tender offer, representing
€
161 million, increasing its stake in Orange to 99.02%. 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.
-
the capital increase of Wind, subscribed for in an amount equivalent to the percentage holding (26.575%), for
€
35 million;
-
The purchase of minority interests in Wirtualna Polska (30.46%) for
€
18
million; and
-
Wanadoo’s purchase of minority interests in QDQ Media for
€
12
million.
n
At December 31, 2002, cash used in financial investments totaled
€
2,228
million (excluding repurchases of treasury shares and net of the cash acquired in connection with these investments). The principal financial investments included the following:
-
the exercise of the call option on all of NTL’s preferred shares held by financial institutions for $1.1 billion, equivalent to
€
1,092 million;
the purchase of approximately 103 million Orange shares, previously held by E.On, for
€
950 million, in exchange for the sale of E.On’s equity stake in OCH, formerly Orange Communications S.A., in Switzerland, to Orange S.A.. This purchase was made as part of E.On’s exercise of its put option;
-
Orange’s participation in BITCO Thailand’s capital increase for
€
69 million;
-
Orange’s participation in Wind’s capital increase in Italy for
€
48 million;
-
participation in the Novis capital increase for
€
26 million;
-
Wanadoo’s purchase of an additional share of the minority interest in QDQ Media for
€
23 million, which raised its holding to 99%;
-
Orange’s participation in the Optimus capital increase in Portugal for
€
20 million;
-
Orange’s acquisition of the remaining shares in Orange Communications S.A. for
€
16 million;
-
Wanadoo Portails’ purchase of the minority interests in Wanadoo Editions for
€
13 million, which raised Wanadoo Portails’ controlling stake in Wanadoo Editions to 100%;
-
the acquisition of Openet Telecom by Orange (Wirefree Services Belgium) and Orange World & Brand for
€
12 million. Openet Telecom is an Irish company that specializes in implementation and development of tools for managing customer receivables and billing for telecommunications companies; and
-
Wanadoo’s purchase of MyWeb, the Dutch Internet service provider, for
€
5 million.
Cash used in financial
investments was reduced by another
€
155 million, equivalent to the amount of cash acquired, of which
€
144 million represented the TP Group’s net cash at April 1, 2002, when it was fully consolidated.
5.2.2 A
NALYSIS
OF
O
PERATING
I
NCOME
AND
I
NVESTMENTS
IN
T
ANGIBLE
AND
I
NTANGIBLE
A
SSETS
BY
S
EGMENT
In order to better reflect the Group’s evolution and the structure of its operations among its various activities and subsidiaries, France Telecom has identified, starting in the first six months of 2003, the following six
business segments: “Orange”, “Wanadoo”, “Fixed Line, Distribution, Networks, Large Customers and Operators”, “Equant”, “TP Group”, and “Other International”.
The following table sets forth the principal operating data by segment. The figures as of and at December 31, 2002
have been restated according to the new segmentation. The segment data set forth in the following sections, unless otherwise indicated, is presented before inter-segment eliminations. In addition, the changes set forth below are calculated on the
basis of data in thousands of euros, even though they are shown in millions of euros.
(
€
millions)
At December 31, 2003
Orange
Wanadoo
Fixed Line,
Distribution,
Networks,
Large
Customers
and
Operators
Equant
TP
Group
Other
International
Inter-
segment
eliminations
Group
Total
Revenues
17,941
2,617
21,761
2,612
4,164
1,621
(4,595
)
46,121
Cost of services and products sold
(6,382
)
(1,235
)
(9,505
)
(1,830
)
(1,399
)
(603
)
3,731
(17,223
)
Selling, general and administrative expenses
(4,965
)
(1,027
)
(4,214
)
(524
)
(897
)
(408
)
918
(11,117
)
Research and development expenses
(16
)
(8
)
(451
)
–
(9
)
0
6
(478
)
Operating income before depreciation and amortization
6,578
347
7,590
259
1,859
608
62
17,303
Depreciation and amortization
(2,313
)
(97
)
(3,313
)
(427
)
(969
)
(294
)
(125
)
(7,538
)
Amortization of actuarial adjustments in the early retirement plan
(211
)
0
(211
)
Operating income
4,265
250
4,066
(168
)
890
314
(63
)
9,554
CAPEX
2,362
76
1,356
248
884
183
(23
)
5,086
UMTS/GMS licenses
–
–
–
–
–
–
–
–
Operating income before depreciation and amortization – CAPEX
4,216
271
6,234
11
975
425
85
12,217
Average number of employees (full-time equivalent)
30,722
6,568
120,037
9,872
43,451
11,007
–
221,657
(
€
millions)
At December 31, 2002 (on a comparable basis)
Orange
Wanadoo
Fixed Line,
Distribution,
Networks,
Large
Customers
and
Operators
Equant
TP
Group
Other
International
Inter-
segment
eliminations
Group
Total
Revenues
16,463
2,073
22,288
2,632
4,104
1,559
(4,510
)
44,609
Cost of services and products sold
(5,977
)
(1,037
)
(10,161
)
(1,860
)
(1,475
)
(702
)
3,576
(17,636
)
Selling, general and administrative expenses
(5,491
)
(977
)
(4,680
)
(605
)
(900
)
(428
)
975
(12,106
)
Research and development expenses
(21
)
(4
)
(530
)
0
(9
)
(1
)
3
(562
)
Operating income before depreciation and amortization
4,974
56
6,918
167
1,719
427
44
14,305
Depreciation and amortization
(2,270
)
(107
)
(3,377
)
(435
)
(945
)
(297
)
(106
)
(7,537
)
Amortization of actuarial adjustments in the early retirement plan
(199
)
(199
)
Operating income
2,704
(51
)
3,342
(268
)
774
130
(63
)
6,568
CAPEX
3,142
107
2,097
327
1,051
246
(20
)
6,950
UMTS/GMS licenses
88
–
–
–
–
46
0
134
Operating income before depreciation and amortization – CAPEX
1,832
(51
)
4,821
(160
)
668
181
64
7,355
Average number of employees (full-time equivalent)
Operating income before depreciation and amortization
5,146
90
7,199
200
1,453
784
45
14,917
Depreciation and amortization
(2,364
)
(96
)
(3,504
)
(521
)
(800
)
(506
)
(119
)
(7,910
)
Amortization of actuarial adjustments in the early retirement plan
(199
)
Operating income
2,782
(6
)
3,496
(321
)
653
278
(74
)
6,808
CAPEX
3,281
108
2,243
392
1,045
396
(24
)
7,441
UMTS/GMS licenses
88
–
–
–
–
46
0
134
Operating income before depreciation and amortization – CAPEX
1,865
(18
)
4,956
(192
)
408
388
68
7,475
Average number of employees (full-time equivalent)
30,876
6,761
131,311
11,928
45,222
14,047
–
240,145
5.2.2.1 O
RANGE
SEGMENT
The “Orange” segment includes mobile telephone services worldwide, in France and in the United Kingdom, except for mobile telephone services not contributed to Orange (principally Voxtel in Moldavia, FTM Lebanon, and
PTK Centertel in Poland).
At December 31, 2003, Orange’s
controlled subsidiaries had 49.1 million customers.
Orange analyzes its
activities as follows:
-
“France”, which comprises metropolitan France, Orange Caraïbe and Orange Réunion;
-
“United Kingdom”;
-
“Rest of World”, which includes Belgium, Botswana, Cameroon, Denmark, the Dominican Republic, Egypt, the Ivory Coast, Madagascar, The Netherlands, Romania, Slovakia and Switzerland.
Rest of World also includes Orange’s minority interests in Austria, India, Portugal and Thailand. The minority interest held in Wind was sold on July 1, 2003; and
-
“Support services”, which includes activities for the development of wireless services for the entire segment, in addition to general selling and administrative costs and other
shared expenses.
The table below sets out the main operating indicators of the “Orange” segment.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues
17,941
16,463
17,085
9.0
%
5.0
%
Network revenues
16,394
14,937
15,488
9.8
%
5.8
%
Operating income before depreciation and amortization
6,578
4,974
5,146
32.2
%
27.8
%
Operating income before depreciation and amortization/Revenues
36.7
%
30.2
%
30.1
%
Operating income
4,265
2,704
2,782
57.7
%
53.3
%
CAPEX
2,362
3,142
3,281
(24.8
)%
(28.0
)%
Investments in UMTS/GSM licenses
0
88
88
ns
ns
Operating income before depreciation and amortization less CAPEX
4,216
1,832
1,865
130.1
%
126.1
%
Average number of employees (full-time equivalent)
30,722
31,471
30,876
(2.4
)%
(0.5
)%
The table below sets forth the
calculation of figures on a comparable basis for the “Orange” segment in 2002. The changes in the scope of consolidation relate to the transfer of the wireless activity in Egypt (ECMS/Mobinil) from the “Other International”
segment to the “Orange” segment from July 1, 2002, with effect from January 1, 2002 on a comparable basis.
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Revenues
Operating income
before
depreciation and
amortization
Operating
Income
CAPEX
Operating
income before
depreciation and
amortization less
CAPEX
Average
number of
full-time
employees
2002 figures on a historical basis
17,085
5,146
2,782
3,281
1,865
30,876
Entry into the scope of consolidation:
Mobinil, ECMS
199
95
46
43
53
596
Other changes in scope of consolidation
(1
)
0
0
0
(1
)
(1
)
Exchange rate variations
(2)
(820
)
(267
)
(124
)
(182
)
(85
)
2002 figures on a comparable basis
16,463
4,974
2,704
3,142
1,832
31,471
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
The exchange rate effects on the information on a comparable basis are as follows:
(
€
millions)
Variations on a comparable basis (unaudited)
Currency
Revenues
Operating
income
before
depreciation
and
amortization
Operating
income
CAPEX
Operating
income
before
depreciation
and
amortization
less CAPEX
Pound (Sterling)
GBP
(543
)
(135
)
(53
)
(105
)
(31
)
Pound (Egyptian)
EGP
(158
)
(84
)
(48
)
(27
)
(57
)
U.S. Dollar
USD
(65
)
(24
)
(6
)
(14
)
(10
)
Other currencies
(54
)
(24
)
(17
)
(36
)
13
Exchange rate variations
(820
)
(267
)
(124
)
(182
)
(85
)
Revenues
The table below sets forth, for the periods ended 2003 and 2002, revenues for the
Orange segment.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Orange France
(1)
7,983
7,651
7,651
4.3
%
4.3
%
Orange UK
5,819
5,418
5,961
7.4
%
(2.4
)%
Orange Rest of World
4,315
3,574
3,657
20.7
%
18.0
%
Inter segment eliminations
(176
)
(180
)
(184
)
(2.2
)%
(4.3
)%
Orange revenues
17,941
16,463
17,085
9.0
%
5.0
%
Number of customers at December 31 (millions)
49.1
44.4
44.4
10.8
%
10.8
%
(1)
Includes revenues from French overseas departments through Orange Caraïbes and Orange Réunion.
On a historical basis, Orange’s revenues increased 5.0% between 2002 and 2003. This growth was partly due to the consolidation of
Mobinil/ECMS, which was partially offset by the negative impact of exchange rate variations, particularly from revenues in pounds sterling, Egyptian pounds and U.S. dollars.
On a comparable basis, Orange’s revenues reached
€
17.9 billion at December 31, 2003, an increase of 9.0%. This increase was related to the 9.8% growth of network revenues. The increase in the number of customers (49.1 million at December 31, 2003),
supported by the integration and roll-out of the Orange brand, was 10.8% in 2003. This increase was combined with a positive trend in ARPU (average annual revenue per user – see “– 5.9 Non-GAAP Financial Measures and Financial
Glossary – Financial Glossary”), particularly in France and the United Kingdom, as a result of the development of “non-voice” services, which increased 24.9%, representing 12.7% of network revenues in 2003 compared to 10.7% in
2002 on a comparable basis.
The following table sets forth Orange France’s revenues and operating data.
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues (
€
millions)
7,983
7,651
7,651
4.3
%
4.3
%
Total number of customers (in thousands)
20,329
19,216
19,216
5.8
%
5.8
%
Of which:
Contract customers (in thousands)
11,763
10,683
10,683
10.1
%
10.1
%
Prepaid customers (in thousands)
8,566
8,533
8,533
0.4
%
0.4
%
Average annual revenue per user (ARPU) (
€
)
379
377
0.5
%
Average monthly usage per user (AUPU) (in minutes)
158
143
10.5
%
Revenues for Orange France
increased 4.3% at December 31, 2003 (on both a historical and comparable basis). This growth was principally due to the 5.5% increase of network revenues due to the increase in the number of active customers (an increase of 5.8%, reaching 20.3
million at December 31, 2003). Simultaneously, ARPU (average annual revenue per user) at December 31, 2003 increased for the first time during the year from
€
377 to
€
379. ARPU calculated on the basis of quarterly revenues showed growth from the second
quarter of 2003. This improvement was the result of several factors:
-
the evolution of average monthly usage per user which increased 10.5% compared to an annual growth of 3.6% at December 31, 2002;
-
the effect of the increase in number of contract customers for whom ARPU is 3.4 times greater than prepaid customers. Contract customers represented 58% of the total number of active
customers at December 31, 2003 compared to 56% a year earlier; and
-
the change in ARPU benefited from the progression of “non-voice” services, which accounted for 11.7% of network revenues at December 31, 2003, compared with 8.9% a year earlier.
ARPU increased despite the impact of the successive
decreases of approximately 15% in the price of calls made from fixed line networks to the Orange France network, which occurred in March 2002 and January 2003. A third decrease in price of approximately 12.5% was implemented from January 2004.
In 2003, as for the preceding years, billing between mobiles operators
in France was effectuated following the “Bill & Keep” arrangement.
“Bill & Keep” refers to the method by which the mobile operator bills the subscriber who makes the call for the whole amount of the outgoing call towards another mobile subscriber (the called party), without paying back a
share of the payment for access to the terminal part of the other mobile operator’s network.
Orange currently believes that mobile operators will discontinue using the “Bill & Keep” system during the first half of 2004.
Discontinuing use of the “Bill & Keep” arrangement would lead to an
increase in Orange France revenues in 2004 and to the recording of charges as to the paying back of fees, for an equivalent amount.
The following table sets forth revenues and operating data for Orange UK. The data presented on a comparable basis for 2002 takes into account the negative impact
of the exchange rate variations in the pound sterling.
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues (
€
millions)
5,819
5,418
5,961
7.4
%
(2.4
)%
Total number of customers (in thousands)
13,649
13,312
13,312
2.5
%
2.5
%
Of which:
Contract customers (in thousands)
4,457
4,238
4,238
5.2
%
5.2
%
Prepaid customers (in thousands)
9,192
9,074
9,074
1.3
%
1.3
%
Average annual revenue per user (ARPU) (
€
)
(1)
271
259
4.6
%
Average monthly usage per user (AUPU) (in minutes)
146
140
4.3
%
(1)
Before October 1, 2002, revenues from incoming calls from customers who switched from Orange UK to one of the other U.K. networks, while retaining their Orange numbers (mobile number
portability or “MNP”), were included in calculating Orange UK’s overall ARPU and the ARPU for contract customers. Beginning October 1, 2002, these revenues were excluded from the calculation of Orange UK’s GSM network revenues
and, consequently, from total ARPU and from ARPU for contract customers.
On a historical basis, revenues for Orange UK decreased 2.4% at December 31, 2003, as a result of the negative impact of exchange rate variations in the pound sterling.
On a comparable basis excluding the effects of exchange rate variations, Orange
UK’s revenues increased 7.4% on a comparable basis, corresponding to the 7.5% increase in network revenues in 2003.
This sustained growth of network revenues was the result of:
-
the 4.6% growth, as measured in pounds sterling, of ARPU. This growth was partially attributable to the development of “non-voice” services, which accounted for 15.9% of network
revenues at December 31, 2003, compared with 14.3% in 2002, and for which ARPU increased 16.2% between 2002 and 2003;
-
the positive effect of the increase in the number of contract customers for whom ARPU is 4.6 times greater than for prepaid customers. Contract customers represented 32.7% of the total number
of active customers at December 31, 2003 compared to 31.8% at December 31, 2002; and
-
the 2.5% increase in the number of active customers, reaching 13.6 million active customers at December 31, 2003 compared with 13.3 million a year earlier.
On July 24, 2003, call termination rates for the four wireless telephone operators in
the United Kingdom were reduced by 15%.
In May 2003, the Office of
Telecommunications (“OFTEL”), the regulatory authority in the United Kingdom, acting in an advisory capacity, published a proposal for a decrease in call termination rates to mobile telephones over a period of three years based on the
recommendations of the British Competition Commission. The reduction is equal to the Retail Price Index of 15% per year (for Vodafone and O2) or 14% per year (for Orange and T-Mobile) from April 1, 2003 through March 31, 2006. The implementation of
this three-year tariff reform was delayed.
The following table sets forth revenues and the number of customers for Orange Rest of World. The data presented on a comparable basis for 2002 reflects (i) the
changes in scope of consolidation, in particular the transfer to Orange on July 1, 2002 of the 71.25% interest in Mobinil and (ii) the negative impact of the exchange rate variations in the Egyptian pound:
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues (
€
millions)
4,315
3,574
3,657
20.7
%
18.0
%
Total number of customers (in thousands)
15,161
11,839
11,839
28.1
%
28.1
%
On a historical basis, revenues
for Orange Rest of World increased 18.0%.
On a comparable basis,
revenues for Orange Rest of World increased 20.7% at December 31, 2003, which reflected the 23.1% growth in network revenues.
The growth in network revenues resulted primarily from the 28.1% increase (on a comparable basis) in the number of active customers, supported by the integration
and roll-out of the Orange brand. Since January 1, 2003, the number of customers increased by 3.3 million, primarily in Romania, Egypt, Slovakia and Belgium.
On a comparable basis, the 20.7% increase in Orange Rest of World’s revenues was mainly linked to the results achieved in Belgium, Romania, Switzerland and
Egypt.
Operating Expenses Before Depreciation and Amortization
The following table sets forth operating expenses before depreciation and amortization
by destination in 2002 and 2003.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Cost of services and products sold
(6,382
)
(5,977
)
(6,200
)
6.8
%
2.9
%
Selling, general and administrative expenses
(4,965
)
(5,491
)
(5,715
)
(9.6
)%
(13.1
)%
Research and development expenses
(16
)
(21
)
(24
)
(24.9
)%
(35.0
)%
The following table sets forth
the calculation of operating expenses before depreciation and amortization on a comparable basis.
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Cost of services and
products sold
Selling, general and
administrative
expenses
Research and development
expenses
2002 figures on a historical basis
(6,200
)
(5,715
)
(24
)
Changes in the scope of consolidation
(70
)
(33
)
0
Exchange rate variations
(2)
293
257
3
2002 figures on a comparable basis
(5,977
)
(5,491
)
(21
)
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
The cost of services and products sold in the “Orange” segment principally includes the cost of purchasing handsets and accessories, the cost of operating
and maintaining the network, interconnection fees to other operators’ networks, the cost of leased connections and the cost of purchasing minutes sold by Orange’s subsidiaries that are service providers.
The cost of services and products sold in the “Orange” segment amounted to
€
6,383 million in 2003 compared to
€
6,201 million in 2002 on a historical basis, a 2.9% increase between the two years.
On a comparable basis, the cost of services and products sold increased 6.8% and was mainly due to the increase in the number of customers (particularly the
increase in the cost of interconnection fees to other operators’ networks because of the increase in the number of calls and the acquisition cost of handsets sold to new customers), activities relating to maintenance of the network and a
portion of the costs related to customer retention.
n
Selling, general and administrative expenses
Selling expenses for the “Orange” segment consist of commissions paid to distributors for new customers, publicity and marketing costs, costs relating to
the implementation of programs for customer retention, costs related to direct sales and to the distribution of handsets and accessories, the cost of customer services, billing costs and the costs relating to bad debt. Administrative expenses for
the “Orange” segment consist of financial, planning, regulatory oversight and legal expenses. They also include general expenses arising from facilities and offices, general personnel costs, on-going training and expenses for the
information system.
Selling, general and administrative expenses for
the “Orange” segment reached
€
4,965 million in 2003 compared to
€
5,714 million in 2002 (on a historical basis), a decrease of 13.1%.
On a comparable basis, this was a decrease of 9.6% between 2002 and 2003. As a result, selling, general and administrative expenses of the “Orange”
segment as a percentage of revenues has decreased from 33.3% in 2002 to 27.7% in 2003. This decrease was due in particular to the decrease of expenses for marketing, publicity and communication, in addition to the reduction in commissions paid to
distributors for the acquisition of new customers and the sale of prepaid cards (in the United Kingdom). This was partially offset by the increase in the commissions paid to distributors for the renewal of handsets resulting from the drive for
retention of customers who generate higher revenues.
n
Evolution of customer acquisition and retention costs
In the majority of the countries where Orange operates, the costs of customer acquisition have decreased, in parallel with an increase in the costs of customer
retention, which reflects the evolution of Orange’s markets towards commercial strategies favoring customers (contract customers) who generate higher revenues rather than towards the acquisition of new clients. The costs of customer acquisition
and retention are accounted for partly in the line item “Cost of services and products sold” and partly in the line item “Selling, general and administrative expenses”.
On a comparable basis, total customer acquisition costs for the “Orange”
segment decreased 14.2% between 2002 and 2003. This decrease was offset by a 44.2% increase in customer retention costs resulting from the expenses made to retain clients in a competitive environment.
On a comparable basis, the decrease of total customer acquisition costs was
considerable in France (28.3%) and the United Kingdom (8.3%). This decrease was offset by the significant increase in customer retention costs (68.7% in France and 11.7% in the United Kingdom). As a percentage of the “Orange”
segment’s revenues, customer acquisition and retention costs have decreased from 11.9% in 2002 to 10.9% in 2003 in France and from 14.8% in 2002 to 13.6% in 2003 in the United Kingdom. The success of the policy to migrate prepaid customers to
contracts was evidenced in France by the decrease of the churn rate for contract clients. The churn rate in France decreased from 21.6% in 2002 to 18.3% in 2003. In the United Kingdom the churn rate increased from 17.5% at December 31, 2002 to 22.6%
at December 31, 2003 as a result of the increased churn rate of prepaid customers.
n
Research and development expenses
Research and development expenses amounted to
€
16 million in 2003, compared to
€
24 million in 2002, decreasing 35% between the two years on a historical
basis.
On a comparable basis, this was a decrease of 25% between 2002
and 2003.
Operating Income Before Depreciation and Amortization
The “Orange” segment’s operating income before depreciation and amortization grew 27.8% on a historical basis, to
€
6,578 million at December 31, 2003, compared to
€
5,146 million at December 31, 2002. This significant growth reflected the notable improvement in operating profitability across the segment, with the rate of the margin of operating income before depreciation and
amortization over total revenues increasing from 30.1% at December 31, 2002, to 36.7% at December 31, 2003. This development reflected strong margin growth in Orange’s principal markets (France and the United Kingdom) and significant growth in
international operations, which all produced, for the first time, positive operating income before depreciation and amortization.
On a comparable basis, the “Orange” segment’s operating income before depreciation and amortization grew by 32.2% between December 31, 2002 and
December 31, 2003, to
€
6,578 million in 2003, compared to
€
4,974 million for the period one year earlier. On the same comparable basis, the rate of the margin of operating income before depreciation and amortization over total revenues increased from 30.2% at
December 31, 2002, to 36.7% at December 31, 2003.
Depreciation and Amortization
(excluding goodwill)
The following table sets forth the amount of
depreciation and amortization (excluding goodwill) for 2002 and 2003.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Depreciation and amortization (excluding goodwill)
(2,313
)
(2,270
)
(2,364
)
1.8
%
(2.2
)%
The following table sets forth
the calculation of depreciation and amortization (excluding goodwill) on a comparable basis.
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Depreciation and amortization
(excluding goodwill)
2002 figures on a historical basis
(2,364
)
Changes in the scope of consolidation
(49
)
Exchange rate variations
(2)
143
2002 figures on a comparable basis
(2,270
)
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
Depreciation and amortization (excluding goodwill) amounted to
€
2,313 million in 2003, compared with
€
2,364 million in 2002 (on a historical basis), a decrease of 2.2% which was mainly due to the favorable exchange rate variations, partially offset by the consolidation of the wireless activities in Egypt.
On a comparable basis, depreciation and amortization (excluding goodwill) increased
1.8% between 2002 and 2003. The provisions mainly concern network infrastructure and depend upon the level of investment.
Until the present, the amortization of intangible assets did not represent a significant element of this line item. In the future, the acquisition costs of the UMTS
licenses acquired in the United Kingdom, The Netherlands, Switzerland, France, Belgium, Denmark and Slovakia, in addition to those which may be acquired in the future, will be amortized on a straight-line basis from the date at which the related
network is technically ready for the commercial launch of service.
Operating Income
On a historical basis, the “Orange” segment’s
operating income increased 53.3% to
€
4,265 million for the period ended December 31, 2003.
On a comparable basis, the increase was 57.7% and reflected the improvement in the
segment’s operating profitability, despite the slight increase in provisions for depreciation and amortization of tangible and intangible fixed assets.
Investments in tangible and intangible assets (excluding UMTS licenses)
Excluding UMTS and GSM licenses, investments in tangible and intangible assets by the “Orange” segment showed a significant decrease of 28.0%, to
€
2,362 million in 2003, compared to
€
3,281 million in 2002 on a historical basis.
On
a comparable basis, the decrease was 24.8%. This decrease was due to the postponement of investments estimated to amount to between
€
7 billion and
€
8 billion for the three years 2003 to 2005. Orange’s strategy has remained unchanged,
leading the Orange Group to offer an optimized network everywhere it operates. In addition, Orange is about to begin a new phase of investment intended to solidify its growth.
The decrease in tangible and intangible investments, which reflect the effects of the “TOP Sourcing” Program, included the
following:
-
in France, expenses related to investments in tangible and intangible assets increased by 5.9%, as compared to 2002. This increase was due to unchanged second generation expenditures and
initial expenditures for the development of the third generation network (UMTS);
-
in the United Kingdom, investments in tangible and intangible assets decreased significantly (34.1% decrease on a historical basis, mainly the result of exchange rate variations in the pound
sterling, and 27.5% on a comparable basis), compared to December 31, 2002, reflecting a slowdown in second generation expenses while expenses for the third generation networks (UMTS) in 2003 were less significant than expected due to deferrals into
2004; and
-
Orange’s investments in tangible and intangible assets in Rest of World decreased by almost half, mainly because of the finalization of network roll-out projects in Switzerland and The
Netherlands, as well as the termination of operations in Sweden.
n
Acquisitions of mobile licenses
No mobile licenses were acquired during 2003.
Acquisitions of mobile licenses in 2002 amounted to
€
88 million, including a
€
53 million additional payment for the acquisition of a GSM license in the Ivory
Coast and a
€
35 million payment for the acquisition of a UMTS license in Slovakia.
The table below lists the acquired UMTS licenses at December 31, 2003.
Country
Company
France
Telecom’s
Interest
(1)
Cost of the
license at the
date of
acquisition
Awarded
Period
(in %)
(
€
billions)
(years)
The Netherlands
Orange Nederland
99.02
%
0.44
July 2000
15
U.K.
Orange Personal
Communications
Services
99.02
%
6.60
September 2000
20
Switzerland
Orange
Communications S.A.
99.02
%
0.04
December 2000
15
Belgium
Mobistar
50.29
%
0.15
March 2001
20
France
Orange France
99.02
%
0.62 plus 1% of
annual UMTS
revenues
August 2001
20
Denmark
Orange A/S
66.57
%
0.1
September 2001
20
Slovakia
Orange Slovensko
63.25
%
0.04
July 2002
20
(1)
Direct or indirect holding including the dilution following the listing of Orange S.A..
Orange does not expect to tender for new UMTS licenses involving significant costs.
“Mobile Licenses” for the “Orange” segment at December 31, 2003 principally included the net value of the licenses
for the operation of GSM and UMTS networks in the United Kingdom (
€
6.4 billion), France (
€
0.6 billion) and The Netherlands (
€
0.4 billion).
Licenses for the operation of wireless UMTS networks will be amortized on a straight line basis from the date at
which the corresponding network is technically ready for an effective launch of the service.
The postponement of the development and roll-out of the UMTS networks and services led France Telecom to review at December 31, 2003, as it did at December 31, 2002, as set forth in Note 2 of the Notes to the Consolidated
Financial Statements, the present value of the UMTS license in the United Kingdom (which had a net book value of
€
5.8 billion at
December 31, 2003). At the Orange PCS level, given the very close relationship of second generation (“2G”) and third generation (“3G”) services offerings, both from a commercial and technical point of view, this review consisted
of comparing the net book value of 2G and 3G intangible assets and property, plants and equipment, with the expected cash flows over the remaining life of the UMTS license on the basis of the most recent and updated business plan, discounted at 9%.
On the basis of this review, no impairment charge was necessary. The possible moderately unfavorable evolution (below 10%), of expected cash flows would lead to a depreciation of the use value of second and third generation tangible and intangible
assets in the United Kingdom, including the allocated licenses.
A GSM
license was awarded to Orange France for 15 years from March 25, 1991, expiring in March 2006. Pursuant to the terms of the license, the conditions for its renewal, as for SFR’s license, 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 decrease the price of SMS text messages and will work in close cooperation with the French State, local authorities and the ART to complete the rural area coverage program and ensure 100%
wireless telephony coverage for all French towns and villages. In other countries where it operates, France Telecom cannot foresee the new conditions that will be applicable within the framework of GSM licenses following their renewal, and in
particular, cannot dismiss the possibility that the cost to the operator may be significantly higher than the current cost of the license fees.
The information relating to the risks regarding UMTS licenses are discussed in more detail in “Item 3. Key Information – 3.3.1 Risk Factors Relating to
France Telecom’s Business –The high cost of UMTS licenses, and investments and expenses necessary for the success of this technology, could adversely affect France Telecom’s business, financial condition and results of
operations”.
Operating Income Before Depreciation and Amortization Less CAPEX
Operating income before depreciation and amortization less CAPEX
increased 2.3 times between 2002 (on both a historical and a comparable basis) and 2003, reaching
€
4,216 million.
This growth resulted from the positive trend in operating income before depreciation
and amortization combined with a decrease in investments in tangible and intangible assets, excluding licenses.
5.2.2.2 W
ANADOO
SEGMENT
France Telecom holds 71.13% of the share capital of Wanadoo.
The “Wanadoo” segment includes Internet access, portals, e-Merchant sites, and directories. These activities have been grouped within Wanadoo S.A. since 2000.
Wanadoo is a leader in the European Internet and directories market with over 9.1
million customers for Internet Access and over 641,000 directories’ advertisers at December 31, 2002. Wanadoo is the leading Internet provider in France and the United Kingdom, the second-leading in Spain and the third-leading in The
Netherlands. Wanadoo has over 2.4 million cable and ADSL subscribers.
Wanadoo groups its businesses under two principle divisions:
The table below sets forth the main operating indicators of the “Wanadoo” segment.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues
2,617
2,073
2,075
26.2
%
26.1
%
Operating income before depreciation and amortization
347
56
90
ns
ns
Operating income before depreciation and amortization / Revenues
13.3
%
2.7
%
4.4
%
Operating income
250
(51
)
(6
)
ns
ns
CAPEX
76
107
108
(28.7
)%
(29.5
)%
Operating income before depreciation and amortization less CAPEX
271
(51
)
(18
)
ns
ns
Average number of employees (full-time equivalent)
6,568
6,701
6,761
(2.0
)%
(2.9
)%
The change in method for the
calculation of revenues from the sale of advertising spots in electronic directories implemented in 2003 led to a reduction in revenues of
€
14 million and in operating income of
€
12 million. In 2003, the impact on the net income of the Group was a
loss of
€
5 million (a loss of
€
8 million on the net income of the Wanadoo Group). The initial effect of this change in accounting method amounted to a reduction of
€
39 million of the Group share, recorded in “Other movements” in the statement of changes in shareholders’ equity at December 31, 2003 (see Note 25 of the Notes to the Consolidated Financial
Statements).
The table below sets forth for 2002 the calculation of
figures on a comparable basis for the “Wanadoo” segment. The variations in the scope of consolidation relate mainly to the full consolidation of eresMas on November 1, 2002 (rebranded Wanadoo Espana on January 1, 2003, following the
merger), with effect from January 1, 2002 on a comparable basis.
(
€
millions)
Variations
on a comparable basis
(1)
(unaudited)
Revenues
Operating income
before
depreciation and
amortization
Operating
Income
CAPEX
Operating income
before
depreciation and
amortization less
CAPEX
Average
number of
employees
2002 figures on a historical basis
2,075
90
(6
)
108
(18
)
6,761
Entry into the scope of consolidation:
EresMas
59
(39
)
(60
)
5
(44
)
Other changes in the scope of consolidation
(27
)
6
15
(5
)
11
(60
)
Other variations
(2)
(12
)
(9
)
(9
)
0
(9
)
Exchange rate variations
(3)
(22
)
8
9
(1
)
9
2002 figures on a comparable basis
2,073
56
(51
)
107
(51
)
6,701
(1)
Before inter-segment eliminations.
(2)
Change in accounting method of revenues from advertising sold in electronic directories.
(3)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
The following table sets forth revenues for the “Wanadoo” segment for 2002 and 2003 and the distribution between the two divisions.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a comparable
basis (unaudited)
historical
on a comparable
basis (unaudited)
historical
Access, portals and e-Merchant
1,708
1,209
1,199
41.3
%
42.5
%
Directories
918
869
880
5.6
%
4.3
%
Inter sub-segment eliminations
(9
)
(4
)
(4
)
ns
ns
Wanadoo revenues
2,617
2,073
2,075
26.2
%
26.1
%
Of which:
– Revenues in France
1,997
1,619
1,646
23.3
%
21.3
%
– Revenues outside France
620
454
429
36.6
%
44.5
%
Number of active users
(1)
(in thousands)
9,153
8,416
8,535
9
%
7
%
Of which:
– Active users in France
4,520
3,924
3,924
15
%
15
%
– Active users outside France
4,633
4,492
4,611
3
%
0
%
(1)
Subscribers who connected at least once during the past 30 days based on figures for June.
On a historical basis, Wanadoo’s revenues grew by 26.1% between December 31, 2002 and December 31, 2003. In addition to the
positive impact of the acquisition of eresMas, this growth reflected the positive impact of the growth of Internet access (particularly broadband), partially offset by the negative impact of exchange rate fluctuations. International operations
contributed 23.7% to revenues from “Access, portals, and e-Merchant” during 2003, compared to 20.7% during 2002. “Access, portals and e-Merchant” activities increased 42.5% while “Directories” activities increased 4.3%.
On a comparable basis, revenues increased by 26.2% between December 31,
2002 and December 31, 2003, with growth of 41.3% in “Access, portals and e-Merchant” operations and 5.7% in the “Directories” business.
n
Revenues from “Access, portals and e-Merchant”
Revenues from “Access, portals and e-Merchant” operations increased 42.5% on a historical basis at December 31, 2003 a result of the consolidation of
eresMas (rebranded Wanadoo Espana following the merger) and 41.3% on a comparable basis.
This increase was mainly due to revenues from Internet Access services, which increased 47% (
€
1,514 million in
2003 compared to
€
1,031 million in 2002). The increase in the number of broadband (ADSL and cable) users was particularly rapid,
reaching approximately 2.4 million users in 2003 (27% of its European subscriber base at December 31, 2003) compared with 1.4 million a year earlier, contributing significantly to the increase in ARPU (average monthly revenue per user).
In France, the rapid development of broadband access that began in 2002 continued,
with 1.8 million Wanadoo broadband subscribers in France at December 31, 2003, a 74% increase compared with 2002. ARPU for all offers increased 17.9%, reaching
€
17.80 per month.
In the United Kingdom,
the rapid increase in access revenues was due to a growth in contract customers, which accounted for 43% at December 31, 2003 of total active customers of 2.6 million compared to 38% at December 31, 2003, out of a total of 2.57 million active
customers. At December 31, 2003, Freeserve had 158,000 ADSL users compared to 49,000 a year earlier. The transformation of the customer base led ARPU for all available offers to increase to
€
9.10 per month, an increase of 35.8% compared to 2002.
In Spain, access revenues experienced strong growth due to the growing proportion of contract customers, which accounted for 54% of total active customers at
December 31, 2003. In addition, migration from low speed access to ADSL access had a positive impact, with the number of Wanadoo ADSL subscribers in Spain reaching 190,000 at December 31, 2003, representing 12.7% of the 1.5 million active users at
that date.
In The Netherlands, Wanadoo had 544,000 customers at
December 31, 2003. Broadband customers represented 53.1% of the total customer base and ARPU amounted to
€
7.50.
Revenues from the portals business increased 18% from
€
117 million in 2002 to
€
138 million in 2003, despite
the negative impact of the sale of Wanadoo Editions. Advertising revenues from Wanadoo’s portals increased significantly in 2003 despite a flat advertising market in the countries where Wanadoo operates.
Revenues from e-Merchant increased 10%, reaching
€
56 million in 2003 compared to
€
51 million in 2002,
generated by steady growth in the number of orders from Alapage, which reached over 1.2 million orders, an increase of 22% compared to 2002.
n
Revenues from “Directories”
Revenues from “Directories” reached
€
918 million in 2003, an increase of 4.3%, on a historical basis and an increase of 5.6% on a comparable basis due to the development of online directory services in France (revenues amounted to
€
885 million in 2003). Revenues from online directories (including Minitel and Internet advertising and site creation) increased 8% to
€
221 million. Revenues from pagesjaunes.fr increased 24%.
Operating Expenses Before Depreciation and Amortization
The following table sets forth operating expenses before depreciation and amortization by destination in 2002 and 2003.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a comparable
basis (unaudited)
historical
on a comparable
basis (unaudited)
historical
Cost of services and products sold
(1,235
)
(1,037
)
(1,016
)
19.1
%
21.6
%
Selling, general and administrative expenses
(1,027
)
(977
)
(965
)
5.1
%
6.4
%
Research and development expenses
(8
)
(4
)
(4
)
125.1
%
126.1
%
The following table sets forth
the calculation of figures on a comparable basis impacting operating expenses before depreciation and amortization by destination.
(
€
millions)
Variations on a comparable basis
(1)
unaudited
Cost of services and
products sold
Selling, general and
administrative
expenses
Research and development
expenses
2002 figures on a historical basis
(1,016
)
(965
)
(4
)
Other variations
(2)
(43
)
(21
)
0
Exchange rate variations
(3)
22
9
0
2002 figures on a comparable basis
(1,037
)
(977
)
(4
)
(1)
Before inter-segment eliminations.
(2)
Includes changes in the scope of consolidation and changes in accounting methods for revenues from online directories.
(3)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
n
Cost of services and products sold
The cost of services and products sold for the “Wanadoo” segment amounted to
€
1,235 million in 2003, compared to
€
1,016 million in 2002 on a historical basis, an
increase of 21.6% between the two years.
On a comparable basis, this
was a 19.1% increase. As a percentage of revenues, cost of services and products sold decreased from 50% in 2002 to 47% in 2003 as a result of the significant efforts made to optimize costs in all activities.
Between 2002 (on a comparable basis) and 2003, the cost of goods and services sold for
“Access, portals and e-Merchant” activities increased 25.6%, while revenues increased 41.3%. This improvement of the ratio of costs of services and products sold to revenues resulted from efforts made in the area of customer relations
costs, the optimization of network costs for access offers and the rationalization of portal operations. In the “Directories” business, the cost of services and products sold decreased 3.1%, while revenues increased 5.7%. This variation
was linked mainly to costs of paper and printing and the optimization of print runs.
Selling, general and administrative expenses for the “Wanadoo” segment increased 6.4% between 2002 and 2003, reaching
€
1,027 million in 2003 compared to
€
965
million in 2002 (on a historical basis) due mainly to increased broadband sales.
On a comparable basis, this was a 5.1% increase between 2002 and 2003. As a percentage of revenues, selling, general and administrative expenses for the “Wanadoo” segment were 39% in 2003 compared to 47% in 2002. The improvement
in the level of selling, general and administrative expenses for “Access, portals and e-Merchant” activities was mainly due to cost control relating to sales and marketing expenditures, within the framework of Wanadoo’s desire to
pursue its growth, acquire new customers and encourage the migration of its subscriber base towards paying or broadband services.
n
Research and development expenses
Research and development expenses amounted to
€
8 million in 2003 compared to
€
4 million in 2002 on both a historical and comparable basis.
Operating Income Before Depreciation and Amortization
At December 31, 2003, Wanadoo’s operating income before depreciation and
amortization increased significantly, reaching
€
347 million on a historical basis, compared to
€
90 million at December 31, 2002. On a comparable basis, operating income before depreciation and amortization increased to
€
347 million from
€
56 million at December 31, 2002.
As a percentage of revenues, operating income before depreciation and amortization amounted to 13.3% in 2003, compared to 2.7% in 2002 on a comparable basis. Operating income before depreciation and amortization for “Access, portals and
e-Merchant” activities improved significantly compared to December 31, 2002 (
€
45 million at 31 December, 2003, compared to a
loss of
€
192 million at December 31, 2002 on a comparable basis). Operating income before depreciation and amortization for the
“Directories” business increased 19.6% on a comparable basis, from
€
280 million in 2002 to
€
335 million in 2003.
Depreciation and Amortization (excluding goodwill)
The following table sets forth the amount of depreciation and amortization (excluding goodwill) for 2002 and 2003.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Depreciation and amortization (excluding goodwill)
(97
)
(107
)
(96
)
(8.8
)%
1.3
%
The following table sets forth
the calculation of depreciation and amortization (excluding goodwill) on a comparable basis.
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Depreciation and amortization
(excluding goodwill)
2002 figures on a historical basis
(96
)
Other variations
(2)
(12
)
Exchange rate variations
(3)
1
2002 figures on a comparable basis
(107
)
(1)
Before inter-segment eliminations.
(2)
Includes changes in the scope of consolidation and changes in the accounting method for revenues from online directories.
(3)
Impact of the differences between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
Depreciation and amortization remained stable, amounting to
€
97 million in 2003, compared with
€
96 million in 2002 on a historical basis.
On a comparable basis, depreciation and amortization decreased approximately 9% between 2002 and 2003. This
decrease corresponded to investments made in “Access, portals and e-Merchant” activities. In the “Directories” activities, depreciation and amortization related principally to the assets of Pages Jaunes and QDQ Media.
Operating Income
On a historical basis, operating income showed significant growth, increasing from negative
€
6 million at December 31, 2002, to
€
250 million at
December 31, 2003.
Given the decrease in provisions for amortization of
tangible and intangible assets of “Access, portals, and e-Merchant” activities, and the quasi-stability of the “Directories” activities, operating income experienced significant growth, increasing from negative
€
51 million at December 31, 2002, on a comparable basis, to
€
250 million at December 31, 2003.
Investments in Tangible and Intangible Assets
Investments in tangible and intangible assets for the “Wanadoo” segment decreased significantly by 29.5% between 2002 and 2003, on a historical basis.
On a comparable basis, Wanadoo’s investments in tangible and intangible assets decreased by approximately 28.7% between 2002 and
2003. “Access, portals and e-Merchant” activities showed a decrease of
€
28 million on this same basis of comparison, while
investments by the “Directories” business remained virtually stable (a decrease of
€
3 million). The decrease for
“Access, portals and e-Merchant” activities was principally due to the reduction in the production for audiovisual and game products (Wanadoo Editions was sold during the summer) and the significant structural investments made in 2002 for
Wanadoo’s platforms in France, which were not renewed in 2003.
Operating Income
Before Depreciation and Amortization Less CAPEX
The amount of
operating income before depreciation and amortization less CAPEX showed a distinct improvement, increasing from negative
€
18 million
on a historical basis and negative
€
51 million on a comparable basis at December 31, 2002 to
€
271 million at December 31, 2003. This increase reflected the improvement in operating income before depreciation and amortization combined with Wanadoo’s
reduction in investments in tangible and intangible assets.
5.2.2.3 F
IXED
L
INE
, D
ISTRIBUTION
, N
ETWORKS
, L
ARGE
C
USTOMERS
AND
O
PERATORS
SEGMENT
The “Fixed Line, Distribution, Networks, Large Customers and
Operators” segment includes the France Telecom Group’s fixed line services, mainly in France, in particular fixed line telephony, services to operators, business services, cable TV, retail agencies, and the sale and rental of equipment, as
well as support functions (including research and development services, logistics, outsourcing and purchasing) and the information system division.
Operating Indicators for the “Fixed Line, Distribution, Networks, Large Customers and Operators” Segment
The table below sets forth the main operating indicators of the
“Fixed Line, Distribution, Networks, Large Customers and Operators” segment.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a comparable
basis
(unaudited)
historical
on a comparable
basis
(unaudited)
historical
Revenues
21,761
22,288
23,064
(2.4
)%
(5.6
)%
Operating income before depreciation and amortization
7,590
6,918
7,199
9.7
%
5.4
%
Operating income before depreciation and amortization/Revenues
34.9
%
31.0
%
31.2
%
Operating income
4,066
3,342
3,496
21.6
%
16.3
%
CAPEX
1,356
2,097
2,243
(35.4
)%
(39.6
)%
Investments in UMTS/GSM licenses
Operating income before depreciation and amortization less CAPEX
6,235
4,821
4,956
29.3
%
25.8
%
Average number of employees (full-time equivalent)
120,037
126,922
131,311
(5.4
)%
(8.6
)%
The table below sets forth for
2002 the calculation of figures on a comparable basis for the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment. The changes in scope of consolidation relate mainly to the sale of TDF on December 13, 2002, with
effect from January 1, 2002 on a comparable basis.
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Revenues
Operating income
before
depreciation and
amortization
Operating
Income
CAPEX
Operating income
before
depreciation and
amortization less
CAPEX
Average
number of
employees
2002 figures on a historical basis
23,064
7,199
3,496
2,243
4,956
131,311
Withdrawal from the scope of consolidation:
TDF
(731
)
(285
)
(162
)
(138
)
(147
)
(4,341
)
Other variations
(12
)
6
6
1
6
(10
)
Exchange rate variations
(2)
(33
)
(2
)
2
(9
)
6
2002 figures on a comparable basis
22,288
6,918
3,342
2,097
4,821
126,960
(1)
Before inter-segment eliminations.
(2)
Difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
Revenues
Revenues from the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment is divided among three sub-segments: Consumer services,
Business services and Carrier services. In addition there are “Other revenues” relating to support services, particularly Research and Development and information technology services provided to the other segments of the France Telecom
Group.
The distribution of customers in the “Consumer” or
“Business” markets is determined on the basis of a multi-criteria analysis based upon the value of the customer. The analysis considers the revenues generated by France Telecom from the customer,
the services used, their future growth potential and, where applicable, the need for personalized customer services. “Consumer services” are designed
especially for household customers, independent contractors and businesses with no more than five employees, although varying depending on the type of business. The “Business services” activity comprises services designed for businesses
with more than five employees and Large Customers (companies with over 200 employees). The “Carrier services” activity corresponds to sales achieved with other telecommunications operators and third party Internet Access Providers (IAPs),
and includes wireless services by satellite.
The table below sets forth
the revenues for the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment for the periods ended December 31, 2002 and December 31, 2003 and the variations between the two periods, expressed as percentages.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a comparable
basis
(unaudited)
historical
on a comparable
basis
(unaudited)
historical
Consumer Services
11,304
11,669
11,685
(3.1
)%
(3.3
)%
Business Services
6,695
6,788
7,560
(1.4
)%
(11.4
)%
Carrier Services
3,367
3,378
3,379
(0.3
)%
(0.4
)%
Other revenues
395
453
440
(12.8
)%
(10.2
)%
Fixed Line, Distribution, Networks, Large Customers and Operators revenues
21,761
22,288
23,064
(2.4
)%
(5.6
)%
On a historical basis, revenues
of the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment decreased 5.6% in 2003 compared to 2002. The decrease was mainly due to the sale of TDF on December 13, 2002. On a comparable basis, the decrease in
revenues of the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment was 2.4% (amounting to
€
527
million), due, in large part, to revenues from fixed line telephony, which represented two-thirds of the segment’s revenues.
In particular, revenues from “telephone communications” from subscriber lines decreased by 9.5% (amounting to
€
597 million) in 2003 (Consumer and Business services). Approximately half of this decrease corresponded to the impact of the 12% decrease in the average cost of calls to
mobiles due to tariff decreases in 2002 and in January 2003. In addition, this reflected the impact of the complementary tariff reductions related to increased discounts granted to businesses. Furthermore, revenues from telephone communications by
consumers and businesses were affected by a loss of market share, particularly in the market for local traffic, which was opened to competition from January 1, 2002, although the rate of loss of France Telecom’s market share decreased
significantly during 2003. France Telecom’s market share for local traffic was 75.8% in December 2003, a decrease of 5.1 points in 2003 compared to a market share loss of 15.9 points in 2002. France Telecom’s market share for long distance
traffic was 61.8%, a loss limited to 2.5 points.
The decrease in
revenues from telephone communications in 2003 was partially offset by the effect of the rapid development of ADSL, for which revenues from the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment increased by 87.7%
in a year, reaching
€
695 million in 2003 (including revenues from the unbundling of lines), compared to
€
370 million in 2002. Including revenues from low speed consumer Internet, revenues from the Internet for the “Fixed Line, Distribution, Networks, Large
Customers and Operators” segment (consumers, sales to third party ISPs and the unbundling of lines) were
€
1,167 billion,
compared to
€
919 million in 2002, an increase of 26.9% in a year. In addition, the 5.0% increase on a comparable basis of revenues
from “business networks” was achieved due to the steady increase of data network (13.0% increase on a comparable basis), in particular revenues from services linked to Internet and Intranet for businesses, which increased 26.3% in 2003
compared with 2002.
The total number of telephone lines in France
reached 33.9 million at December 31, 2003 compared to 34.1 million at December 31, 2002, a decrease of 0.6%. This number includes digital (Numeris) channels (expressed as line-equivalents, with each channel corresponding to one line), which
accounted for 5.0 million lines at December 31, 2003 compared to 4.9 million at December 31, 2002, or an annual increase of 2.3%.
n
Revenues from Consumer services
The table below sets forth the
revenues and other operating information for Consumer services for the periods ended December 31, 2002 and December 31, 2003 and the variations between the two periods, expressed as percentages.
Number of consumer telephone lines
(1) (2)
(in millions)
27.6
27.9
27.9
(0.9)
%
(0.9)
%
Voice telecommunications of consumer subscribers (in billions of minutes)
59.2
63.7
63.7
(7.1)
%
(7.1)
%
Number of prepaid communication subscribers
(2)
(in millions)
8.8
6.7
6.7
31.2
%
31.2
%
Consumer traffic for online services and low speed Internet access (in billions of minutes)
23.3
23.0
23.0
1.2
%
1.2
%
Number of consumer subscriptions to ADSL, excluding wholesales to ISPs
(2)
(in thousands)
1,763
1,014
1,014
74.0
%
74.0
%
(1)
This number includes analog (standard) lines and Numeris (ISDN) channels, each of which is counted as one line. The number of consumer Numeris channels at December 31, 2003 amounted to 1.1
million, an increase of 1.4% compared with 2002.
(2)
At the end of the period.
Consumer subscriptions
The increase in revenues from subscription fees was principally due to price increases for subscriptions which came into effect on July 20, 2002 to reflect the rate
of inflation since October 2000.
The basic monthly subscription fee was
increased from
€
12.55, tax included, to
€
13.00, tax included, representing an increase of
€
0.45, or 3.6%. The monthly fee for small business
subscribers was increased by an identical amount, increasing from
€
12.65, excluding tax to
€
13.10, excluding tax. The fee for small business “Presence” contracts increased by
€
0.50, increasing from
€
16.30, excluding tax, to
€
16.80, excluding tax per month. The charge for Numeris lines is, as in the past, adjusted in the “Presence” small business contract subscription. Revenues were
also affected by the ongoing development of free services for standard subscriptions, such as Call Waiting, Call Forwarding, Three-Way Conferencing and Caller Identification.
These favorable developments were partially offset by the fact that the Unlisted Number option became free as of August 6, 2003, and,
to a slightly lesser extent, the 0.9% decrease in the number of consumer-subscribed telephone lines.
Consumer telephone communications
Revenues from consumer telephone communications decreased 9.2% in 2003 compared to the previous year. This decrease was due to (i) the impact of the 12% decrease in
the average cost of calls to mobiles due to tariff decreases in 2002 and 2003 and (ii) the impact of the loss of market share, in particular, in the market for local traffic, which was opened to competition as of January 1, 2002.
At the same time, calling packages continued to grow rapidly, with 8.8 million
subscribers at December 31, 2003, an increase of 31.2% over the previous year. Calling packages accounted for 21.2% of telephone communications revenues at December 31, 2003 compared to 12.4% at December 31, 2002.
They are responsible for the significant growth of the share of recurring revenues for consumer subscribers. In
2003, revenues from subscriptions and calling packages represented 60.4% of total revenues of subscriptions and telephone communications compared to 53.9% in 2002.
Consumer online and Internet access services
The overall increase of 14.2% in consumer online services and Internet access revenues in 2003 was mainly linked to the development
and the wholesale sale of ADSL access to Wanadoo in France. The revenues for this operation have more than doubled compared to 2002, reflecting the rapid growth of ADSL. At December 31, 2003, the number of ADSL accesses sold to Wanadoo amounted to
1.535 million compared with 756,000 a year earlier.
In addition, the
number of direct customer subscriptions to the “ADSL line” (range of access to France Telecom’s ADSL network, which allows subscribers to choose their own ISP) amounted to 229,000 subscribers at December 31, 2003 compared to 258,000
at December 31, 2002, a decrease of 11.2% in the number of subscribers.
Finally, revenues from “Information and operator services” increased 8.3% compared to 2002 due to an increase in calls originating from mobile telephones.
The effect of these positive developments was partially offset by (i) the 13.7% decline in revenues from telephone communications for
low-speed Internet access sold to Wanadoo and (ii) the 23.9% decline in revenues from Teletel kiosk services, linked to the downward trend in Teletel traffic during the year (a 23.1% decrease).
Other consumer services
The table below sets forth information concerning other consumer services provided for
the years ended December 31, 2002 and 2003, and the variations between these periods expressed in percentage changes:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a comparable
basis
(unaudited)
historical
on a comparable
basis
(unaudited)
historical
Equipment sales and rentals
1,149
1,102
1,102
4.3
%
4.3
%
Payphones and telephone cards
453
589
589
(23.1
)%
(23.1
)%
Cable television
151
140
153
8.1
%
(1.2
)%
Other consumer products
506
586
589
(13.7
)%
(14.1
)%
Other consumer services revenues
2,260
2,417
2,433
(6.5
)%
(7.1
)%
Volume of payphone and telephone card traffic (in billions of minutes)
2.1
2.6
2.6
(18.8
)%
(18.8
)%
Number of payphones
(1)
(in thousands)
190.3
199.6
199.6
(4.7
)%
(4.7
)%
Number of cable network subscribers
(1)
(in thousands)
855
820
854
4.3
%
0.1
%
(1)
At the end of the period.
Equipment sales and rentals
The annual growth of 4.3% in revenues from “Equipment sales and rentals” for consumers in 2003 was related to the sustained development of sales of mobile
equipment and talktime Mobicarte recharges by the distribution network of France Telecom stores in France. Sales of equipment and mobile services increased 31.4% compared to 2002 and amounted to 44% of revenues from “Equipment sales and
rentals” in 2003.
At the same time, equipment rentals and
maintenance of Minitels (telematic terminals) continued to experience a downward trend, while the sale of equipment of fixed line services was marked by (i) the impact of reductions in the price of ADSL modems (whose volume remained dynamic) and
(ii) the decrease in sales of other equipment (in particular telephones and fax machines).
Revenues for “Payphones and telephone cards” decreased 23.1% in 2003, compared to 2002, due mainly to the significant
decrease of 18.8% in the overall volume of traffic in 2003 compared to 2002. Payphone traffic, particularly affected by the development of wireless services, maintained its downward trend with an annual decrease of 16%, following a decrease of 17.0%
in 2002. Similarly, traffic for telephone cards (France Telecom cards and “Tickets téléphone”) decreased 25.1% in 2003, compared to a 7.9% decrease in 2002, which reflected the significant decrease in the traffic for
“Tickets de téléphone”, which had previously been increasing steadily. The marketing of two “Tickets de téléphone” since January 15, 2004 to call either North Africa, or Europe and the United States,
at particularly favorable rates, is expected to renew telephone card activity in 2004.
Cable television
The 1.2% decrease on a
historical basis of revenues from “Cable television” in 2002 was linked to the merger on December 29, 2002 of the subsidiary Wanadoo Interactive Cable (cable ISP) with Wanadoo Interactive, whose revenues are included in the
“Wanadoo” segment discussed above.
On a comparable basis,
revenues from “Cable television” increased 8.1% due to (i) the 2.5% increase, on a comparable basis, in the number of subscribers and (ii) the positive evolution of the product mix resulting from the progressive shift of subscriptions to
more lucrative digital offers.
Other consumer products
The 13.7% decrease in revenues from “Other consumer
products” on a comparable basis related to services from the distribution network of stores in France provided to other partners of the France Telecom Group (mainly Orange France and Wanadoo Interactive) for the sale of their services. The
impact of the decrease in prices for these services in 2003 was partially offset by the increase in the volume of services provided during 2003. In addition, this reflected an increase of 13.4% in other services provided by France Telecom
S.A.’s call centers to these same partners.
n
Revenues from Business services
The table below sets forth the revenues and other operating information for Business services for the periods ended December 31,
2002 and December 31, 2003 and the variations between the two periods, expressed as percentages.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Business fixed line telephony
3,327
3,531
3,527
(5.8
)%
(5.7
)%
Business networks
2,526
2,406
2,385
5.0
%
5.9
%
Other business services
842
851
1,648
(1.1
)%
(48.9
)%
Business services revenues
6,695
6,788
7,560
(1.4
)%
(11.4
)%
Number of business telephone lines
(1) (2)
(in millions)
5.9
5.9
5.9
0.9
%
0.9
%
Voice traffic of business subscribers (in billions of minutes)
21.5
23.5
23.5
(8.8
)%
(8.8
)%
Business traffic in online services and low speed Internet access (in billions of minutes)
19.5
17.8
17.8
9.7
%
9.7
%
Total number of permanent accesses to data networks
(1)
(in thousands)
227.0
190.5
190.5
19.2
%
19.2
%
Of which:
Number of accesses for Internet and Intranet
(1)
(in thousands)
150.6
110.4
110.4
36.5
%
36.5
%
Total number of leased lines to businesses
231.2
264.5
264.5
(12.6
)%
(12.6
)%
(1)
At the end of the period.
(2)
This number includes analog (standard) lines and Numeris (ISDN) channels, each of which is counted as one line. The number of business Numeris channels at December 31, 2003 amounted to 3.7
million, an increase of 2.9% compared with 2002.
Revenues from Business services decreased 11.4% in 2003 on a historical basis, mainly due to the impact of the sale
of TDF on December 13, 2002. On a comparable basis, the decrease in revenues amounted to 1.4%. The 5.8% decrease in “Business fixed line telephony” revenues was partially offset by the 5.0% increase in “Business networks”
revenues.
Business fixed line telephony
The 5.8% decline in revenues on a comparable basis for “Business fixed line
telephony” was related to the 10.2% decrease on a comparable basis of “Business telephone communications”, partially offset by the 1.3% increase in revenues on a comparable basis from “Telephone subscriptions”.
Business telephone communications
Revenues from business telephone communications contributed almost half of the
revenues from business fixed line telephony in 2003. Revenues decreased 10.2% on a comparable basis (10.1% on a historical basis) compared to the previous year. This decrease was linked to (i) the 12% decrease in the average cost of calls to mobiles
due to the tariff decreases in 2002 and 2003; (ii) the effects of reduced prices resulting from volume discounts awarded to businesses, and (iii) the effect of the decrease in revenues from business telephone communications was due to the effect of
a loss in market share, mainly for local traffic, which was opened to competition on January 1, 2002.
Business telephone subscriptions
“Business telephone subscriptions” amounted to approximately 40% of the revenues of “Business fixed line telephony” in 2003. The 1.3% annual
increase on a comparable basis was related to (i) the increase in the subscription price on July 20, 2002 (see “– Revenues from consumer services – Consumer subscriptions”), (ii) the development of additional services such
as Incoming Call Routing to the called party’s number or conference calling, and (iii) to a lesser extent, the overall 0.9% increase in the number of equivalent telephone lines which reached 5.9 million equivalent telephone lines at December
31, 2003. These positive effects were partially offset by the fact that the Unlisted Number option became a free service as of August 6, 2003.
Online business services
“Online business services” are principally comprised of the Audiotel telephone kiosk activities, which group the electronic information services available
by telephone, such as home banking services and weather reports. Revenues from “online business services” decreased 9.7% compared to 2002 due to (i) the increase in fees passed on to providers of the kiosk services (these payments were
accounted for as deductions from gross revenues from calls) and (ii) to a lesser extent, the 3.6% decrease in the volume of calls made from fixed line telephone subscribers.
Business networks
Revenues from business networks increased 5.0% on a comparable basis (5.9% on a historical basis). The 13.0% increase in revenues from data transmission solutions
on a comparable basis (
€
1.9 billion in 2003) was partially offset by the 13.7% decrease in revenues from leased lines on a
comparable basis (
€
627 million in 2003).
In data transmission solutions, Internet and Intranet-related services experienced very substantial growth (26.3% at December 31, 2003 compared to 2002) and
represented 60% of the revenues from data transmission services in 2003. Revenues from Frame Relay services stabilized, while standard data transmission products (mainly the switching of X25 packages) continued on a downward trend, decreasing 10.5%
at December 31, 2003 compared to the preceding year.
Similarly, the
decrease in revenues from leased lines reflected the transfer of businesses towards data transmission solutions, which include services in addition to the leasing of basic infrastructure. The overall decrease in leased lines amounted to 12.6%,
corresponding mainly to analog and digital low and medium speed lines, while broadband digital lines increased 2.0% compared to the preceding year.
The following table sets forth revenues of other business services and other information for the periods ended December 31, 2002
and 2003, and the percentage changes between the two year-end periods.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a comparable
basis
(unaudited)
historical
on a comparable
basis
(unaudited)
historical
Equipment sales and rentals
313
347
351
(9.9
)%
(10.7
)%
Audiovisual
384
364
1,142
5.5
%
(66.4
)%
Miscellaneous other services
145
140
155
4.1
%
(6.3
)%
Other business services revenues
842
851
1,648
(1.0
)%
(48.9
)%
Revenues from “Other
business services” decreased 48.9% in 2003 on a historical basis, mainly due to the impact of the sale of TDF on December 13, 2002. On a comparable basis, the decrease in revenues amounted to 1.0%. The 9.9% decrease in revenues from equipment
sales and rentals was partially offset by the 5.5% increase in revenues from audiovisual and other business services.
Equipment sales and rentals
The 9.9% decrease on a comparable basis from business equipment sales and rentals reflected the decline in equipment sales, in particular business commutation
switches, fax machines, and videoconference and office equipment. Similarly, sales of market room equipment remained stable while rentals and maintenance of business commutation switches increased 14.9% compared to the previous year.
Audiovisual
The 66.4% decrease on a historical basis of revenues from audiovisual services in 2003 was mainly due to the impact of the sale of TDF
on December 13, 2002. On a comparable basis, audiovisual services increased 5.5% due mainly to development of activity in Europe and Asia.
Miscellaneous other services
Revenues from miscellaneous other services decreased 6.3% on a historical basis due to the grouping of Internet services of certain subsidiaries in “Business
networks”. The 4.1% increase on a comparable basis of miscellaneous other services related to Internet consultation services, engineering services and management of business networks.
n
Revenues from Carrier services
Carrier services include (i) domestic interconnection services with other domestic operators, (ii) services provided in France to international operators (incoming
international traffic and transit services), (iii) “Other carrier services”, in particular the wholesale sale of ADSL access to third-party Internet access providers, data services to operators and services related to unbundling of access
to telephone lines in France. In addition, it also includes backbone networks outside of France, satellite services, the laying and maintenance of submarine cables and management and network engineering .
The following table sets forth the revenues and other operating information for France Telecom’s Carrier
services for the periods ended December 31, 2002 and December 31, 2003 and the variations between the two periods, expressed as percentages.
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Domestic interconnection (
€
millions)
1,206
1,261
1,261
(4.3
)%
(4.3
)%
International operators services (
€
millions)
574
610
610
(5.8
)%
(5.8
)%
Other services (
€
millions)
1,586
1,508
1,509
5.2
%
5.1
%
Total Carrier services revenues (
€
millions)
3,367
3,378
3,379
(0.3
)%
(0.4
)%
Domestic interconnection traffic (billions of minutes)
42.9
40.5
40.5
5.9
%
5.9
%
Internet interconnection traffic (billions of minutes)
33.9
30.2
30.2
12.3
%
12.3
%
Incoming international traffic (billions of minutes)
3.7
3.8
3.8
(3.1
)%
(3.1
)%
Domestic interconnection
“Domestic interconnection” revenues recorded a limited
decline of 4.3% in 2003. Revenues from call termination (call traffic originating from third-party operators and Orange France), which accounted for most of domestic interconnection revenues, decreased 3.6%. The 5.9% increase in call termination
traffic was more than offset by (i) the impact of the development of direct connections with commuted switch operators of third-party networks, which are less lucrative for France Telecom; and, (ii) the impact of price decreases in the 2003
interconnection catalogue that were more moderate than in previous years.
At the same time, revenues from low speed interconnection Internet access traffic, which accounted for approximately 10% of domestic interconnection revenues, decreased 10.0% in 2003. The impact of the 12.3% growth in traffic volumes was
largely offset by the development of contract Internet interconnection implemented at the beginning of 2002. This resulted in significant decreases in pricing for low speed Internet access traffic compared to the traditional per-minute billing
system (contract Internet interconnection enables the user to pay for interconnection in terms of number of accesses independently of the number of actual minutes).
International operators services
Revenues from “international operators services” decreased 5.8% in 2003, mainly due to the particularly strong decline in
transit services (circuit leasing and re-routing of calls), which decreased 41.5% in a market segment that remains highly competitive. At the same time, revenues from incoming international traffic, which accounted for nearly half of revenues from
international operators services, decreased 15.6% in 2003, due to the 9.6% average reduction in fees for incoming calls billed by France Telecom to international operators and, to a lesser extent, (i) the negative 3.7% impact of exchange rate
variations compared to 2002 and (ii) the 3.1% decline in incoming international traffic compared to the previous year.
The decrease in transit services and incoming international traffic was partially offset by the development of network services provided to fixed line and wireless
operators of the other segments of the France Telecom Group, in particular “Orange” and “Other International”.
The following table sets forth revenues and other operating data for “Other carrier services” for the periods ended December
31, 2002 and 2003 and the variations between the two periods expressed as percentages.
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Data services to operators (
€
millions)
686
696
696
(1.3
)%
(1.3
)%
Online services and Internet access (
€
millions)
265
170
170
56.1
%
56.1
%
Other miscellaneous services (
€
millions)
634
642
643
(1.2
)%
(1.4
)%
Total revenues – Other carrier services (
€
millions)
1,586
1,508
1,509
5.2
%
5.1
%
Number of connections leased to operators
(1)
(in thousands)
60.9
62.9
62.9
(3.2
)%
(3.2
)%
Number of ADSL access lines sold to third-party ISPs
(1)
(in thousands)
1,204.2
345.5
345.5
ns
ns
Number of unbundled lines
(1)
(in thousands)
275.6
6.7
6.7
ns
ns
Of which:
Number of fully unbundled lines
(1)
(in thousands)
3.8
1.3
1.3
186.4
%
186.4
%
(1)
At the end of the period.
Data services to operators
The 1.3% overall decline in 2003 in revenues from data services to operators reflected the 3.1% decline in the number of lines leased to third-party operators. The
effect of the favorable mix achieved by the increasing number of digital broadband lines was partially offset by a decrease in the average duration of leased lines.
Online services and Internet access
The strong growth in revenues from online services and Internet access, which increased 56.1% in 2003, reflected the rapid development of wholesale ADSL access
sales to third-party ISPs. The number of ADSL access accounts billed to third-party ISPs increased 3.5 times in one year, reaching 1.2 million access accounts at December 31, 2003 compared to 345,000 at December 31, 2002.
The impact of these increases was partially offset by the 13.4% decrease in low speed
Internet access communications revenues directly billed by France Telecom to subscribers of third-party ISPs, which reflects the recent development of interconnection services especially for the Internet (revenues from billing the network operators
are included in “Domestic interconnection” and “Revenues from Carrier services”).
Other miscellaneous services
The decrease in revenues from service contracts to satellite operators and, to a lesser extent, the decrease in services for the laying and maintenance of submarine
cables was partially offset by (i) the sustained growth of revenues from the unbundling of telephone lines in France, (ii) the increase in revenues from backbone networks outside France (North America, Europe and Asia) and (iii) the development of
wireless services by satellite, particularly in the maritime sector.
n
“Other revenues”
“Other revenues” of the “Fixed Line, Distribution, Networks, Large
Customers and Operators” segment include revenues generated by: (i) the increase in value of research and development activities (revenues from licenses and software) and (ii) consulting and engineering services for information systems for
telecommunications operators. In addition, “Other revenues” includes revenues from services billed to subsidiaries from the Group’s other segments, in particular (i) computing services, within the framework of the pooling of the
Group’s information system services and (ii) rentals of property.
The table below sets forth the revenues for “Other revenues” of the “Fixed Line, Distribution,
Networks, Large Customers and Operators” segment for the periods ended December 31, 2002 and December 31, 2003 and the variations between the two periods, expressed as percentages.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues from Other revenues
395
453
440
(12.7
)%
(10.2
)%
The 12.7% decrease in revenues
from “Other revenues” on a comparable basis in 2003 was due, equally, to (i) the significant decline in consulting and engineering services for information systems for telecommunications operators and (ii) the decrease in revenues from
rentals of property to subsidiaries of other segments. At the same time, research and development revenues remained stable compared to the previous year, contributing approximately one quarter of the revenues of “Other revenues” in 2003.
Similarly, revenues from information systems services to subsidiaries of other segments remained generally stable and represented approximately one third of “Other revenues”.
Operating Expenses Before Depreciation and Amortization
The table below sets forth operating expenses before depreciation and amortization by destination in 2002 and 2003:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Cost of services and products sold
(9,505
)
(10,161
)
(10,541
)
(6.5
)%
(9.8
)%
Selling, general and administrative expenses
(4,214
)
(4,680
)
(4,784
)
(10.0
)%
(11.9
)%
Research and development expenses
(451
)
(530
)
(540
)
(14.9
)%
(16.4
)%
The table below sets out the
calculation of operating expenses before depreciation and amortization on a comparable basis:
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Cost of services and
products sold
Selling, general and
administrative
expenses
Research and development
expenses
2002 figures on a historical basis
(10,541
)
(4,784
)
(540
)
Changes in the scope of consolidation and others
358
96
10
Exchange rate variations
(2)
22
8
0
2002 figures on a comparable basis
(10,161
)
(4,680
)
(530
)
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate December 31, 2002 and the exchange rate December 31, 2003.
n
Cost of services and products sold
Costs of services and products sold for the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment amounted to
€
9,505 million in 2003, compared to
€
10,541 million in 2002 on a historical basis, a 9.8% decrease between the
two years, partly due to the sale of TDF.
This decrease amounted to 6.5% on a comparable basis, a savings of
€
656 million. This decrease, recorded for the most part in external expenses, was the result of a significant internalization effort and can be principally attributed to
an 11.5% decrease in the level of external purchases, representing a savings of
€
503 million. The savings included the following:
-
the total amount of purchases and payments to operators decreased, mainly due to the decline in the average cost of call termination rates for calls from mobile telephones.
-
External purchases, excluding purchases and payments to operators, decreased, mainly due to the effects of TOP projects, particularly “TOP Sourcing” in relation to the renegotiation
of agreements and whose effects were evident in the following items: sub-contracting, fees, computing and merchandise purchasing.
-
A stable level of personnel costs.
See “– 5.1.2.2 Results of the ‘TOP’ Operational Improvements Program”.
n
Selling, general and administrative expenses
Selling, general and administrative expenses for the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment amounted to
€
4,214 million in 2003, compared to
€
4,784 million in 2002 on a historical basis, an 11.9% decrease
between the two years.
On a comparable basis, selling, general and
administrative expenses decreased 10.0% (a savings of
€
466 million) between 2002 and 2003. This decrease was principally due to:
-
the decrease in external purchases, mainly as a result of cost control measures pursuant to TOP projects (computing, advertising and sponsoring).
-
the significant decrease in the level of customer provisions, principally in the Business market (project relating to debt collection and identification of disputed debt claims).
-
the decrease in the level of personnel costs, relating principally to the reduction of the workforce in the “Fixed Line, Distribution, Networks, Large Customers and Operators”
segment.
See “– 5.1.2.2 Results of the
‘TOP’ Operational Improvements Program”.
n
Research and development expenses
Research and development expenses amounted to
€
451 million in 2003, compared to
€
540 million in
2002, a 16.4% decrease between the periods on a historical basis.
On a
comparable basis, the decrease amounted to 14.9% between 2002 and 2003. This decrease was due to the refocusing of research and development activities towards innovations with growth potential and by streamlining the portfolio of projects,
particularly those of strategic interest for France Telecom. This refocusing was in addition to a strict implementation of the TOP savings plans.
France Telecom focuses its innovation strategy around growth services. To achieve this, France Telecom’s research and development is centered around:
-
the acceleration and extension of the roll-out of broadband in France, both for residential services (voice, image, electronic surveillance) and also for computing for businesses;
-
changes in the mobility of wireless activities to provide for access in any location; and
-
the introduction of systems increasing the interoperability of telecommunications services with customer management independent from networks.
Operating Income Before Depreciation and Amortization
On a historical basis, operating income before depreciation and amortization of the
“Fixed Line, Distribution, Networks, Large Customers and Operators” segment increased 5.4% due to the sale of TDF.
On a comparable basis, operating income before depreciation and amortization of the “Fixed Line, Distribution, Networks, Large Customers and Operators”
segment increased 9.7% between 2002 and 2003, mainly due to the effects of the implementation of TOP projects. The savings achieved largely offset the decrease in revenues. Operating income before depreciation and amortization compared to revenues
was 34.9% in 2003, compared to 31.0% in 2002 on a comparable basis.
Depreciation and Amortization (excluding goodwill) and Amortization of Actuarial Adjustments in the Early Retirement Plan
The table below sets forth the amount of depreciation and
amortization (excluding goodwill) for 2002 and 2003.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Depreciation and amortization (excluding goodwill)
(3,313
)
(3,377
)
(3,504
)
(1.9
)%
(5.4
)%
Amortization of actuarial adjustments in the early retirement plan
(211
)
(199
)
(199
)
6.2
%
6.2
%
The table below sets forth the
calculation of depreciation and amortization (excluding goodwill) on a comparable basis:
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Depreciation and amortization
(excluding goodwill)
Amortization of actuarial adjustments
in the early retirement plan
2002 figures in historical basis
(3,504
)
(199
)
Changes in the scope of consolidation and others
122
0
Exchange rate variations
(2)
5
0
2002 figures on a comparable basis
(3,377
)
(199
)
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
Provisions for depreciation and amortization amounted to
€
3,313 million in 2003, compared to
€
3,504
million in 2002 on a historical basis, a decrease of 5.4%, partly due to the sale of TDF.
On a comparable basis, the decrease amounted to 1.9% between 2002 and 2003 and reflected the significant decrease in investments in tangible and intangible assets for this segment.
Operating Income
On a historical basis, operating income increased 16.3% despite the negative impact of the sale of TDF.
On a comparable basis, operating income for the “Fixed Line, Distribution,
Networks, Large Customers and Operators” segment increased by 21.6%, reflecting the favorable effect of the growth in operating income before depreciation and amortization, in addition to the decrease in provisions for depreciation and
amortization of tangible and intangible assets.
Investments in Tangible and
Intangible Assets
Investments in tangible and intangible assets by
the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment declined by 39.6% on a historical basis between 2002 and 2003, and decreased by 35.4% on a comparable basis.
The significant savings in investments on a comparable basis in 2003 compared to 2002
were due to the joint effects of the policy for voluntary rationalization of investments implemented through the TOP projects and the “TOP Sourcing” Program for the optimization of contracts signed. Overall, investments decreased
€
742 million, or 35.4%, on a comparable basis in 2003 compared to 2002.
During 2003, network investments, which amounted to 71% of investments in tangible and intangible assets of the “Fixed Line,
Distribution, Networks, Large Customers and Operators” segment, decreased
€
351 million, or 27% on a comparable basis compared
to 2002.
However, investments relating to Internet spending and broadband, a strong growth sector, increased significantly
in 2003 compared to their 2002 levels. In 2003, such investments represented 35% of network investments:
-
ADSL: investments in ADSL equipment increased by
€
38 million, a 22%
increase in one year. The ADSL customer base grew significantly, increasing by over 1.6 million users at December 31, 2003 compared to December 31, 2002 (at December 31, 2003, the customer base amounted to 3.1 million ADSL access users);
-
Other Internet-specific equipment: Similarly to ADSL, these investments remained stable during 2003, despite a decline in unit prices.
Investments for other network equipment (local loop, shared network resources,
switched networks, other networks, cable networks and miscellaneous) decreased
€
384 million in 2003, or 38% compared to 2002. These
investments related principally to “renewal” equipment.
The
principal savings included the following:
-
Spending on computing decreased by
€
168 million, or 36%;
-
Investments in real estate decreased by
€
68 million, or 56% compared to
2002.
Operating Income Before Depreciation and Amortization Less CAPEX
On a historical basis, operating income before depreciation and
amortization less CAPEX for the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment increased by 25.8% between 2002 and 2003.
This growth was 29.3% on a comparable basis. It reflected a significant decrease in investments in tangible and intangible assets, combined with an increase in
operating income before depreciation and amortization.
5.2.2.4 E
QUANT
SEGMENT
The “Equant” segment was created following the merger of Equant and Global One on July 1, 2001. The merger produced the leader in the field of worldwide services of data transmission to businesses by the extent of its
geographical coverage and seamless network and the diversity of its voice and data services.
At December 31, 2003, France Telecom held 54.15% of Equant’s share capital.
Operating Indicators for the “Equant” Segment
The table below sets forth the main operating indicators of the “Equant” segment.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues
2,612
2,632
3,156
(0.8
)%
(17.2
)%
Operating income before depreciation and amortization
259
167
200
54.9
%
29.3
%
Operating income before depreciation and amortization/Revenues
9.9
%
6.3
%
6.3
%
Operating income
(168
)
(268
)
(321
)
37.1
%
47.5
%
CAPEX
248
327
392
(24.1
)%
(36.7
)%
Operating income before depreciation and amortization less CAPEX
11
(160
)
(192
)
106.6
%
105.5
%
Average number of employees (full-time equivalent)
The following table sets forth the calculation of figures on a comparable basis of the Equant segment in 2002,
including euro/U.S. dollar exchange rate variations:
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Revenues
Operating income
before
depreciation and
amortization
Operating
Income
CAPEX
Operating income
before
depreciation and
amortization less
CAPEX
Average
number of
employees
2002 figures on a historical basis
3,156
200
(321
)
392
(192
)
11,928
Exchange rate variations
(2)
(523
)
(33
)
53
(65
)
32
2002 figures on a comparable basis
2,632
167
(268
)
327
(160
)
11,928
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate for U.S. dollars at December 31, 2002 and the exchange rate at December 31, 2003.
Revenues
On a historical basis, Equant’s revenues decreased 17.2% between 2002 and 2003 due to strong fluctuations in the euro/dollar
exchange rate.
Equant’s revenues were relatively stable on a
comparable basis between 2002 and 2003, decreasing very slightly by 0.8%.
The increase in revenues from network services and integration services was offset by the decrease in revenues from other services and revenues relating to the agreement with SITA.
Due to the exchange rate fluctuations, the following comments are presented on the
basis of figures expressed in U.S. dollars as reported by Equant.
n
Network services
Equant’s network services sector comprises revenues from network agreements for
data transmission with direct and indirect customers and also includes network consulting services included in the agreements.
In 2003, Equant’s revenues for network services increased 2.6% to $1,607 million. Direct sales grew by 8.3% compared with 2002. Revenues increased
significantly in Western Europe, which largely offset the decrease in revenues in North America. Revenues made through indirect distribution channels decreased 19.7% in 2003 compared to 2002. This decrease was principally due to the decrease in
revenues from Sprint, Deutsche Telekom and Radianz.
At December 31,
2003, Equant operated over 1,000 IPVPN customer networks, compared to 400 at December 31, 2002, demonstrating its capacity for growth in the most dynamic sector of the market.
n
Integration services
Equant’s
services sector includes the company’s integration services, messaging services, hosting, security and the distribution of equipment and networks. Integration services comprise part of the consulting and network engineering activities and also
installation and maintenance services of network equipment.
Total
revenues for integration services increased 5.1% in 2003 compared to 2002, reaching $447 million in 2003, mainly due to the increase in revenues from the provision and deployment of equipment, which increased 23.5%. Revenues from messaging, hosting
services and security increased 8.6% compared to 2002. The economic slowdown in the United States significantly impacted demand of small businesses for computer maintenance and led to a 9.7% decline in revenues from other integration services.
n
Other services
Revenues from other services decreased 6.2%, to $224 million, in 2003 compared to 2002. This decrease reflected amendments to product development agreements with
France Telecom Transpac and the anticipated reduction in revenues from switched voice services.
Revenues relating to the SITA agreement amounted to $641 million in 2003, a 10.2% decrease in 2003 compared to 2002. The termination of the guaranteed minimum revenues provision at the end of June 2003 had a significant impact on revenues
from SITA. The relationship with SITA now operates within the framework of a new agreement signed on October 16, 2003, which sets the terms of price revisions.
Operating Expenses Before Depreciation and Amortization
The following table sets forth operating expenses before depreciation and amortization by destination in 2002 and 2003:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Cost of services and products sold
(1,830
)
(1,860
)
(2,232
)
(1.7
)%
(18.0
)%
Selling, general and administrative expenses
(524
)
(605
)
(725
)
(13.3
)%
(27.7
)%
The difference between the
figures on a historical basis and on a comparable basis for 2002 relate solely to exchange rate variations linked to variations of the U.S. dollar to the euro.
n
Cost of services and products sold
Costs of services and products
sold of the “Equant” segment amounted to
€
1,830 million in 2003, compared to
€
2,232 million in 2002 on a historical basis, a decrease of 18.0% between the two periods.
On a comparable basis, this decrease was 1.7%. As a percentage of revenues, the cost of services and products sold decreased to 70% of
revenues in 2003, compared to 71% of revenues in 2002. The decrease in the cost of goods and services sold in 2003 related mainly to transmission and access circuit costs as well as personnel and office costs.
n
Selling, general and administrative expenses
Selling, general and administrative expenses for the “Equant” segment amounted to
€
524 million in 2003, compared to
€
725 million in 2002 on a historical basis, an
improvement of 27.7% between the two years.
On a comparable basis, the
improvement between 2002 and 2003 amounted to 13.3%. As a percentage of revenues, selling, general and administrative expenses decreased to 20% in 2003 from 23% in 2002.
Selling, general and administrative expenses declined mainly due to a decrease in personnel costs and site expenses relating to the
restructuring and integration program implemented by Equant, in addition to a reduction of general sales and marketing expenses.
Operating Income Before Depreciation and Amortization
Equant’s operating income before depreciation and amortization experienced strong growth, increasing from
€
200 million at December 31, 2002, to
€
259 million at
December 31, 2003, a 29.3% increase on a historical basis.
On a
comparable basis, this growth was 54.9% (
€
259 million at December 31, 2003, compared to
€
167 million at December 31, 2002).
As a percentage of revenues, operating income before depreciation and amortization costs increased from 6.3% at December 31, 2002 to 9.9% at December 31, 2003,
due to the decrease in operating expenses.
Depreciation and Amortization (excluding goodwill)
The table below sets forth the amount of depreciation and amortization (excluding goodwill) for the “Equant” segment in 2002
and 2003.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Depreciation and amortization (excluding goodwill)
(427
)
(435
)
(521
)
(1.7
)%
(18.0
)%
The difference between figures
on a historical basis and on a comparable basis for 2002 relate solely to exchange rate fluctuations related to variations of the U.S. dollar to the euro.
Provisions for depreciation and amortization amounted to
€
427 million in 2003, compared to
€
521 million in 2002 on a historical basis, a decrease of 18.0%.
On a comparable basis, this change was virtually stable, amounting to a decrease of
1.7% between the periods.
Operating Income
On a historical basis, operating income registered a significant improvement,
increasing from negative
€
321 million in 2002 to negative
€
168 million one year later, an increase of 47.5%.
On a comparable basis, this growth was 37.1%. As provisions for depreciation and amortization remained stable, operating income reflected the growth of operating
income before depreciation and amortization.
Investments in Tangible and Intangible
Assets
Investments in tangible and intangible assets declined
significantly, decreasing 36.7% in 2003 on a historical basis.
On a
comparable basis, this decrease amounted to 24.1%. The major items of investments in tangible and intangible assets at December 31, 2003 were:
-
“network and equipment”, in the amount of
€
110 million;
-
“capitalized personnel costs”, in the amount of
€
97 million;
-
“IRUs (Indefeasible Rights of Use) and other intangible assets”, in the amount of
€
41 million.
Operating Income Before Depreciation
and Amortization Less CAPEX
The decrease in investments and the
improvement in operating income before depreciation and amortization enabled Equant to strengthen its level of operating income before depreciation and amortization less CAPEX, which became positive. It increased from negative
€
160 million in 2002 on a comparable basis (negative
€
192 on a historical basis), to
€
11 million in 2003.
5.2.2.5 TP G
ROUP
SEGMENT
TP Group has been fully consolidated since April 2002. The “TP Group” segment includes TP S.A., the historic Polish operator, and its subsidiaries, notably PTK Centertel’s mobile activities.
At December 31, 2003, the consortium created by France Telecom and Kulczyk Holding
held 47.5% of TP S.A., of which 33.93% was held by France Telecom.
The table below sets forth the main operating indicators of the “TP Group” segment.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues
4,164
4,104
3,471
1.5
%
20.0
%
Operating income before depreciation and amortization
1,859
1,719
1,453
8.2
%
28.0
%
Operating income before depreciation and amortization/Revenues
44.7
%
41.9
%
41.8
%
Operating income
890
774
653
15.0
%
36.3
%
CAPEX
884
1,051
1,045
(15.9
)%
(15.4
)%
Operating income before depreciation and amortization less CAPEX
975
668
408
46.1
%
139.5
%
Average number of employees (full-time equivalent)
43,451
57,482
45,222
(24.4
)%
(3.9
)%
The table below sets forth the
calculation of figures on a comparable basis for the “TP Group” segment. The changes in the scope of consolidation relate to the full consolidation of TP Group from April 1, 2002, with effect on a comparable basis from January 1, 2002.
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Revenues
Operating
income
before
depreciation
and
amortization
Operating
Income
CAPEX
Operating
income
before
depreciation
and
amortization
less CAPEX
Average
number of
employees
2002 figures on a historical basis
3,471
1,453
653
1,045
408
45,222
Entry into the scope of consolidation:
TP Group
1,218
512
231
156
356
12,260
Exchange rate variations
(2)
(585
)
(246
)
(110
)
(150
)
(96
)
2002 figures on a comparable basis
4,104
1,719
774
1,051
668
57,482
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate of the Polish zloty at December 31, 2002 and the exchange rate at December 31, 2003.
The following table sets forth revenues for the “TP Group” segment for 2002 and 2003 and the distribution of TP Group’s revenues by activity:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Fixed line services
3,250
3,430
2,884
(5.2
)%
12.7
%
Wireless services
1,025
794
700
29.1
%
46.4
%
Internet and other revenues
76
59
43
28.8
%
76.7
%
Inter sub-segment eliminations
(187
)
(179
)
(156
)
(4.5
)%
(19.9
)%
TP Group revenues
4,164
4,104
3,471
1.5
%
20.0
%
Total number of active customers (in thousands)
18,344
16,719
16,719
9.7
%
9.7
%
Of which:
Active fixed line customers
11,127
10,792
10,792
3.1
%
3.1
%
Active wireless customers
5,702
4,480
4,480
27.3
%
27.3
%
Active Internet customers
1,515
1,447
1,447
4.6
%
4.6
%
On a historical basis, revenues
grew 20.0% between December 31, 2002 and December 31, 2003. This increase was marked by two particular factors with opposite effects:
-
Revenues for 2002 on a historical basis only relate to nine months of activity whereas revenues in 2003 are for the complete period.
-
The exchange rate fluctuations in the euro/Polish zloty parity had a negative impact between 2002 and 2003 (on average
€
1 = 3.92 zloty for the nine months of activity in 2002 and
€
1 = 3.84 zloty
for the full year 2002, compared to
€
1 = 4.39 zloty in 2003).
As a result, on a comparable basis, TP Group’s revenues increased 1.5% between
December 31, 2002 and December 31, 2003, to reach
€
4,164 million.
The 5.2% decline in revenues from fixed line services, which represented approximately 78% of TP Group’s total revenues, was more
than offset by strong growth (29.1%) in revenues from wireless services of its PTK Centertel subsidiary.
n
Revenues from fixed line services
Revenues from fixed line services
declined mainly due to a decrease in revenues from communications and interconnection, which was only partially offset by growing services such as data transmission, broadband Internet and services based upon intelligent networks. Communications
were impacted by the opening of the long distance calling market to competition (January 2003) and of the fixed line to wireless market (October 2003), in addition to the significant decline in the cost of calls (long distance calling and fixed to
wireless). Also, traffic from fixed lines was subject to competition from wireless services, particularly for local traffic. Interconnection revenues reflected the negative impact of the regulatory decrease in tariffs and the opening of the long
distance calling market to competition. Finally, payphone activities also decreased as a result of the increase in use of mobile phones. These evolutions were partially offset by the increase in the cost of subscriptions, the significant growth of
the Internet, in particular broadband Internet (73% increase) and the promising success of data transmission (15% increase), despite the difficult economic environment. Services to businesses on the basis of intelligent networks increased almost
20%.
n
Revenues from wireless services
The growth of revenues from wireless services was due to the rapid growth in the number of subscribers. At December 31, 2003, the number of customers was 5.702
million, an increase of 27.3% compared to December 31, 2002. PTK Centertel’s market share improved, reaching 33.0% at December 31, 2003, or almost 1 point gain in one year, while improving its customer mix. The share of contract plans in the
wireless customer base, for which ARPU is four times higher than prepaid plans, also showed regular growth. At December 31, 2003, contract customers represented 44.2% of overall subscribers, compared to 39.1% one year earlier.
In addition to the very rapid growth of wireless services, TP Group benefited from strong growth in the broadband Internet market (ADSL and SDI
(1)
), for
which the number of clients doubled in a year.
The virtual stability of
revenues from this activity, excluding Internet and directories activities, was due to the rationalization of operations and refocusing of activities, in addition to a clear improvement in profitability.
Operating Expenses Before Depreciation and Amortization
The table below sets forth operating expenses before depreciation and amortization by
destination in 2002 and 2003:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Cost of services and products sold
(1,399
)
(1,475
)
(1,254
)
(5.2
)%
11.6
%
Selling, general and administrative expenses
(897
)
(900
)
(757
)
(0.4
)%
18.5
%
Research and development expenses
(9
)
(9
)
(8
)
0.8
%
14.5
%
The following table sets out
the calculation of figures on a comparable basis of operating expenses before depreciation and amortization by destination:
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Cost of services and
products sold
Selling, general and
administrative expenses
Research and
development expenses
2002 figures on a historical basis
(1,254
)
(756
)
(8
)
Changes in the scope of consolidation
(432
)
(272
)
(2
)
Exchange rate variations
(2)
211
128
1
2002 figures on a comparable basis
(1,475
)
(900
)
(9
)
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate of the Polish zloty at December 31, 2002 and the exchange rate at December 31, 2003.
n
Cost of services and products sold
Costs of services and products sold for the “TP Group” segment amounted to
€
1,399 million in 2003, compared to
€
1,254 million in 2002 on a historical basis, an
11.6% increase due to the full consolidation of TP Group and the positive impact of exchange rate fluctuations.
On a comparable basis, the cost of services and products sold decreased 5.2%. As a percentage of revenues, the cost of services and products sold decreased to 34%
in 2003 from 36% in 2002.
Costs increased solely for wireless
activities, although significantly less than revenues. Savings and rationalization programs for TP S.A. and other subsidiaries achieved their results.
n
Selling, administrative and general expenses
Selling,
administrative and general expenses of the “TP Group” segment amounted to
€
897 million in 2003, compared to
€
757 million in 2002 on a historical basis, an 18.5% increase between the two years due to the full consolidation of TP Group and the
positive impact of exchange rate fluctuations.
On a comparable basis,
this increase amounted to 0.4% between 2002 and 2003. As a percentage of revenues, selling, administrative and general expenses remained stable at 22%.
Research and development expenses remained stable at
€
9 million in 2003, compared to
€
8 million on a historical basis and
€
9 million on a comparable basis in 2002.
Operating Income
Before Depreciation and Amortization
Operating income before
depreciation and amortization for the “TP Group” segment increased significantly from
€
1,453 million at December 31, 2002
on a historical basis, compared to
€
1,859 million at December 31, 2003, an increase of 28.0%.
On a comparable basis, this increase amounted to 8.2% (
€
1,859 million at December 31, 2003, compared to
€
1,719 million at December 31, 2002).
As a
percentage of revenues, operating income before depreciation and amortization increased from 41.9% at December 31, 2002, to 44.7% at December 31, 2003, due to the control of operating expenses and the reorientation of resources to growing wireless
activities.
This growth was due to the cumulative effect of an increase
in revenues led by the dynamic growth of wireless activities and very significant savings, particularly for fixed line activities, made as a result of the operating expenses reduction program, especially relating to real estate, transportation and
equipment expenses, as well as expenses for studies, subcontracting and consulting services, and, in particular, personnel costs following gains in productivity and the subcontracting of network maintenance. The number of employees declined sharply
following implementation of a reorganization plan for TP Group, resulting in a 12% decline in personnel between December 31, 2002 and December 31, 2003 and resulting in a decrease in personnel costs of almost 17%. Furthermore, interconnection fees
decreased significantly.
Depreciation and Amortization (excluding goodwill)
The table below sets forth the amount of depreciation and
amortization (excluding goodwill) for the “TP Group” segment for the periods ended December 31, 2002 and 2003:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Depreciation and amortization (excluding goodwill)
(969
)
(945
)
(800
)
2.5
%
21.1
%
The following table sets forth
the calculation of depreciation and amortization (excluding goodwill) on a comparable basis:
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Depreciation and amortization (excluding goodwill)
2002 figures on a historical basis
(800
)
Changes in the scope of consolidation
(280
)
Exchange rate variations
(2)
135
2002 figures on a comparable basis
(945
)
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate of the Polish zloty at December 31, 2002 and the exchange rate at December 31, 2003.
Depreciation and amortization amounted to
€
969 million in 2003, compared to
€
800 million in
2002 on a historical basis, an increase of 21.1%.
On a comparable
basis, this increase amounted to 2.5% between the two year-end periods.
Operating income increased significantly from
€
653 million in 2002 on a historical basis to
€
890 million one year later, a 36.3% increase.
On a comparable basis, this increase amounted to 15%. As provisions for depreciation
and amortization remained virtually stable, operating income reflected the growth in operating income before depreciation and amortization.
Investments in Tangible and Intangible Assets
On a historical basis, investments in tangible and intangible assets decreased 15.4% between 2002 and 2003.
Investments in tangible and intangible assets decreased almost 15.9% on a comparable
basis between 2002 and 2003.
This change reflected a reduction in
investments in wireless activities by “TP Group” following significant efforts achieved for the network in 2002. In fixed line telephony, overall expenses also decreased, significantly for classic networks. This decrease was partially
offset by (i) expenses made within the framework of an ambitious program for the modernization of customer relations management (implementation of “CRM”: Customer Relationship Management) and billing, and (ii) increased investments in real
estate.
For other subsidiaries, investments decreased by approximately
70% on a comparable basis between 2002 and 2003.
Operating Income Before Depreciation
and Amortization Less CAPEX
On a historical basis, operating income
before depreciation and amortization less CAPEX increased 2.4 times between December 31, 2002 and December 31, 2003.
Operating income before depreciation and amortization less CAPEX grew 46.1% between 2002 and 2003 on a comparable basis. It increased from
€
668 million to
€
976
million, reflecting the improvement in operating income before depreciation and amortization, and the decrease in investments in tangible and intangible assets.
5.2.2.6 O
THER
I
NTERNATIONAL
SEGMENT
The “Other International” segment includes other international subsidiaries, the main activities of which are fixed line telephony services outside France
as well as certain wireless activities of the France Telecom Group not contributed to Orange (Voxtel in Moldavia and FTM Lebanon). For information regarding risks related to integration of companies that France Telecom has acquired, see “Item
3. Key Information – 3.3.1 Risk Factors Relating to France Telecom’s Business – France Telecom may not be able to successfully integrate the companies that it has acquired into the Group or to achieve planned synergies” and
“ – The value of France Telecom’s international investments in telecommunications companies outside Western Europe may be materially affected by political, economic and legal developments in these countries”.
Operating Indicators for the “Other International” Segment
The table below sets forth the main operating indicators of the “Other
International” segment.
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Revenues
1,621
1,559
2,427
4.0
%
(33.2
)%
Operating income before depreciation and amortization
608
427
784
42.5
%
(22.5
)%
Operating income before depreciation and amortization/Revenues
37.5
%
27.4
%
32.3
%
Operating income
314
130
278
141.8
%
13.3
%
CAPEX
183
246
396
(25.4
)%
(53.8
)%
Investments in UMTS/GSM licenses
0
46
46
ns
ns
Operating income before depreciation and amortization less CAPEX
425
181
388
134.7
%
9.5
%
Average number of employees (full-time equivalent)
The table below sets forth the calculation of figures on a comparable basis for the “Other International”
segment. The changes in the scope of consolidation relate to:
-
the transfer of ownership of the FTM Lebanon network to the Lebanese government as of August 31, 2002, with effect from January 1, 2002 on a comparable basis;
-
the sale of Casema on January 28, 2003, with effect from February 2002 on a comparable basis;
-
the transfer of wireless activities in Egypt (ECMS, Mobinil) from the “Other International” segment to the “Orange” segment, as of July 1, 2002, with effect from January
1, 2002 on a comparable basis; and
-
the sale of the indirect holding of CTE Salvador on October 22, 2003, with effect from November 1, 2002 on a comparable basis.
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Revenues
Operating
income
before
depreciation
and
amortization
Operating
Income
CAPEX
Operating
income
before
depreciation
and
amortization
less CAPEX
Average
number of
employees
2002 figures on a historical basis
2,427
784
278
396
388
14,047
Withdrawal from the scope of consolidation:
FTM Lebanon
(251
)
(115
)
(80
)
(8
)
(107
)
(405
)
Casema
(212
)
(78
)
14
(68
)
(10
)
(673
)
Mobinil, ECMS
(199
)
(95
)
(46
)
(43
)
(53
)
(617
)
CTE Salvador
(67
)
(22
)
(9
)
(11
)
(11
)
(511
)
Other changes in the scope of consolidation
(20
)
(2
)
(2
)
1
(1
)
(94
)
Exchange rate variations
(2)
(119
)
(45
)
(25
)
(21
)
(25
)
2002 figures on a comparable basis
1,559
427
130
246
181
11,747
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
The following table sets forth the impacts of exchange rate variations in 2002 figures
on a comparable basis:
(
€
millions)
Variations on a comparable basis (unaudited)
Currency
Revenues
Operating
income
before
depreciation
and
amortization
Operating
income
CAPEX
Operating
income
before
depreciation
and
amortization
less CAPEX
On a historical basis, revenues from the “Other International” segment declined by 33.2%, to
€
1,621 million, due to significant exchange rate fluctuations, in particular for the U.S. dollar and Egyptian pound, in addition to changes in the scope of consolidation,
mainly including:
-
the transfer of ownership of the FTM Lebanon network to the Lebanese Government as of August 31, 2002;
-
the sale of Casema on January 28, 2003;
-
the transfer to Orange of wireless operations in Egypt (Mobinil and ECMS) as of July 1, 2002; and
-
the sale of the indirect holding in CTE Salvador’s share capital on October 22, 2003.
On a comparable basis, revenues from the “Other International” segment grew 4.0% between December 31, 2002 and December 31,
2003. This growth was due mainly to the improvement in international fixed line services, notably with an increase in revenues of the Uni2 Group in Spain for the period ended December 31, 2003.
Operating Expenses Before Depreciation and Amortization
The table below sets forth operating expenses before depreciation and amortization for
the “Other International” segment by destination in 2002 and 2003:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Cost of services and products sold
(603
)
(702
)
(1,027
)
(14.1
)%
(41.3
)%
Selling, general and administrative expenses
(408
)
(428
)
(612
)
(4.6
)%
(33.3
)%
Research and development expenses
0
(1
)
(2
)
ns
ns
The following table sets forth
the calculation of operating expenses before depreciation and amortization on a comparable basis:
Variations on a comparable basis
(1)
(unaudited)
(
€
millions)
Cost of services and
products sold
Selling, general and
administrative expenses
Research and
development expenses
(
€
millions)
2002 figures on a historical basis
(1,027
)
(612
)
(2
)
Changes in the scope of consolidation
277
159
1
Exchange rate variations
(2)
48
25
0
2002 figures on a comparable basis
(702
)
(428
)
(1
)
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
n
Cost of services and products sold
Cost of goods and services sold for the “Other International” segment amounted to
€
603 million in 2003, compared to
€
1,027 million in 2002 on a historical basis, a 41.3%
decrease between the two periods, due to variations in the exchange rate and scope of consolidation as detailed above.
On a comparable basis, this decrease amounted to 14.1%. As a percentage of revenues, the cost of goods and services sold decreased to 37% in 2003, compared to 45%
in 2002, due to savings achieved in the subsidiaries Uni2 (Spain) and Ikatel (Mali).
Selling, general and administrative expenses for the “Other International” segment amounted to
€
408 million in 2003, compared to
€
612 million in
2002 on a historical basis, a 33.3% decrease between the two periods, in particular due to variations in the exchange rate and scope of consolidation.
On a comparable basis, this decrease amounted to 4.6% between 2002 and 2003. As a percentage of revenues, selling, general and administrative expenses decreased,
representing 25% of revenues in 2003 compared to 27% in 2002.
n
Research and development expenses
Research and development expenses are not significant in 2003, compared to
€
2 million on a historical basis and
€
1 million on a comparable basis in 2002.
Operating Income
Before Depreciation and Amortization
Operating income before
depreciation and amortization of the “Other International” segment at December 31, 2003 fell substantially by 22.5% on a historical basis, from
€
784 million at December 31, 2002 to
€
608 million at December 31, 2003. This decrease reflected changes in the
scope of consolidation and exchange rate variations, as described above.
On a comparable basis, operating income before depreciation and amortization increased 42.5% between December 31, 2002 and December 31, 2003. This increase reflected the improved profitability of the operations of subsidiaries in fixed line
telephony, such as Uni2 in Spain and CTE in El Salvador (for the period preceding its sale on October 22, 2003). As a percentage of revenues, operating income before depreciation and amortization increased from 27.4% in 2002 to 37.5% in 2003 on a
comparable basis.
Depreciation and Amortization (excluding goodwill) Provision
The table below sets forth the amount of depreciation and
amortization provisions (excluding goodwill) for the “Other International” segment for 2002 and 2003:
(
€
millions)
Year ended December 31,
Variations
2003
2002
2002
2003/2002
2003/2002
on a
comparable
basis
(unaudited)
historical
on a
comparable
basis
(unaudited)
historical
Depreciation and amortization provisions (excluding goodwill)
(294
)
(297
)
(506
)
(1.0
)%
(42.0
)%
The following table sets forth
the calculation of depreciation and amortization provisions (excluding goodwill) on a comparable basis:
(
€
millions)
Variations on a comparable basis
(1)
(unaudited)
Depreciation and amortization (excluding
goodwill)
2002 figures on a historical basis
(506
)
Changes in scope of consolidation
189
Exchange rate variations
(2)
20
2002 figures on a comparable basis
(297
)
(1)
Before inter-segment eliminations.
(2)
Impact of the difference between the exchange rate at December 31, 2002 and the exchange rate at December 31, 2003.
Depreciation and amortization provisions amounted to
€
294 million in 2003, compared with
€
506 million in
2002 on a historical basis, a 42.0% decrease.
On a comparable basis,
depreciation and amortization remained stable between 2002 and 2003.
Operating Income
On a historical basis, operating income increased 13.3%, from
€
278 million at December 31, 2002, to
€
314 million one year later.
On a comparable
basis, operating income increased 2.4 times, increasing from
€
130 million at December 31, 2002, to
€
314 million at December 31, 2003, due to the strong improvement in operating income before depreciation and amortization combined with the relative stability of
depreciation and amortization provision for tangible and intangible fixed assets. The segment benefited from the growth of subsidiaries such as CI Telecom, Uni2 and CTE Salvador (for the period preceding its sale on October 22, 2003).
Investments in Tangible and Intangible Assets
On a historical basis, the “Other International Operations” segment showed a
decrease of 53.8% in investments in tangible and intangible assets between December 31, 2002 and December 31, 2003. This decrease was due in part to exchange rate variations and changes in the scope of consolidation discussed above, in particular,
Mobinil / ECMS and Casema.
On a comparable basis, investments
in tangible and intangible assets decreased 25.4%, from
€
246 million at December 31, 2002 to
€
183 million one year later.
Operating Income Before Depreciation and Amortization Less CAPEX
On a historical basis, the decrease in operating income before depreciation and amortization was largely offset by the decrease in capital expenditures, which
resulted in an increase in operating income before depreciation and amortization less CAPEX of 9.5%.
On a comparable basis, the growth in operating income before depreciation and amortization was significantly higher due to the combination of a strong increase in
operating income before depreciation and amortization and a decrease in investments in tangible and intangible assets, which resulted in operating income before depreciation and amortization less CAPEX increasing 2.3 times, from
€
181 million at December 31, 2002, to
€
425 million at December 31, 2003.
The following table presents information concerning operating income through net income for the periods ended December 31, 2003 and
December 31, 2002.
(
€
millions)
Year ended December 31,
2003
2002
historical
Operating income
9,554
6,808
Interest expenses net (excluding TDIRA)
(3,688
)
(4,041
)
TDIRA Interest Expense
(277
)
–
Foreign exchange gain/(loss), net
(25
)
136
Discounting of early retirement plan
(199
)
(216
)
Current income from integrated companies
5,365
2,687
Other non-operating income/(expense), net
(1,119
)
(12,849
)
Income taxes
2,591
(2,499
)
Employee profit sharing
(127
)
(148
)
Net income/(loss) from integrated companies
6,710
(12,809
)
Equity in net income/(loss) of affiliates
(168
)
(367
)
Goodwill amortization
(1,677
)
(2,352
)
Exceptional goodwill amortization
(1,137
)
(5,378
)
Net income/(loss) of the consolidated group
3,728
(20,906
)
Minority interests
(522
)
170
Net income/(loss)
3,206
(20,736
)
5.2.3.1 I
NTEREST
EXPENSES
,
NET
AND
FOREIGN
EXCHANGE
GAIN
/(
LOSS
),
NET
Gross borrowings less cash, cash equivalents and marketable securities (“net
financial debt”) of France Telecom amounted to
€
44,167 million at December 31, 2003, compared to
€
68,019 million at December 31, 2002. Net financial debt is calculated in Note 16 of the Notes to the Consolidated Financial Statements (see “– 5.4.1.1
Schedule of Net Financial Debt”). Net financial debt included
€
6,838 million of convertible or exchangeable bonds, compared to
€
11,192 million at December 31, 2002.
Interest expenses, net (excluding TDIRA) amounted to
€
3,688 million in 2003, compared to
€
4,041 million in 2002, a decrease of
€
353 million in interest expense between the two periods.
However, the weighted average annual cost of France Telecom’s net financial debt increased from 5.90% at December 31, 2002, to 7.05% at December 31, 2003.
The increase in average cost was due to the following:
n
A significant portion of the bonds issued (
€
17.1 billion of the debt
outstanding at December 31, 2003) have step-up clauses. The reductions in France Telecom’s credit rating in June and July 2002 resulted in an increase in the coupon rates (i) from September 2002 for debt securities in pound sterling and U.S.
dollars, and (ii) from February and March 2003 for other indebtedness (with annual interest payments). As a result, the impact on interest expense of the rating downgrades of France Telecom in June and July 2002 was approximately
€
40 million in 2002, compared to
€
164 million in 2003. Similarly, the upgrade in S&P’s rating of France Telecom’s debt on May 14, 2003 only reduced interest expense by
€
5.8 million in 2003, as against estimates of
€
25 million and
€
27 million for 2004 and 2005, respectively.
n
Margins demanded by bond investors were still high at the beginning of 2003: the weighted average interest rate of the issuances in January and February 2003 was 7.30% for an average maturity
of 13.75 years.
These issuances allowed for the extension of the average maturity of the debt and the repayment of short-term debt: including
€
3.1 billion at 2.50% for the Orange convertible due February 2003 and drawdowns on syndicated credit lines. The refinancing of short-term debt by long-term debt resulted
in an increase in costs estimated at
€
218 million in 2003.
n
In 2003, France Telecom also placed an average of
€
4.2 billion. The
difference between the interest rate on investments and the interest rate on borrowings also contributed to the increase in average cost of the debt, representing approximately
€
166 million.
n
The hedging from exchange rate coverage on the Polish zloty incurred an increase in interest expense of
€
42 million.
n
At December 31, 2003, coupon payments of approximately 3.6 billion in U.S. dollars were not hedged. The decrease of the U.S. dollar in 2003 enabled a
€
68 million reduction in interest expense.
The weighted average spot rate of long-term financial debt, including bank loans and exchangeable or convertible bonds, which represents the average nominal
interest rate on long-term debt at a fixed date, increased from 6.07% at December 31, 2002, to 6.22% at December 31, 2003.
The average maturity of France Telecom’s net financial debt increased during 2003, rising from four years at December 31, 2002 to approximately six years at
December 31, 2003. Average maturity increased for two reasons:
n
The bond issuances in January and February 2003 (
€
6.4 billion with an
average maturity of 13.75 years) were used to repay short-term obligations (the Orange convertible bond and a portion of drawdowns on syndicated credit lines).
n
The capital increase of almost
€
15 billion completed during the first half
of 2003 made it possible to repay short-term borrowings (debt payments, the balance of drawdowns on syndicated credit lines and commercial paper), with the balance being placed in short-term investments.
France Telecom increased the share of its fixed-rate debt, after swaps, from 72% at
December 31, 2002 to 91% at December 31, 2003 (including futures).
Interest expense related to the perpetual bonds redeemable for France Telecom shares (TDIRAs), issued as part of the MobilCom settlement, of
€
277 million was incurred in 2003. In August 2003, in exchange for a cash payment of
€
438 million, the
interest rate for the TDIRAs was decreased from 7% to 5.75% over 7 years. The value of this adjustment, amounting to the equivalent actuarial value of the rate decrease, was recorded in non-operating expenses.
Foreign exchange gain (loss), net for the period ended December 31, 2003 amounted to a
loss of
€
25 million (compared to a gain of
€
136 million for the full year 2002). This loss was due to the conversion of debts in a currency other than that of the subsidiary concerned and resulted mainly from the depreciation of the Polish zloty against the
euro (
€
157 million in foreign exchange loss for TP Group) and the depreciation of the Dominican peso against the U.S. dollar (loss
of
€
72 million). These losses were almost completely offset by exchange gains on borrowings in U.S. dollars, sterling, and zloty by
the parent company. France Telecom’s exposure to the risk of exchange rate fluctuations on debt is discussed in ”Item 11. Quantitative and Qualitative Disclosures about Market Risks – Exposure to Market Risks and Financial
Instruments”.
France Telecom’s policy is not to use
derivative financial instruments for speculative purposes. Since most derivative financial instruments are intended to hedge against business exposures, the risks associated with these instruments are offset by the risks generated by the items
covered. Information concerning derivative instruments is set forth in Note 20 of the Notes to the Consolidated Financial Statements. Derivative instruments and their fair value are set forth in Note 21 to the Consolidated Financial Statements.
5.2.3.2 C
URRENT
INCOME
FROM
INTEGRATED
COMPANIES
Current income from integrated companies was
€
5,365 million at December 31, 2003, compared to
€
2,687 million at December 31, 2002.
5.2.3.3 O
THER
NON
-
OPERATING
INCOME
/(
EXPENSE
)
At December 31, 2003, other non-operating income/(expense) amounted to an expense of
€
1,119 million, compared to an expense of
€
12,849 million at December 31, 2002. This
item includes disposal gains or losses, dilution impact, other provision and reversal movements, costs of sale of receivables and dividends.
At December 31, 2003, disposal gains or losses amounted to
€
333 million
and the principal divestitures related to the following transactions:
-
On December 19, 2003, France Telecom tendered to Sofora, a company jointly held with Telecom Italia, its shares of Nortel Inversora (which holds 54.7% of the capital of Telecom Argentina),
which represented 25.5% of Nortel Inversora’s economic interests. On the same day, France Telecom sold 48% of Sofora’s capital to the company W of Argentina, a subsidiary of the Los W group, a significant Argentinean investor, for
€
97 million. France Telecom further granted W of Argentina a call option for $10,000 for the remaining 2% and received a premium of
€
3 million. The disposal gains amounted to
€
97 million for this transaction.
-
The sale of the 26% indirect holding in the share capital of CTE Salvador (through a 51% holding in the consortium Estel) for a net amount of $217 million (
€
197 million), producing a disposal gain of
€
78 million. This transaction was announced on September 9, 2003, and completed on October 22, 2003.
-
At December 31, 2003, France Telecom sold its interest in Inmarsat (5.3%) for $79 million, producing a disposal gain of
€
35 million.
-
The second tranche in the divestiture of real estate by France Telecom S.A. for
€
419 million, producing a disposal gain of
€
31 million.
-
On June 20, 2003, France Telecom sold its 5.5% shareholding in Sprint PCS, the American telecommunications operator, for a total amount of $330 million (
€
286 million). Disposal gains, before tax and net of exchange rate effects, amounted to
€
19 million for this transaction.
-
Casema was sold on January 28, 2003, for a net cash amount of
€
498
million, producing a disposal gain of
€
16 million.
-
Gains from the partial sale on September 30, 2002 of the second tranche of shares of Pramindo Ikat (15% of shares, following an initial tranche of 30% in September 2002) for
€
22 million, producing a disposal gain of
€
14 million. The third tranche of the disposal (55% of the shares) is expected in December 2004.
-
Sale of Eutelsat shares on April 28, 2003, for a net cash amount of
€
373
million, producing a disposal gain of
€
14 million.
n
Among the principal divestitures at December 31, 2002:
-
A disposal gain on the sale of TDF, which amounted to
€
486 million.
-
A disposal gain of the sale of Panafon, which amounted to
€
274 million.
-
A disposal gain on the sale of France Telecom’s interest in Télévision Par Satellite (TPS), which amounted to
€
177 million.
-
A disposal gain from the partial sale on September 30, 2002 of the first tranche of shares of Pramindo Ikat (30% of the shares), which amounted to
€
27 million.
-
A disposal loss of
€
41 million from the resolution in July 2002 of the
off-balance sheet commitment on CCIC securities.
In
addition, the gain from the dilution recorded for eresMas (rebranded Wanadoo Espana on January 1, 2003, following the merger) at Wanadoo amounted to
€
35 million.
Provisions and Reversal of Provision Movements
n
Excluding disposal gains, other non-operating income/(expense) included, at December 31, 2003, provisions relating notably to the following:
-
an additional provision for the Kulczyck put, linked to the purchase of TP S.A. shares, of
€
299 million (due mainly to the depreciation of the Polish zloty against the euro. This provision, which amounted to
€
571 million for 2002, was increased to
€
870 million for the period ended December 31, 2003).
-
in 2003, within the framework of the restructuring plan, the
€
125 million
in NTL notes received by France Telecom following the sale of its Noos shares were cancelled in exchange for the 27% of Noos held by NTL since the sale in 2001 and over which France Telecom benefited from a pledge. At December 31, 2003, the actual
value of these shares on the basis of a multi-criteria evaluation was zero and, as a result, France Telecom wrote down its entire holding.
-
following a reassessment of the fair value of the shares of BITCO / TA Orange Company Ltd accounted for under the equity method, a write-down of
€
73 million was recorded as a non-operating expense, in addition to the exceptional amortization of goodwill.
-
in contrast, reversals of provisions mainly involved a reversal of the provision for Wind shares, to adjust the value of the shares to the price at which they were sold (divestiture occurred
on July 1, 2003), of
€
270 million.
At December 31, 2002, provisions for certain foreign investments were made. They reflected the re-evaluation of the value in use of these companies within the framework of a strategic
reassessment. These provisions mainly included:
-
€
192 million for Uni2.
-
€
212 million for Dutchtone (
€
183 million for the group share).
-
€
132 million for Connect Austria (renamed ONE GmbH on July 1, 2003) (
€
114 million for the group share).
-
€
30 million for Optimus (
€
26 million for the group share).
-
Telinvest shares for
€
61 million.
-
Globecast shares for
€
45 million.
-
Novis and Clix shares for
€
45 million.
Furthermore, in 2002, a provision for NTL and MSCP’s current accounts (Noos
transaction) of
€
285 million was made and a provision of
€
52 million relating to the sale of Casema shares was recorded. Sprint shares were written down in an amount of
€
39 million and a provision relating to Intelig has been recorded in Brazil for
€
145 million.
Other non-operating income/(expense) also included, at December 31,
2002, exceptional provisions for
€
11,963 million, consisting of:
-
€
7,290 million for MobilCom;
-
€
1,641 million for an additional provision for NTL;
-
€
1,627 million relating to Wind (
€
1,404 million impacting on France Telecom’s share of net income);
-
€
571 million for the commitment to buy back TP S.A. shares from Kulczyk
Holding;
-
€
490 million (
€
423 million net for the group share) relating to restructuring costs within Orange,
€
252 million of which was related to the withdrawal from Sweden announced in December 2002; and
-
€
343 million (the impact on France Telecom’s share of net income
being
€
244 million) for the depreciation of assets in the Ivory Coast (CI Telcom and Orange Ivory Coast).
Restructuring Costs
n
At December 31, 2003, restructuring provisions and costs amounted to
€
305
million, involving:
-
Orange and its subsidiaries, for
€
129 million;
-
Costs for the restructuring and integration of Equant amounting to
€
105
million;
n
At December 31, 2002, restructuring costs involved:
-
Orange and its subsidiaries, for
€
490 million (
€
423 million net for the group share), of which
€
252 million was linked to the withdrawal from Sweden announced in December 2002;
-
Costs for the restructuring and integration of Equant, for
€
48 million;
Others
Other items of non-operating income/(expense) recorded at December 31, 2003 included
mainly:
-
an additional amount of
€
431 million on the TDIRAs, net of revenues from
the repurchase of the TDIRAs (see “– 5.2.3.1 Interest Expense, Net and Foreign Exchange Gain/(Loss), Net”);
-
costs related to the securitization of commercial receivables for
€
104
million; and
-
the loss on the repurchase of bonds by France Telecom S.A. for
€
106
million, following debt restructuring, and by Orange, for
€
35 million.
In 2002, other items of non-operating income/(expense) included:
-
costs related to the securitization of commercial receivables for
€
62
million;
-
expenses related to France Telecom shares of
€
60 million;
an additional expense related to the distribution of free Deutsche Telekom shares (adjustment of the price related to the transfer agreement of Deutsche Telekom shares held by France Telecom)
resulted in a provision of
€
58 million.
5.2.3.4 I
NCOME
TAXES
Income tax split between the tax consolidation groups and for the other subsidiaries is as follows:
(
€
millions)
Year ended December 31,
2003
2002
historical
- Current taxes
–
14
- Deferred taxes
1,100
(1,602
)
France Telecom S.A. tax group (see below)
1,100
(1,588
)
- Current taxes
–
(576
)
- Deferred taxes
1,861
45
Orange S.A. tax group (see below)
1,861
(531
)
- Current taxes
(18
)
(2
)
- Deferred taxes
231
70
Wanadoo S.A. tax group (see below)
213
68
- Current taxes
0
0
- Deferred taxes
(293
)
(208
)
Orange UK Group
(293
)
(208
)
- Current taxes
(137
)
(64
)
- Deferred taxes
(7
)
9
TP Group
(144
)
(55
)
- Current taxes
(8
)
(85
)
- Deferred taxes
(14
)
25
Other French subsidiaries
(22
)
(60
)
- Current taxes
(187
)
(200
)
- Deferred taxes
63
75
Other foreign subsidiaries
(124
)
(125
)
Total income tax benefit (charge)
2,591
(2,499
)
Of which:
– Current taxes
(350
)
(913
)
– Deferred taxes
2,941
(1,586
)
France Telecom S.A. Consolidated Tax Group
France Telecom S.A. files a consolidated tax return for all French
subsidiaries in which it owns 95% or more of the share capital.
Fiscal Year 2001:
In 2001, France Telecom S.A. and its
consolidated tax group recorded a significant tax loss arising primarily from the impact of the IPO of Orange S.A. and the sale of France Telecom shares to SITA in connection with the Equant acquisition. This resulted in carryback tax credits in the
amount of
€
1,630 million and tax loss carryforwards totaling
€
2,231 million.
In December 2001, France Telecom sold to a financial institution French State tax credits on carrybacks, of which
€
1,111 million was in exchange for bills which were cashed in 2002.
Fiscal Year 2002:
In 2002, the risks related to NTL and MobilCom, combined with the significant decrease in the France Telecom S.A. share price which was reflected in the statutory
accounts by the recording of tax deductible provisions, led to a significant increase in tax losses carried forward by the France Telecom S.A. consolidated tax group. This resulted in the forecast recovery date of deferred tax assets being extended
beyond the eight-year timeframe used for the 2001 financial statements.
In accordance with the principle of prudence prevailing in the recognition of deferred tax assets for accounting purposes, at June 30, 2002 and December 31, 2002, the France Telecom S.A. consolidated tax group recorded a valuation allowance
for deferred tax assets generated during the period and a
€
1,800 million valuation allowance was recorded against deferred tax
amounts at December 31, 2001, representing respectively
€
5,792 million at June 30, 2002 and
€
2,691 million at December 31, 2002. The net deferred tax charge for the France Telecom S.A. tax group for the year ended December 31, 2002 amounted to
€
1,602 million after taking into account the tax related to the 2002 dividends (
€
198 million recorded in retained earnings).
Fiscal Year 2003:
Taking into account the impact of its capital increase on its financing plan and on its taxable income for the coming years, as well as the future integration of
the Orange companies within France Telecom S.A.’s tax consolidation group, in 2003 France Telecom recorded a net deferred tax gain of
€
1,100 million, primarily relating to a reversal of the deferred tax valuation allowance.
Sales of treasury shares led to a deferred tax asset of
€
1,963 million that was recorded directly under shareholders’ equity (see Note 25 of the Notes to the Consolidated Financial Statements).
Based on its budgets, business plans and financing plans that reflect the financial situation at December 31, 2003, France Telecom
believes that the deferred tax assets maintained in the balance sheet for France Telecom S.A. and the companies within its consolidated tax group will be able to recovered due to the taxable income expected in the coming years as part of its
regularly profitable activity as a fixed line and mobile operator in France.
France Telecom S.A. and its main French subsidiaries were subject to a tax audit for the fiscal years 1998 and 1999. This audit is partly completed and any eventual reassessment relate mainly to timing differences in taxable amounts. The
subsidiaries concerned have communicated their comments to the tax authorities. With respect to the consolidated tax group, France Telecom S.A. is awaiting a final decision from the tax authorities.
Orange S.A. Consolidated Tax Group
Orange S.A. and its French subsidiaries have had their own consolidated tax regime
since 2002.
In 2002, Orange initiated a number of changes in its
internal organization with a view to improve its operating efficiency in three main areas, namely mass market products and services, business services and technical development. As part of this operating and strategic review, during 2002 Orange
initiated a project to bring Orange’s international operations outside France and the United Kingdom under a single management organization. This reorganization, which was implemented during the first six months of 2003, resulted in the
alignment of Orange’s corporate structure with its new operating structure. Consequently, Orange’s main consolidated, equity accounted and non-consolidated investments outside France and the United Kingdom were regrouped under a holding
entity, Orange Global Limited, a wholly-owned subsidiary of Orange.
This operational reorganization generated a total of
€
11.5 billion in tax losses in France during the first six months of
June 2003, including approximately
€
9 billion in ordinary tax losses and
€
2.5 billion in long-term capital losses. These tax losses primarily arose from the cumulative impairment charges booked against Orange’s investment in Wirefree
Services Belgium (“WSB”), as reflected in Orange S.A.’s statutory accounts at December 31, 2002. These charges mainly reflect the loss in value of WSB’s underlying investments in MobilCom, Wind and Orange Nederland N.V. Given the
expected net taxable profits of the French tax group in the coming years, Orange recognized a net exceptional deferred tax credit of
€
2,684 million, representing the net present value of the expected tax savings based on the utilization of ordinary tax losses generated through the reorganization. Part of these tax losses have been utilized against the
taxable profits generated by the French tax group during 2003, resulting in a deferred tax charge of
€
798 million. Based on changes
in deferred taxes on temporary differences during the period, Orange recorded a net deferred tax gain of
€
1,861 million.
As a result of the public exchange offer, at December 31, 2003, Orange was directly
and indirectly held over 95% by France Telecom S.A., a French company subject to corporate income taxes.
Therefore, as of January 1, 2004, the members of Orange’s tax group may elect to file a consolidated tax
return with France Telecom S.A.. This election was filed during January 2004.
Wanadoo
S.A. Consolidated Tax Group
Wanadoo S.A. and its French
subsidiaries have had their own consolidated tax regime since 2001.
In
the Wanadoo tax consolidation group, deferred tax assets related to tax loss carry forwards had been fully provided for at December 31, 2002. At December 31, 2003, Wanadoo recognized a deferred tax gain of
€
357 million, net of the discounting effect, corresponding to the tax gain expected in the future as a result of the use of tax losses. Recognition of this gain was due
to the outlook of future profitability for the French companies included in the tax consolidation group. Taxable income forecasts based on Wanadoo’s business plans show that the tax group should be able to recover its tax losses within a period
of 3 to 4 years. Part of these tax losses have been offset against the taxable profits generated by the French tax group during 2003, resulting in a deferred tax charge of
€
85 million.
During 2001
and 2002, Pages Jaunes was subject to a tax audit relating to fiscal years 1998 and 1999. The company feels that it has strong arguments to counter the tax reassessments still disputed and intends to rely on these arguments in the ensuing
litigation.
Further to a review of the taxation methods applicable to
revenues received by Wanadoo S.A. during 2000 and deducted for tax purposes under the parent-subsidiary tax regime, on September 17, 2003 the tax authorities sent a tax reassessment to Wanadoo S.A., challenging the application of the
parent-subsidiary regime for the revenues generated for Wanadoo S.A. on the purchase by two of its subsidiaries of their treasury shares. The risk relating to this tax reassessment represents the payment of an additional
€
18 million in tax, including late payment interest at December 31, 2003 and the possible loss of
€
25 million in tax loss carryforwards from 2000 used in 2002. The company has contested this reassessment but the tax authorities are maintaining their claim. Wanadoo
S.A. intends to take the issue to the administrative courts to contest the position taken by the tax authorities. For reasons of prudence, the company has recorded a provision for the full amount of the tax risk.
5.2.3.5 E
MPLOYEE
PROFIT
SHARING
Pursuant to the Act of July 26, 1996 and French labor legislation, France Telecom has been subject to employee profit sharing requirements since January 1, 1997.
The profit sharing agreement, signed with France Telecom’s labor unions, includes France Telecom’s French subsidiaries whose capital is owned, directly or indirectly, at more than 50%.
The charge, calculated at December 31, 2003 according to the terms and conditions of
the applicable agreement amounted to
€
127 million at December 31, 2003, compared to
€
148 million at December 31, 2002.
5.2.3.6 N
ET
INCOME
/(
LOSS
)
FROM
INTEGRATED
COMPANIES
Net income/(loss) from integrated companies for the period ended December 31, 2003 was
€
6,710 million, compared to a loss of
€
12,809 million
for the period ended December 31, 2002.
5.2.3.7 E
QUITY
IN
NET
INCOME
/(
LOSS
)
OF
AFFILIATES
For the period ended December 31, 2003, equity in net income/(loss) of affiliates amounted to a loss of
€
168 million, compared to a loss of
€
367
million a year earlier.
This
€
199 million improvement was due mainly to the following:
n
The significant improvement in the equity from the net income of Wind between 2002 and 2003, which improved from a loss of
€
305 million to a loss of
€
70 million (a gain of
€
235 million). This gain was due to the sale of Wind completed in July 2003;
n
The improvement in the equity from the net income of BITCO/TA Orange, which improved from a loss of
€
80 million to a loss of
€
68 million (an improvement of
€
12 million); and
n
The impact of the full consolidation of TP Group from April 1, 2002, previously accounted for under the equity method. A loss of
€
6 million had been recorded at its consolidation.
Conversely, earnings of
€
24 million were
reported on Eutelsat in 2003, compared to earnings of
€
70 million reported for the period ended December 31, 2002 (a negative impact
of
€
46 million). The sale of Eutelsat was completed on April 28, 2003, and had been agreed upon on February 4, 2003.
Completion of significant
financial investments in connection with the Group’s international growth, especially in 2000, generated a significant volume of goodwill. The amount of the provisions for goodwill amortization (excluding exceptional goodwill amortization) at
December 31, 2003, was
€
1,677 million, compared to
€
2,352 million at December 31, 2002. Amortization, over 20 years, of such goodwill in 2003 principally involved:
n
Orange for an amount of
€
1,226 million, including Orange PCS for
€
1,030 million and OCH for
€
78 million;
n
Wanadoo for an amount of
€
241 million, including Wanadoo Espana (eresMas)
for
€
81 million, and Freeserve for
€
74 million;
n
TP Group for an amount of
€
132 million;
n
Equant for an amount of
€
33 million.
The significant reduction between 2002 and 2003 was due to exceptional goodwill
amortization recorded for the period ended December 31, 2002 (for Equant, OCH, and JTC, see “– Exceptional Goodwill Amortization”) and the decline of the pound sterling.
For information regarding risks related to goodwill, see “Item 3. Key Information – 3.3.1 Risk Factors Relating to France
Telecom’s Business – France Telecom recorded significant goodwill following the acquisitions it made between 1999 and 2002. Accelerated amortization of this goodwill may be required, which could have a material negative impact on France
Telecom’s results”.
Exceptional Goodwill Amortization
France Telecom conducted a review of goodwill values at December 31, 2003. Goodwill
was written down by way of exceptional amortization in an amount of
€
1,137 million as follows:
n
Freeserve for
€
447 million (
€
318 million for the group share) bringing the net book value of the company at the closing exchange rate to
€
782 million for the group share. This impairment resulted from an increase in the growth potential (penetration rates, rapid expansion of broadband, development of
distribution networks);
n
QDQ Media for
€
245 million (
€
174 million for the group share) bringing the net book value of the company to
€
17 million for the group share. The limited growth of revenues achieved, in addition to the hazards of the persisting difficult economic and competitive environment, as seen during 2003, led to a revision of the
business plan in 2002;
n
Mauritius Telecom for
€
143 million for the group share, bringing the net
book value at the closing exchange rate of Mauritius Telecom and its subsidiaries to
€
86 million. This impairment resulted from a
revision of the business plan, particularly in relation to an unfavorable regulatory development compared to the existing regulations at the time of the acquisition of the interest (the early opening of fixed line telephony in 2003);
n
BITCO / TA Orange for
€
287 million. This impairment is due to the
re-evaluation of the book value of BITCO shares, which were evaluated on the basis of the economic conditions imposed on TA Orange Ltd., pursuant to the concession contract it operates by. This revealed the uncertainties surrounding the opening of
the telecommunications market in Thailand and the potential economic consequences for TA Orange Ltd. In addition, the book value of BITCO was brought to zero, particularly following ongoing discussions with Orange’s partners in the share
capital of BITCO. See “– 5.7.1 Subsequent Events – Reductions of Orange’s stake in BITCO (Thailand)”.
In the context of goodwill review of the main sub-groups, the perpetual growth rates and discount rates applied to the expected cash flows on the basis of economic
assumptions and forecasted operating conditions used by France Telecom for the main entities in each of the Group’s businesses are as follows:
The decrease in the perpetual growth rate for Pages Jaunes (Wanadoo – Directories) reflected the increase in
value of the long-term effects of broadband penetration on revenues from paper directories, as was demonstrated during 2003 in those countries where a high penetration rate for broadband affected the revenues of those companies in the directories
sector.
At December 31, 2003, the sensitivity of value in use to an
independent change of one point in the perpetual growth rate or discount rate, compared to the excess of estimated value in use over carrying value is as follows (France Telecom group share):
Excess of value in use
over carrying value
Impact of a one point decrease/increase
in the
(
€
billions)
Perpetual growth rate
Discount rate
Orange
12.0
+6.4/-4.6
-7.6/+10.5
TP Group
1.0
+0.6/-0.4
-0.6/+0.8
Equant
0.1
+0.1/-0.1
-0.1/+0.2
Wanadoo – Internet
4.0
+0.4/-0.3
-0.6/+0.8
Wanadoo – Directories
2.1
+0.2/-0.2
-0.3/+0.4
At December 31, 2002,
exceptional amortization of goodwill amounted to
€
5,378 million, including Equant for
€
4,375 million, OCH in Switzerland for
€
872 million
and JTC in Jordan for
€
131 million.
5.2.3.9 N
ET
INCOME
/(
LOSS
)
OF
THE
CONSOLIDATED
GROUP
Net income/(loss) of the consolidated group was
€
3,728 million at December 31, 2003, compared to a loss of
€
20,906 million at December 31, 2002.
5.2.3.10 N
ET
INCOME
/(
LOSS
)
Taking into consideration minority interests, which amounted to an expense of
€
522 million at December 31, 2003, compared to an expense of
€
170 million a year earlier,
consolidated net income/(loss) was
€
3,206 million in 2003, compared to a loss of
€
20,736 million in 2002.
The comparison of the 2002 and 2001 periods in this section is broken down into
three main items : (i) a presentation of Group revenues through operating income, with a discussion of Group capital expenditures and financial investments, (ii) an analysis by segment of the principal operating income figures and investments in
tangible and intangible assets and (iii) a presentation of Group operating income through net income.
5.3.1 F
ROM
R
EVENUES
TO
O
PERATING
I
NCOME
AND
C
APITAL
E
XPENDITURES
AND
F
INANCIAL
I
NVESTMENTS
OF
THE
G
ROUP
The following table sets forth the figures relating to revenues and operating income and details by item France Telecom’s total operating expenses:
(
€
millions)
Years ended December 31,
Variations
2002
historical
% of
revenues
2001
historical
% of
revenues
2002/2001
historical
Revenues
46,630
43,026
8.4
%
Cost of services and products sold
(18,558
)
39.8
%
(17,619
)
40.9
%
5.3
%
Selling, general and administrative expenses
(12,579
)
27.0
%
(12,520
)
29.1
%
0.5
%
Research and development expenses
(576
)
1.2
%
(567
)
1.3
%
1.6
%
OPEX
(31,713
)
68.0
%
(30,706
)
71.4
%
3.3
%
Operating income before depreciation and amortization
14,917
32.0
%
12,320
28.6
%
21.1
%
Depreciation and amortization
(7,910
)
17.0
%
(6,910
)
16.1
%
14.5
%
Amortization of actuarial adjustments the early retirement plan
(199
)
0.4
%
(210
)
0.5
%
(5.3
%)
Total operating expenses
(39,822
)
85.4
%
(37,826
)
87.9
%
5.3
%
Operating income
6,808
14.6
%
5,200
12.1
%
30.9
%
Total operating expenses as a
percentage of overall revenues decreased from 87.9% at December 31, 2001, to 85.4% at December 31, 2002.
5.3.1.1 R
EVENUES
The
following table presents for 2002 and 2001, the contributive revenues of each of the Group’s segments (excluding intra-group revenues):
(
€
millions)
Years ended December 31,
Variations
2002
2001
2002/2001
historical
historical
historical
Orange segment
15,410
13,495
14.2
%
Wanadoo segment
1,935
1,449
33.5
%
Fixed Line, Distribution, Networks, Large Customers and Operators segment
20,637
21,595
(4.4
)%
Equant segment
2,842
2,131
33.3
%
TP Group segment
3,471
0
Other International segment
2,335
4,355
(46.4
)%
Total Group revenues
46,630
43,026
8.4
%
Revenues for the Group
increased 8.4% due to the growth of wireless, international and Internet activities and despite the decline of fixed line revenues in France. The share of revenues from international activities more than doubled since December 31, 2000, reaching
41.2% at December 31, 2002, compared to 35.8% at December 31, 2001.
5.3.1.2 F
ROM
REVENUES
TO
OPERATING
INCOME
BEFORE
DEPRECIATION
AND
AMORTIZATION
Operating Expenses Before Depreciation and Amortization
Following the launch of the “Ambition FT 2005” Plan (see “– 5.1.2
The ‘Ambition FT 2005’ Plan”) on December 4, 2002, France Telecom established a set of objectives connected with the TOP operational improvements program, the expected effects of which led the Group to analyze operating expenses
before depreciation and amortization by type: external purchases and other
expenses, (the sum of which corresponds to operating expenses before depreciation and amortization excluding personnel costs) and personnel costs. See Note 5 to the
Consolidated Financial Statements for information regarding how the presentation of operating expenses before depreciation and amortization by type relates to the presentation of such expenses by destination.
Operating expenses before depreciation and amortization excluding personnel costs
amounted to
€
21,677 million at December 31, 2002 and included purchases of materials and merchandise in the amount of
€
3,620 million, payments to third-party operators in the amount of
€
6,758 million, studies, fees and nontechnical subcontracting in the amount of
€
1,640 million and costs of advertising, promotion, patronage and brand communication and sponsoring in the amount of
€
1,232 million.
On a historical basis, operating
expenses before depreciation and amortization of actuarial adjustments of the early retirement plan increased 3.3% between 2001 and 2002, for growth in revenues of 8.4%.
Essentially, this corresponded to changes in consolidation and significant developments, including:
n
consolidation of TP Group as of April 1, 2002;
n
impact of Equant in its new consolidation as of July 1, 2001;
n
inclusion of Digita in the consolidation as of July 1, 2001;
n
consolidation of QDQ Media as of April 1, 2001;
n
full consolidation of eresMas (rebranded Wanadoo Espana as of January 1, 2003, following the merger) which occurred on November 1, 2002;
n
consolidation of Internet Telecom as of January 1, 2002; and
n
consolidation of Freeserve as of March 1, 2001.
Cost of Services and Products Sold
The cost of services and products sold included all direct and indirect production costs of supplying and maintaining services to customers, including connections,
transportation, supervision and maintenance, as well as costs of services and products purchased for resale, including amounts repaid to international telecommunications operators.
The table below sets forth the change in costs of services and products sold between 2001 and 2002:
(
€
millions)
Year ended December 31,
Variations
2002
2001
2002/2001
historical
historical
historical
Cost of services and products sold
(18,558
)
(17,619
)
5.3
%
Overall, the cost of services
and products sold increased 5.3% between 2001 and 2002 on a historical basis. This increase essentially corresponded to the changes in consolidation described above, which had a negative impact on the cost of services and products sold.
In addition to the increase resulting from the impact of consolidations, other
factors linked to the increase had to do with the development of:
n
the Group’s activities relating to wireless networks in the United Kingdom, France and some international subsidiaries, primarily Orange Romania and ECMS in Egypt;
n
fixed line services internationally, primarily Uni2 in Spain; and
n
international Internet activities, notably in the United Kingdom and in Spain.
This increase was partially offset by several factors, particularly:
n
gains in productivity made in the fixed line network in France; and
n
cost savings realized by Equant resulting from consolidation of the networks of Global One and Equant, which made it possible, by realizing synergies, to optimize networks costs and reduce
purchases of external capacity.
The table below sets forth the change in selling, general and administrative expenses between 2001 and 2002:
(
€
millions)
Year ended December 31,
Variations
2002
2001
2002/2001
historical
historical
historical
Selling, general and administrative expenses
(12,579
)
(12,520
)
0.5
%
On a historical basis, selling,
general and administrative expenses increased slightly by 0.5%. The increase resulted mainly from the consolidation effects set forth in the introduction to this section.
Aside from the increase due to consolidation effects, selling, general and administrative expenses also reflected the growth in
certain activities:
n
in international wireless activities (notably Orange Communications S.A. in Switzerland and Orange Slovensko), and in France and the United Kingdom for the part excluding acquisition costs;
and
n
in Internet activities.
Conversely, savings partially offset these increases. These savings reflected primarily the cost-cutting efforts made by the Group, especially:
n
the decrease in total costs of acquiring mobile telephone subscribers in the United Kingdom and in France, resulting from instituting a policy of promoting customer loyalty rather than
increasing the customer base;
n
the savings made in some wireless subsidiaries, such as Dutchtone in The Netherlands, Mobistar in Belgium and Orange Denmark, explained also in part by the decrease in total costs of
acquiring subscribers;
n
the cost-cutting done after the savings program was instituted, and the plan for restructuring the TP Group; and
n
the synergies realized by Equant by integrating sales forces, which made it possible to streamline Equant’s administrative and selling expenses.
Research and Development Expenses
In December 2002, research and development expenses amounted to
€
576 million compared to
€
567 million in December
2001 on a historical basis.
This maintenance of research and
development expenses allowed France Telecom to better prepare itself for its future markets, principally based on the activity of its research and development center, FTR&D. With respect to the various entities of the group (branches and
subsidiaries), FTR&D recentered its activity, concentrating on two areas:
n
the expansion of its activity for the international subsidiaries of the Group, such as Orange and Wanadoo; and
n
the establishment of skills centers in fields such as messaging, e-Merchant, IP networks, security, development of high speed wireless Internet technology (Wifi).
Therefore, France Telecom’s research and development activity is in line with the
acceleration observed in the core of the industry since 2001.
Overall,
France Telecom has continued its efforts in research and development within the Group compared to 2001, while pursuing its internationalization through cooperation with TP S.A., for example, but also through its laboratories abroad (California,
Japan, London, and Boston in synergy with Orange).
The table below sets forth the figures relating to personnel expenditures and personnel costs:
(
€
millions)
Year ended December 31,
Variations
2002
2001
2002/2001
historical
historical
historical
Wages and salaries
(7,535
)
(6,889
)
9.4
%
Social charges
(2,705
)
(2,593
)
4.3
%
Total personnel expenditures
(10,240
)
(9,482
)
8.0
%
Capitalized personnel costs
(1)
431
356
(21.1
)%
Taxes on salaries
(227
)
(282
)
(19.5
)%
Total personnel costs
(2)
(10,036
)
(9,408
)
6.7
%
(1)
Capitalized personnel costs correspond to personnel expenditures included in the cost of assets produced by France Telecom.
(2)
Not including employee profit sharing. This amount corresponds to personnel costs included in operating income before depreciation and amortization.
The personnel expenditures presented below do not include statutory employee
profit-sharing, or the charges relating to the updating or the change in actuarial assumptions relating to the early retirement plan:
(
€
millions)
Year ended December 31,
Variations
2002
2001
2002/2001
historical
historical
historical
Personnel expenditures
France Telecom S.A.
(5,577
)
(5,644
)
1.2
%
Domestic subsidiaries
(1,401
)
(1,285
)
(9.0
)%
Total France
(6,978
)
(6,929
)
(0.7
)%
International subsidiaries
(3,262
)
(2,553
)
(27.8
)%
Group Total
(10,240
)
(9,482
)
(8.0
)%
Year ended December 31,
Variations
2003
2002
2003/2002
historical
historical
historical
Average number of employees (full-time equivalent)
The 8% increase in personnel expenditures between December 31, 2001 and December 31, 2002 was mainly due to the
increase in France Telecom’s international activities.
The 16.5%
increase in the Group’s average number of full-time equivalent employees was the result of a 62.6% increase that occurred internationally (mainly due to the consolidation of TP Group). The average number of full-time equivalent employees in
France decreased 2.9%.
France Telecom S.A.
The average number of employees of France Telecom S.A. decreased 4.7% between 2001 and
2002. The decrease was due mainly to employee departures linked to the early retirement plan. Between the implementation of the early retirement plan in September 1996 and December 31, 2002, 21,598 people chose to accept early retirement under the
plan (excluding other preexisting early departure programs), including 4,205 employees in 2002.
Total personnel expenditures of France Telecom S.A. decreased by nearly 1.2% between 2001 and 2002. This decrease was due mainly to a reduction in headcount and
gains in productivity that occurred in network activities and support services, which allowed for the reassignment of personnel to fast-growing subsidiaries. The increase in profit-sharing, which resulted from the level of operating income
indicators, increases in salary due to general public sector measures, and the increase in the base salaries of employees under collective bargaining, partially offset the impact of the reduction in headcount.
Subsidiaries in France
The average number of employees of subsidiaries in France, which increased by 7.4%
between 2001 and 2002 (excluding the impact of the spin-off of Globecast France) was due to organic and external growth in wireless telephony and the Internet.
The change in personnel costs of subsidiaries in France was mainly due to the change in headcount.
International Subsidiaries
The 62.6% increase in the average number of employees in international subsidiaries between 2001 and 2002 reflected the increased internationalization of the Group.
This growth was primarily due to the following effects of
consolidation:
n
the consolidation of TP Group as of April 1, 2002 (45,222 average number of employees); and
n
the impact of the newly consolidated Equant as of July 1, 2001 (1,932 average number of employees).
Conversely, the number of employees in the international subsidiaries reflected the impact of the equity-method consolidation of
Telecom Argentina (less 7,537 average number of employees).
The
personnel expenditures of the international subsidiaries increased by 27.8%, primarily due to the effects of consolidation mentioned above.
5.3.1.3 O
PERATING
INCOME
BEFORE
DEPRECIATION
AND
AMORTIZATION
Operating income before depreciation and amortization increased by 21.1% between 2001 and 2002, amounting to
€
14,917 million in 2002, compared to
€
12,320 million in 2001.
5.3.1.4 F
ROM
OPERATING
INCOME
BEFORE
DEPRECIATION
AND
AMORTIZATION
TO
OPERATING
INCOME
Depreciation and Amortization (excluding goodwill)
Depreciation and amortization (excluding goodwill) increased 14.5%
on a historical basis between 2001 and 2002.
This increase was due in
large part to changes in consolidation, principally concerning:
n
the consolidation of TP Group; and
n
the impact of Equant.
This growth was partially offset by:
n
the consolidation of Telecom Argentina by the equity method; and
n
a significant decrease in depreciation and amortization of fixed assets following the sale of part of the real estate holdings.
Aside from these changes in consolidation, the increase in depreciation and amortization was mainly due to the
increase in depreciation expense for wireless networks (primarily the United Kingdom, France, The Netherlands, Switzerland and Belgium). It was partially offset by the reduction in depreciation expense, notably for the fixed line telephony business
in France, due to the decreased level of capital expenditure in recent years.
Amortization of Actuarial Adjustments in the Early Retirement Plan
At December 31, 2002, the amortization of actuarial adjustments in the early retirement plan was a net charge of
€
199 million, compared to
€
210 million at December 31, 2001.
5.3.1.5 O
PERATING
INCOME
Operating income increased 30.9% between 2001 and 2002, reaching
€
6,808 million in 2002 compared to
€
5,200 million in 2001.
5.3.1.6 C
APITAL
EXPENDITURES
AND
F
INANCIAL
I
NVESTMENTS
The following table sets forth the capital expenditures and financial investments made in 2002 and 2001:
(
€
millions)
Year ended December 31,
2002
2001
historical
historical
Investments in tangible and intangible assets excluding UMTS/GSM licenses
(1)
7,441
8,091
Investments in UMTS and GSM licenses
134
873
Financial investments
(2)
2,228
4,355
(1)
See Note 4 of the Notes to the Consolidated Financial Statements.
(2)
Excluding the repurchase of treasury shares and net of cash acquired.
Investments in Tangible and Intangible Assets Excluding GSM and UMTS Licenses
Investments in tangible and intangible assets excluding licenses decreased significantly between 2001 and 2002, a decrease of 8% on a historical basis. The decrease
primarily resulted from reductions in investments made in the fixed line segments in France and outside of France.
At December 31, 2002, investments in tangible and intangible assets excluding licenses amounted to
€
7,441 million, compared to
€
8,091 million at
December 31, 2001 on a historical basis, broken down by segment as follows:
(
€
millions)
Year ended December 31,
Variations
2002
2001
2002/2001
historical
historical
historical
Orange segment
3,281
3,356
(2.2
)%
Wanadoo segment
108
111
(2.7
)%
Fixed Line, Distribution, Networks, Large Customers and Operators segment
2,243
3,107
(27.8
)%
Equant segment
392
436
(10.1
)%
TP Group segment
1,045
0
Other International segment
396
1,081
(63.4
)%
Inter-segment eliminations
(24
)
Total Group CAPEX
7,441
8,091
(8.0
)%
Investments in tangible and
intangible assets excluding licenses are described in “Item 4. Information on France Telecom – 4.3.2 Principal Activities.”
In 2002, the Group’s investments included
€
134 million for the acquisition of the following wireless licenses:
n
€
53 million for an additional payment for a GSM license in the Ivory Coast
(“Orange” segment);
n
€
35 million for the acquisition of a UMTS license in Slovakia
(“Orange” segment); and
n
€
46 million for the acquisition of a GSM license in Mali (Ikatel)
(“Other International” segment).
In 2001, the
Group’s investments included
€
873 million for the acquisition of the following wireless licenses:
n
€
151 million for the acquisition of a UMTS license in Belgium
(“Orange” segment);
n
€
104 million for the acquisition of a UMTS license in Denmark
(“Orange” segment); and
n
€
619 million for the acquisition of a UMTS license in France
(“Orange” segment).
Financial Investments
At December 31, 2002, net cash used in financial investments (excluding the purchase
of treasury shares and net of cash acquired) represented a total of
€
2,228 million. The main financial investments were as follows:
n
the exercise of the call option on all of NTL’s preferred shares held by financial institutions for $ 1.1 billion, equivalent to
€
1,092 million;
n
the purchase of approximately 103 million Orange shares, previously held by E.On, for
€
950 million, in exchange for the sale of E.On’s equity stake in OCH, formerly Orange Communications S.A., in Switzerland, to Orange S.A.. This purchase was made as part of E.On’s exercise of its put option;
n
Orange’s participation in BITCO Thailand’s capital increase for
€
69 million;
n
Orange’s participation in Wind’s capital increase in Italy for
€
48 million;
n
participation in Novis’ capital increase for
€
26 million;
n
Wanadoo’s purchase of an additional share of the minority interest in QDQ Media for
€
23 million, which raised its holding to 99%;
n
Orange’s participation in Optimus’ capital increase in Portugal for
€
20 million;
n
Orange’s acquisition of the remaining shares in Orange Communications S.A. for
€
16 million;
n
Wanadoo Portails’ purchase of the minority interests in Wanadoo Editions for
€
13 million, which raised Wanadoo Portails’ controlling stake in Wanadoo Editions to 100%;
n
the acquisition of Openet Telecom by Orange (Wirefree Services Belgium) and Orange World & Brand for
€
12 million. Openet Telecom is an Irish company that specializes in implementation and development of tools for managing customer receivables and billing for telecommunications companies; and
n
Wanadoo’s purchase of MyWeb, the Dutch Internet service provider, for
€
5 million.
The cash allocated to
financial investments was reduced by another
€
155 million, equivalent to the amount of cash acquired, of which
€
144 million represents the TP Group’s net cash at April 1, 2002 when it was fully consolidated.
In 2001, net cash used in financial investments included the following transactions:
n
payment to Deutsche Telekom for the purchase in 2000 of 18.9% of the capital of Wind for
€
2,076 million (payment recorded in other short-term debts on the balance sheet at December 31, 2000);
n
subscription in the capital increase of Wind for
€
190 million;
n
acquisition of an additional 8.93% of TP S.A. in Poland for
€
679 million,
increasing the percentage of the Group’s interest from 25% to 33.93% as of October 1, 2001;
n
subscription in the capital increase of PTK Centertel in Poland for
€
124
million;
n
acquisition by Orange of an additional 14.75% in the Swiss wireless operator Orange Communications S.A. for
€
175 million, bringing Orange S.A.’s total interest to 99.75%. An additional
€
59
million remained outstanding for payments concerning acquisitions in 2000;
purchase of shares held by Motorola (25.15%) in ECMS / Mobinil for a total net cash amount of
€
205 million, increasing the Group’s holding to 71.25%;
n
acquisition by Orange of an additional 15% of BITCO (Thailand) for
€
158
million, bringing its direct holding to 49%;
n
acquisition of 49% of Digita in Finland by TDF for
€
125 million in cash;
n
acquisition of an additional 31% of Uni2 for
€
102 million, bringing the
Group’s interest to 100%;
n
acquiring control of 86.7% of QDQ Media, of which 30%, or
€
85 million, was
paid in cash, with the balance being paid for by an exchange of Wanadoo S.A. shares;
n
lastly, other less significant investments were made in France, Spain, Germany, Sweden and Portugal, allowing the Group to strengthen its competitive position in Europe.
5.3.2 A
NALYSIS
OF
O
PERATING
I
NCOME
AND
I
NVESTMENTS
IN
T
ANGIBLE
AND
I
NTANGIBLE
A
SSETS
BY
S
EGMENT
Until December 31, 2002, France Telecom analyzed its activity according to four segments: “Orange,” “Wanadoo,” “Fixed line, voice and data services—France” and “Fixed line, voice and data
services—Outside France.”
The following table sets forth the
principal operating data according to the six segments of activity defined by the Group as of the first half of 2003 and described in “Item 5. Operating and Financial Review and Prospects – 5.2.2 Analysis of Operating Income and
Investments in Tangible and Intangible Assets by Segment”: “Orange,” Wanadoo,” “Fixed Line, Distribution, Networks, Large Customers and Operators,” “Equant,” “TP Group” and “Other
International”. The data published for the years ended December 31, 2002 and 2001 have been restated according to the six new segments of activity to enable comparability with the year ended December 31, 2003.
(
€
millions)
At December 31, 2002 (historical),
Orange
Wanadoo
Fixed Line,
Distribution,
Networks,
Large
Customers
and
Operators
Equant
TP
Group
Other
International
Inter-
segment
eliminations
Group
Total
Revenues
17,085
2,075
23,064
3,156
3,471
2,427
(4,648
)
46,630
Operating income before depreciation and amortization
5,146
90
7,199
200
1,453
784
45
14,917
Depreciation and amortization
(2,364
)
(96
)
(3,504
)
(521
)
(800
)
(506
)
(119
)
(7,910
)
Amortization of actuarial adjustments in the early retirement plan
(199
)
0
(199
)
Operating income
2,782
(6
)
3,496
(321
)
653
279
(75
)
6,808
CAPEX
3,281
108
2,243
392
1,045
396
(24
)
7,441
UMTS/GMS licenses
88
–
–
–
–
46
0
134
Operating income before depreciation and amortization – CAPEX
1,865
(18
)
4,956
(192
)
408
388
68
7,475
Average number of employees (full-time equivalent)
Fixed Line,
Distribution,
Networks,
Large
Customers
and
Operators
Equant
TP
Group
(1)
Other
International
Inter-
segment
eliminations
Group
Total
Revenues
15,087
1,563
24,054
2,392
4,495
(4,565
)
43,026
Operating income before depreciation and amortization
3,288
(64
)
7,757
(177
)
1,487
29
12,320
Depreciation and amortization
(1,848
)
(89
)
3,494
(324
)
1,042
(113
)
(6,910
)
Amortization of actuarial adjustments in the early retirement plan
(210
)
0
(210
)
Operating income
1,440
(153
)
4,053
(501
)
445
(84
)
5,200
CAPEX
3,356
111
3,107
436
1,081
0
8,091
UMTS/GMS licenses
873
0
0
0
0
0
873
Operating income before depreciation and amortization – CAPEX
(68
)
(174
)
4,650
(613
)
406
28
4,229
Average number of employees (full-time equivalent)
29,970
6,588
136,335
9,996
23,295
0
206,184
(1)
TP Group has been consolidated by the full consolidation method since April 1, 2002. Consequently, there are no historical figures for TP Group in 2001.
Unless otherwise indicated, the segment information presented below is before
inter-segment eliminations.
5.3.2.1 O
RANGE
SEGMENT
Representing 44.4 million active customers in its majority-owned subsidiaries at December 31, 2002, the “Orange” segment included most of France Telecom’s wireless activities under its subsidiary Orange S.A.
Operating Indicators for the Orange Segment
The following table sets forth the main operating indicators of the “Orange”
segment at December 31, 2002 and 2001 on a historical basis.
(
€
millions)
Year ended December 31,
Variations
2002
historical
2001
historical
2002/2001
historical
Revenues
17,085
15,087
13.2
%
Of which network revenues
15,488
13,434
15.3
%
Operating income before depreciation and amortization
5,146
3,288
56.5
%
Operating income before depreciation and amortization / Revenues
30%
22%
Operating income
2,782
1,440
93.1
%
CAPEX
3,281
3,356
(2.2
)%
UMTS/GMS licenses
88
873
(89.9
)%
Operating income before depreciation and amortization – CAPEX
1,865
(68
)
ns
Average number of employees (full-time equivalent)
30,876
29,970
3.0
%
The operating indicators for
Orange in 2002 were affected by the transfer on July 1, 2002 of mobile activities in Egypt (Mobinil / ECMS) from the “Other International” segment to the “Orange” segment.
On a historical basis, Orange’s revenues increased by 13.2% between 2001 and 2002. This increase was in line with the steady growth of 15.3% in network
revenues, and were partially offset by a decline in equipment sales due to the increasing maturity of the markets in which Orange operates (particularly in the United Kingdom). The growth in network revenues was mainly caused by an increase in the
number of customers, which is supported by the integration and roll-out of the Orange brand. At December 31, 2002, Orange’s customer base included 44.4 million active customers in its majority-owned interests, representing an increase of 13.0%
in one year. The use of “non-voice” services continued to grow and generated
€
1.67 billion in revenues in 2002, or 10.8%
of network revenues. In France, “non-voice” services represented 8.9% of network revenues, compared to 6.7% in 2001. In the United Kingdom, 14.3% of network revenues came from “non-voice” services, compared to 11.2% in 2001.
In 2002, network revenues represented 90% of Orange’s total
revenues. At the same time, the favorable trend in average annual revenue per user (ARPU) was maintained, especially in France and the United Kingdom. This represented a refocusing on higher value-added users and the development of
“non-voice” services such as SMS, WAP, GPRS and information on demand.
In France, the 11% increase in Orange’s revenues, linked to the sustained growth in network revenues, was primarily due to the 8% increase in the number of registered customers, which increased from 17.8 million at December 31, 2001 to
19.2 million at December 31, 2002. Revenues for Orange France were affected by the approximately 15% decrease in the price of calls from fixed line networks to the Orange France network. ARPU amounted to
€
377 at December 31, 2002, a 3.8% decrease during 2002 compared to an 8.0% decrease during 2001. This improvement reflected the favorable impact of the increase in the
share of contract customers for whom ARPU in 2002 was 3.4 times greater than that for prepaid customers. Contract customers represented 56% of overall active users at December 31, 2002, compared to 53% a year earlier. In addition,
“non-voice” ARPU grew 27%, increasing from
€
26 at December 31, 2001, to
€
33 at the end of 2002.
In the United Kingdom, Orange posted growth of 12% in 2002 compared to 2001. This increase can be explained by the increase in the number of active customers, which
reached 13.3 million at December 31, 2002, compared to 12.4 million in 2001 (an increase of 7%), and by the increase in the use of data services and the emphasis on acquiring and instilling loyalty in customers who generate high revenues. The
increase of revenues was due, among other things, to the increase of ARPU, which benefited from the development of “non-voice” services. Furthermore, this increase reflected the growth in average annual revenue, which increased between
2001 and 2002.
“Orange Rest of World”, which includes nearly
all of Europe, experienced very rapid growth, especially in Belgium, Switzerland and Slovakia. In total, revenues from “Orange Rest of World” grew 24% at December 31, 2002 compared to the 2001 figures, reflecting primarily an increase in
the number of customers, and the consolidation effect linked to the transfer of the Egyptian subsidiary (Mobinil / ECMS) to Orange.
Operating Income Before Depreciation and Amortization
Operating income before depreciation and amortization for the “Orange” segment increased by 56.5% on a historical basis to reach
€
5,146 million in 2002 compared to
€
3,288 million in 2001. This sharp increase reflected the increase in operating profitability throughout the segment, as the rate of margin of operating income before depreciation and amortization over network revenues
increased from 24% at December 31, 2001 to 33% at December 31, 2002. In fact, the reduction in total acquisition costs and the distribution of fixed costs over a growing customer base enabled Orange to increase its operating margin.
This increase in Orange operating profitability can be explained by a significant drop
in total acquisition costs, which decreased 25% in France and 17% in the United Kingdom. This reduction was partially offset by the increase in loyalty costs, which grew 48% in France and 32% in the United Kingdom.
In France, the increase in the termination rate, which rose from 20.6% to 21.6%, was
due to the success of the strategy of moving prepaid customers toward contracts, and increasing the termination rate for prepaid offers. Furthermore, this increase was partially offset by the reduction in the flat-rate termination rate, partially
showing the benefit of switching to the Orange brand. In the United Kingdom, the termination rate declined from 18.4% in 2001 to 17.5% in 2002.
Outside of France and the United Kingdom, the increase in operating income before depreciation and amortization reflected the improvement in profitability derived
from the organic growth of Orange subsidiaries, mainly in The Netherlands, Belgium, and Denmark.
Investments in Tangible and Intangible Assets Excluding UMTS and GSM Licenses
Excluding UMTS and GSM licenses, investments in tangible and intangible assets by the “Orange” segment decreased slightly to
€
3,281 million at December 31, 2002, compared to
€
3,356 million at December 31, 2001 (a decline of
2.2%).
In France, Orange’s expenses related to investments in tangible assets decreased slightly between December 31,
2001 and December 31, 2002. This decrease was due to a drop in second generation expenditures and to minimized third generation (UMTS) expenses.
In the United Kingdom, expenses related to investments in tangible assets also decreased compared to December 31, 2001, reflecting a slowdown in second generation
expenses and expenses for acquisition and preparation of sites for the third generation telecommunication networks, which were less significant than expected.
Orange’s expenses related to investments in intangible assets in Rest of World decreased significantly in certain countries, offset by the impact of the
roll-out of a new network in Sweden. However, Orange discontinued its investments in Sweden following the announcement in December 2002 of its withdrawal from that market.
Investments in intangible assets in 2001 included the acquisitions of UMTS licenses in Belgium for
€
151 million, in Denmark for
€
104 million
and in France for
€
619 million. At December 31, 2002, Orange’s investments included
€
53 million for a supplemental payment for the acquisition of a GSM license in the Ivory Coast, and
€
35 million for the acquisition of a UMTS license in Slovakia.
Operating Income Before Depreciation and Amortization Less CAPEX
Operating income before depreciation and amortization less CAPEX increased significantly between 2001 and 2002, from negative
€
68 million in 2001 to
€
1,865 million in 2002. This
growth resulted from the positive trend in operating income before depreciation and amortization combined with a decrease in investments in tangible and intangible assets, excluding licenses.
5.3.2.2 Wanadoo segment
At December 31,
2002, Wanadoo included the Internet and directories activities of the France Telecom Group and targeted both the consumer and business markets. Wanadoo was the second largest Internet access provider in Europe with more than 8.5 million active
subscribers at December 31, 2002 and the third largest directories group in Europe with nearly
€
880 million in revenues at December
31, 2002. Present throughout the entire value chain of Internet activities, Wanadoo included access offerings (dial-up Internet access, ADSL and cable), and services and content (portals, directories, e-Merchant and pay services).
Wanadoo’s activities include:
n
“Access, Portals and e-Merchant” activities and
n
“Directories”.
Operating Indicators for the Wanadoo Segment
The
following table sets forth the main operating indicators for the “Wanadoo” segment at December 31, 2002 and 2001 on a historical basis:
(
€
millions)
Year ended December 31,
Variations
2002
historical
2001
historical
2002/2001
historical
Revenues
2,075
1,563
32.7%
Operating income before depreciation and amortization
90
(64
)
ns
Operating income before depreciation and amortization / Revenues
4%
(4)%
Operating income
(6
)
(153
)
96.1%
CAPEX
108
111
(2.3)%
Operating income before depreciation and amortization – CAPEX
(18
)
(174
)
89.7%
Average number of employees (full-time equivalent)
6,761
6,588
2.6%
The main changes in the scope
of consolidation that occurred between 2001 and 2002 concerning the Wanadoo segment were:
n
consolidation of the activities of Freeserve (United Kingdom) as of March 1;
n
consolidation of the activities of QDQ Media (Spain) as of April 1, 2001;
n
the effect of full consolidation of eresMas, which was rebranded Wanadoo Espana on January 1, 2003, following the merger on November 1, 2002;
the transfer of Wanadoo Services Pro to the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment as of January 1, 2002; and
n
the removal of Telelistas from the scope of consolidation, which occurred on January 1, 2002.
Revenues
At December 31, 2002, revenues for the “Wanadoo” segment increased 32.7% on a historical basis compared to December 31, 2001, due to a certain extent to
the changes in the scope of consolidation indicated above. The 2.5 million increase in the number of active customers in 2002 (40.7% increase in one year) reflected partly the internal growth of 1.5 million customers, but also the contribution of 1
million customers resulting from the acquisition of the Spanish ISP eresMas, consolidated since November 2002 and rebranded Wanadoo Espana on January 1, 2003, following the merger.
The growth in revenues from access services was generated, in part, from the growth in average revenues per user (ARPU), which
reflected the increasing share of more lucrative offers (ADSL and “all-inclusive” low speed packages). The number of broadband customers amounted to 1.374 million at December 31, 2002, of which 1.187 million ADSL subscribers.
The increase in revenues was due, to a large extent, to the increased expansion of
“Access, portals and e-Merchant” services, which had revenues that increased 67%. Furthermore, international activities accounted for 32% of revenues from “Access, portals and e-Merchant” activities in 2002, compared to 26% in
2001.
In addition, revenues from the “Directories”
sub-segment increased 4%, generated by Pages Jaunes and the impact of the consolidation of QDQ Media over the entire year.
The increase in revenues from “Access, portals and e-Merchant” activities was due mainly to the expansion in Internet access services under the effect of:
n
an annual increase in the number of active customers at December 31, 2002, of 41%;
n
the favorable change in the mix of offerings, which significantly increased the proportion of paying offerings, particularly the most profitable offerings, such as the Wanadoo
Intégrales offerings (low-speed access services including a subscription fee) and high-speed offerings, specifically ADSL access. These factors led to an increase in average revenue per user (ARPU).
n
the expansion of e-Merchant activities, for which revenues increased 39% between 2001 and 2002.
At the same time, a significant portion of the increase in revenues from “Directories” activities was due to the increase in
revenues from online directories in France.
Operating Income Before Depreciation and
Amortization
Ahead of its expansion plan, in 2002 Wanadoo posted
operating income before depreciation and amortization of
€
90 million, compared to negative
€
64 million one year earlier, on a historical basis. This increase highlighted the significant improvement in operating profitability of the “Wanadoo” segment.
The “Access, Portals and e-Merchant” sub-segment had negative
operating income before depreciation and amortization, but it improved significantly by almost 43% compared to the end of December 2001 (negative
€
166 million at December 31, 2002 compared to negative
€
290 million at December 31, 2001). This increase was
obtained primarily by the significant improvement in the profitability of access activities. From December 31, 2001 to December 31, 2002, the cost of services and products sold increased by 40% while revenues increased by 67%, thereby highlighting
the sensitivity of the activities to volume, especially with regard to access activities. Access activities benefited from better network rates for low-speed offerings, which were partially offset by an increase in high-speed offerings and by an
increase in costs specific to the access-provider function, which was less than the increase in revenues. The improvement in the profitability of “Access, Portals and e-Merchant” activities was also due to marketing and selling
cost-controls, in a climate marked by the launch of high-speed offerings, which generated higher unit acquisition costs.
“Directories” activities continued to have very positive operating income before depreciation and amortization, which increased more than 21% compared to
December 31, 2001 to reach
€
289 million in 2002. This growth highlighted the major productivity gains made in directories activities
in France. Between December 31, 2001 and December 31, 2002, the cost of services and products sold decreased by 15% while revenues increased by 4%.
Investments in tangible and intangible assets of the “Wanadoo” segment decreased slightly from 2001 to 2002 (a decrease of
2.3%). The “Access, Portals and e-Merchant” sub-segment increased its level of capital spending, in production capacity particularly, to accommodate growth in the number of customers and audience, while capitalized production of
audiovisual activities declined, which explains the reduction reported compared to 2001. Investments in “Directories” activities remained stable.
Operating Income Before Depreciation and Amortization Less CAPEX
Operating income before depreciation and amortization less CAPEX increased significantly by 89.5%, from negative
€
174 million in 2001 to negative
€
18 million in 2002.
This increase reflected the sharp increase in operating income before depreciation and amortization combined with the stability of investments in tangible and intangible assets by Wanadoo.
5.3.2.3 F
IXED
L
INE
, D
ISTRIBUTION
, N
ETWORKS
, L
ARGE
C
USTOMERS
AND
O
PERATORS
SEGMENT
The “Fixed Line, Distribution, Networks, Large Customers and
Operators” segment combines the fixed line services of the France Telecom Group primarily in France, particularly fixed line telephony, services to operators, services to businesses, cable television, sale and rental of equipment, and support
functions (including research and development services) and the information systems division. On December 13, 2002, France Telecom sold its holding in TDF.
The fixed line telephone activities of France Telecom were affected by the gradual opening of its various services to competition: long-distance communications were
opened to competition on January 1, 1998, while the opening of the local communications market occurred on January 1, 2002. Marked at the beginning of 2002 by the impact of the automatic transfer to its competitors of the local traffic of customers
who had preselected their operators, the France Telecom’s market share for local traffic was much more favorable in the second half of the year. According to France Telecom’s estimates, market share for local traffic was 80.9% in December
2002, compared to 82.7% in June 2002 and 96.8% in December 2001.
France
Telecom’s market share for long-distance communications (domestic and international) stabilized in 2002 at its 2001 levels; France Telecom estimated that this was 64.3% in December 2002 compared to 64.6% in December 2001.
At the same time, the unbundling of the local loop implemented. At February 1, 2003,
there were 10,440 unbundled lines including 9,027 partially unbundled lines and 1,413 fully unbundled lines. Partial unbundling allows third-party operators to market ADSL offerings.
Operating Indicators for the Fixed Line, Distribution, Networks, Large Customers and Operators Segment
The following table sets forth the primary operating indicators for the “Fixed
Line, Distribution, Networks, Large Customers and Operators” segment as of December 31, 2002 and 2001 on a historical basis:
(
€
millions)
Year ended December 31,
Variations
2002
historical
2001
historical
2002/2001
historical
Revenues
23,064
24,054
(4.1)%
Operating income before depreciation and amortization
7,199
7,757
(7.2)%
Operating income before depreciation and amortization / Revenues
31%
32%
Operating income
3,496
4,053
(13.7)%
CAPEX
2,243
3,107
(27.8)%
Operating income before depreciation and amortization – CAPEX
4,956
4,650
6.6%
Average number of employees (full-time equivalent)
131,311
136,335
(3.7)%
The changes in the scope of
consolidation that occurred between 2001 and 2002 included:
n
the transfer of Wanadoo Services Pro from the “Wanadoo” segment to the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment on January 1, 2002;
n
the consolidation of Internet Telecom on January 1, 2002; and
n
the consolidation of CNTP (
Compagnie Nouvelle de Traitement des Paiements
) by the equity method as of July 1, 2001, and the impact of the sale of real estate on the segment.
On a historical basis, the revenues of the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment decreased by 4.1%.
This decrease partly reflected the following factors:
n
Since January 1, 2002, France Telecom’s market share for local traffic has been marked by the impact of the automatic transfer to competitors of the local traffic of customers who have
preselected their operators. However, that decrease was much more favorable in the second half of the year: the market share of France Telecom for local traffic was 80.9% in December 2002, compared to 82.7% in June 2002 and 96.8% at the end of
December 2001.
Revenues from domestic and long distance
calling were also affected by the decline in the overall fixed line domestic calling market in France. France Telecom estimated the reduction in the overall volume of both local and long distance traffic to be 8% for 2002, compared to 5% for 2001;
this impact translated into approximately 40% of the reduction in domestic calling revenues posted in 2002.
In turn, revenues from calls to wireless users was affected in 2002 by tariff reductions of approximately 15% for calls as of April 30, 2002, which more than offset
the annual increase of 7.4% in the volume of calls. Lastly, revenues from international outgoing traffic fell by 1.4% in 2002, due to the impact of a 10% tariff reduction made in July 2001, which more than offset the 2.7% increase in the volume of
traffic.
In addition, the impact of the 13.7% decrease in traffic
volume of payphones and calling cards, related to the growth in wireless telephony services, was partially offset by the 6.4% increase in revenues per minute, resulting, in particular regarding payphones, from the increased share of calls to
wireless telephones and international calls, which are more lucrative, while France Telecom’s share of local calls steadily decreased.
With regard to operator services, national interconnection was marked in 2002 by the growth of (i) direct connection of third-party operator networks to the
subscriber switch and (ii) flat-rate interconnection of Internet access traffic, billed depending on the number of interconnected circuits, regardless of the length of calls switching from one network to another.
n
Similarly, revenues from international operator services decreased 18.0% compared to the previous year, following a decrease of 0.5% in 2001. Revenues from incoming international traffic,
which represented two-thirds of the revenues from services to international operators, decreased 16.3% due to a decrease of 14.3% in the average price of fees for incoming calls billed by France Telecom to international operators and a decrease of
2.3% in the volume of incoming calls. Revenues from transit services (leasing of circuits and re-routing of calls) decreased 21.1% in 2002 compared to a decrease of 1.9% the previous year.
n
The downward trend in Minitel revenues and revenues from low-speed Internet access (directly billed by France Telecom).
The impact of those unfavorable developments was partially offset by the following
increases:
n
The very sharp increase in 2002 in revenues from ADSL Internet access (excluding billing by Wanadoo) due to the rapid growth in ADSL connections. The number of ADSL accesses for consumers in
France (including Wanadoo ADSL access) more than tripled, amounting to 1,359,000 at December 31, 2002 compared to 408,000 one year earlier, with an increase in this growth in the fourth quarter, thereby exceeding the goal of 1.3 million ADSL
accesses activated at the end of the year.
n
Revenues from business services continued to grow steadily in 2002. This growth was due to the rapid expansion of data network solutions that incorporate management and supervision services
of the networks of business customers.
Revenues from the
TDF Group, which represented nearly two-thirds of total revenues from “Broadcasting and audiovisual transmission” in 2002, increased by 3.9% compared to the previous year. This increase was mainly due, in France, to (i) the growth in
telecommunications site maintenance and engineering services, with the introduction of wireless operator relays on TDF’s infrastructure and (ii) the 7.8% increase in activities outside France and the strong performance of the video services
studios business.
France Telecom withdrew from TDF on December 13,
2002.
The 4.1% increase in revenues from cable television in 2002
resulted from the growth of the FT Cable group, a direct subscriber services provider, which experienced an increase in revenues of 8.3% resulting from (i) the migration of analog subscriptions to more profitable digital packages and (ii) a 3.7%
increase in the number of subscribers, which rose to 854,000 at December 31, 2002, from 824,000 a year earlier. This increase was partially offset by the decrease in revenues from infrastructure operator activities, due to the sale of networks to
Noos (previously Lyonnaise Cable) completed at the end of May 2002.
Operating Income Before Depreciation and Amortization
On a historical basis, operating income before depreciation and amortization of the “Fixed Line, Distribution, Networks, Large
Customers and Operators” segment decreased by 7.2%. Expenses of the segment reflected the sale of real estate, which translated into a significant increase in rental charges from 2001 to 2002.
Aside from this impact, the overall level of expenses of the segment was stable from
2001 to 2002, which resulted from the following factors:
n
the reduction in payments for mobile call termination fees and international payments;
n
the decrease in external purchases, excluding payments to operators, in particular relating to external consumption and client provisions. This reduction was partially offset by the impact of
the exceptional factors recorded at December 31, 2001, especially the capital gain realized on the sale of tangible assets when the cable networks were sold to Noos. Personnel costs were on the whole stable; and
n
the increase in intra-Group expenses, excluding payments to operators, in particular the purchases of mobile handsets and Mobicarte recharges with Orange, and commercial relationships between
Transpac and Equant.
Operating expenses reflected
productivity gains realized for network activities.
Investments in Tangible and
Intangible Assets
Investments in tangible and intangible assets by
the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment decreased 27.8% from December 31, 2001 to December 31, 2002.
Network investments, which accounted for more than half of the investments in tangible and intangible assets of the segment, decreased overall. Due to the
rationalization and optimization of the networks, the main investments were down, except for ADSL. The most significant changes concerned:
n
the local loop, for which capital spending decreased considerably in 2002. This reduction was due to the effects of rebuilding the network during the first half of 2001 following the storm in
December 1999;
n
capital expenditures connected with the switched telephone network, other specialized networks, and resources shared by these networks, which decreased significantly due to the effects of
lower prices for equipment and the streamlining of investments by targeting high-speed (ADSL) infrastructures and the renovation of radio links;
n
investments in other Internet equipment were down due to the refocusing of spending on high-speed equipment, and lower prices for equipment for high-speed access services; and
n
the increase in investments in ADSL between 2001 and 2002 due to the goal of covering 80% of the population by 2003 and by increased growth in the customer base in 2002 compared to 2001,
despite a drop in equipment prices.
The other tangible
and intangible investment items (data processing, real estate, handsets, pay phones and intangible investments), for the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment were stable. This stability reflected the
decreased spending on data processing and real estate. Conversely, non-network tangible investments showed increased spending on handsets for the purpose of updating the range of handsets leased to encourage use of new services.
Operating Income Before Depreciation and Amortization Less CAPEX
Operating income before depreciation less CAPEX for the “Fixed Line,
Distribution, Networks, Large Customers and Operators” segment increased by 6.6% from 2001 to 2002. This increase reflected the sharp reduction in investments in tangible and intangible assets, which was partially offset by the reduction in
operating income before depreciation and amortization.
5.3.2.4 E
QUANT
SEGMENT
The Equant segment combines the activities of global data transmission services to businesses. Following the purchase of Global One (at the beginning of 2000), France Telecom finalized the purchase of Equant (June 2001), then
immediately merged those two companies, resulting in the creation of the world leader in IP and data services for businesses. At December 31, 2002, France Telecom owned 54.2% of the new Equant entity.
The following table sets forth the main operating indicators for the “Equant” segment at December 31, 2002 and 2001, on a
historical basis:
(
€
millions)
Year ended December 31,
Variations
2002
historical
2001
historical
2002/2001
historical
Revenues
3,156
2,392
31.9%
Operating income before depreciation and amortization
200
(177
)
ns
Operating income before depreciation and amortization / Revenues
6%
(7)%
Operating income
(321
)
(501
)
35.9%
CAPEX
392
436
(10.1)%
Operating income before depreciation and amortization – CAPEX
(192
)
(613
)
68.7%
Average number of employees (full-time equivalent)
11,928
9,996
19.3%
Equant has been fully
integrated into its new scope of consolidation, including Global One in its entirety, since July 1, 2001.
Revenues
Equant’s revenues increased
31.9% between 2001 and 2002, amounting to
€
3,156 million in 2002, compared to
€
2,392 million in 2001. This sharp increase reflected the full consolidation of Equant, as of July 1, 2001.
Excluding the impact of consolidation, Equant’s revenues decreased in 2002 compared to 2001, in a depressed economic environment.
Network services continued to grow and, at the end of 2002, accounted for nearly 53% of total gross revenues. However, revenues were down due to the drop in sales in the integration services market and, to a lesser extent, the decline in gross
revenues from SITA.
Operating Income Before Depreciation and Amortization
Conversely, Equant’s operating income before depreciation and
amortization for 2002 showed significant improvement, increasing from negative
€
177 million at December 31, 2001 to
€
200 million at December 31, 2002. Aside from the impact of the twelve-month consolidation of Equant, this improvement was due to
effective cost controls and the continuation of the initial effects of the synergies involved in the merger with Global One which resulted in an improvement in the network’s cost structure and a streamlining of all functions.
Investments in Tangible and Intangible Assets
Investments in tangible and intangible assets decreased by 10.1%.
Excluding the impact of consolidation between the two years: twelve months in 2002,
compared to six months in 2001, this decrease was the direct result of synergies connected with the merger, and the current slowdown of the market, which resulted in a reduction in tangible and intangible investments made with clients and control of
investment costs. Expenses were primarily for adaptation of the network, as well as development of back-office and sales management systems.
Operating Income Before Depreciation and Amortization Less CAPEX
Better control of capital expenditures and an improvement in operating income before depreciation and amortization enabled Equant to improve its level of operating
income before depreciation and amortization less CAPEX in 2002 compared to the end of 2001, increasing from negative
€
613 million in
2001, to negative
€
192 million in 2002.
The “TP Group” segment has included the activities of TP S.A., the historical Polish operator and its subsidiaries, including, notably, PTK Centertel for wireless activities, since April 1, 2002. The consortium formed
by France Telecom and Kulczyk Holding owns 47.5% of TP S.A., of which France Telecom holds 33.93%.
The following table sets forth the main operating indicators of the “TP Group” segment on a historical basis:
(
€
millions)
Year ended December 31,
Variations
2002
historical
2001
historical
2002/2001
historical
Revenues
3,471
–
–
Operating income before depreciation and amortization
1,453
–
–
Operating income before depreciation and amortization / Revenues
42%
–
–
Operating income
653
–
–
CAPEX
1,045
–
–
Operating income before depreciation and amortization – CAPEX
408
–
–
Average number of employees (full-time equivalent)
45,222
–
–
TP Group has been fully
consolidated since April 1, 2002. Consequently, the figures presented above for 2002 correspond to nine months of activity. Furthermore, the average number of employees is adjusted by the number of months during which the TP Group was fully
consolidated over the total number of months in the period.
Revenues
Revenues for TP Group were
€
3,471 million in 2002. Revenues from fixed line services accounted for approximately 80% of revenues for TP Group. The wireless services of the subsidiary PTK Centertel
experienced rapid growth. Its market share was 32.1% in 2002, compared to 27.8% in 2001. In addition to the very rapid growth in mobile telephony, TP Group benefited from the strong growth of the Internet market.
Operating Income Before Depreciation and Amortization
Operating income before depreciation and amortization was
€
1,453 million at December 31, 2002.
To improve its operating profitability, a program to reduce operating expenses before depreciation and amortization was implemented within TP Group relating to
expenses connected to consumption and services, and particularly with respect to purchases of hardware and energy.
In addition, TP Group implemented a restructuring plan, which led to a reduction in personnel costs.
Investments in Tangible and Intangible Assets
The expenses connected with investments in tangible and intangible assets amounted to
€
1,045 million. An optimization program was initiated in 2001.
Operating Income Before Depreciation and Amortization Less CAPEX
Operating income before depreciation and amortization less CAPEX amounted to
€
408 million at the end of 2002.
The “Other International” segment covers the activities conducted outside of France as an operator of fixed line telephony and data transmission,
television broadcast and cable television and wireless activities not contributed to Orange (Voxtel in Moldavia and FTM Lebanon):
(
€
millions)
Year ended December 31,
Variations
2002
historical
2001
historical
2002/2001
historical
Revenues
2,427
4,495
(46.0)%
Operating income before depreciation and amortization
784
1,487
(47.3)%
Operating income before depreciation and amortization / Revenues
32%
33%
Operating income
278
445
(37.6)%
CAPEX
396
1,081
(63.4)%
Investments in UMTS/GSM licenses
46
–
–
Operating income before depreciation and amortization – CAPEX
388
406
(4.4)%
Average number of employees (full-time equivalent)
14,047
23,295
(39.7)%
The main effects of changes in
the scope of consolidation that occurred between 2001 and 2002 were:
n
the consolidation of Telecom Argentina by the equity method as of 21 December 2001;
n
the impact of the transfer of ownership of the FTM Lebanon network to the Lebanese government as of August 31, 2002;
n
the ceasing of the activity of Tesam as of July 1, 2001; and
n
the transfer on July 1, 2002 of wireless activities in Egypt (Mobinil / ECMS) from the “Fixed line, voice and data services - Outside of France” segment to the “Orange”
segment.
Revenues
On a historical basis, revenues from the “Other International” segment
decreased 46% mainly due to primarily the following consolidation effects:
n
the consolidation of Telecom Argentina by the equity method;
n
the transfer of Egyptian mobile telephone activities (Mobinil / ECMS); and
n
the removal of FTM Lebanon as a result of the transfer of ownership of its network to the Lebanese government.
Aside from those consolidation effects, the revenues of the “Other International” segment reflected the increase in fixed
line services of the Group, notably Uni2 in Spain, which continued the strong growth in their revenues.
Operating Income Before Depreciation and Amortization
The operating income before depreciation and amortization at December 31, 2002 of the “Other International” segment decreased significantly compared to December 31, 2001, a decrease of 47.3%. This decrease was due
notably to the changes in scope of consolidation noted above.
Excluding
those effects, operating income before depreciation and amortization of the “Other International” segment reflected the growth of profitability of other subsidiaries of the segment, particularly Uni2.
Investments in Tangible and Intangible Assets
Investments in tangible and intangible assets excluding licenses decreased
significantly for the “Other International” segment (63.4%) between December 31, 2001 and December 31, 2002. This decrease was due primarily to the equity-method consolidation of Telecom Argentina and the transfer of Mobinil / ECMS to the
“Orange” segment.
Aside from those effects, investments in
tangible and intangible assets decreased notably due to reductions in expenditures made by other subsidiaries, such as Uni2 and Casema.
Intangible investments of the “Other International” segment included the acquisition of a GSM license in Mali (Ikatel) for an amount of
€
46 million.
Operating Income Before Depreciation and Amortization Less CAPEX
Operating income before depreciation and amortization less CAPEX of the “Other
International” segment declined by 4.9% from 2001 to 2002, decreasing from
€
406 million in 2001 to
€
386 million in 2002, due to the drop in operating income before depreciation and amortization, which was partially offset by the reduction in investments in
tangible and intangible assets.
5.
3.3 F
ROM
O
PERATING
I
NCOME
T
O
N
ET
I
NCOME
The following table sets forth figures relating to operating income through net income for the year ended December 31, 2002. Exceptional provisions and
amortization concerned MobilCom, Equant, NTL, Wind, Orange Communications S.A., the Kulczyk put, the Orange restructuring costs, the effects of the political and economic situation in the Ivory Coast, JTC (Jordan) and deferred taxes.
(
€
millions)
Year ended December 31,
2002
historical
2001
historical
Operating income
6,808
5,200
Interest expenses net (excluding TDIRA)
(4,041
)
(3,847
)
Foreign exchange gains/(losses), net
136
(337
)
Discounting of early retirement plan
(216
)
(229
)
Current income from integrated companies
2,687
787
Other non-operating income/(expense), net
(12,849
)
(5,904
)
Income taxes
(2,499
)
2,932
Employee profit sharing
(148
)
(131
)
Net income/(loss) from integrated companies
(12,809
)
(2,316
)
Equity in net income of affiliates
(367
)
(890
)
Goodwill amortization
(2,352
)
(2,531
)
Exceptional goodwill amortization
(5,378
)
(3,257
)
Net income/(loss) of the consolidated group
(20,906
)
(8,994
)
Minority interests
170
714
Net income/(loss)
(20,736
)
(8,280
)
5.3.3.1 I
NTEREST
EXPENSES
,
NET
AND
FOREIGN
EXCHANGE
GAIN
/(
LOSS
),
NET
Interest expenses, net totalled
€
4,041 million in 2002 compared to
€
3,847 million one
year earlier, an increase of
€
194 million. The increase in interest expenses was partly due to an increase in average net financial
debt outstanding and also due to an increase in margins at issue, including an activation of the step-up of the bonds and deterioration in the conditions of the borrowing under the
€
15 billion line of credit following the downgrading of France Telecom’s rating.
Interest expense, net will be affected in the future by the issue of
€
6.1 billion in perpetual bonds redeemable for France Telecom shares (TDIRA) bearing compounded interest of 7% (reduced to 5.75% in August 2003, see “–5.2.3.1
Interest Expenses, Net and Foreign Exchange Gain/(Loss), Net).
Foreign
exchange gain (loss), net in 2002 amounted to a gain of
€
136 million (compared to a loss of
€
337 million at December 31, 2001). This gain was mainly due to the foreign exchange position of the dollar.
France Telecom’s net financial debt was
€
68,019 million at December 31, 2002 compared to
€
63,423 million at December 31, 2001. It included
€
11,192 million in convertible or exchangeable bonds (
€
10,750 million at December 31, 2001).
The average maturity of the net financial debt decreased in 2002, from 4.6 years at December 31, 2001 to approximately 4 years at December 31, 2002. This reduction
in average maturity was due to the small amount of bonds issued in 2002 (
€
3.5 billion). The rise in the weighted annual average cost
of France Telecom’s net financial debt from 5.82% to 5.90% between December 31, 2001 and December 31, 2002 was due to the application of step ups to a significant share of the debt (
€
24.6 billion) and to the increase in margins at issue requested by bond investors. However, the rise in the average cost of the debt was limited to 8 basis points,
partly due to the drop in short-term interest rates (the EURIBOR three-month fell from 4.26% in 2001 to 3.32% in 2002) and also due to the fact that the step-ups had an impact spread out over time on certain bonds (the coupon increase is not
prorated, but made after the payment of the current coupon).
The spot weighted average interest rate of the long-term financial debt including bank loans and exchangeable or
convertible bonds, representing the average nominal interest rate of long-term debt on a given date, increased from 5.29 % at December 31, 2001 to 6.07% at December 31, 2002.
The drop in interest rates led France Telecom to increase its share of fixed-rate debt, after swaps, from 66% at December 31, 2001 to
72% at December 31, 2002.
France Telecom’s policy is not to engage
in speculative derivative transactions. Since most derivatives are entered into to hedge against business exposures and activity-related uncertainties, market risk connected with these instruments is largely offset by the risks created by the hedged
items.
For information regarding risks related to interest rates, see
“Item 3. Key Information – 3.3.3 Risk Factors Relating to Financial Markets – France Telecom’s business may be affected by fluctuations in the financial markets, including changes in interest rates”.
5.3.3.2 C
URRENT
INCOME
FROM
INTEGRATED
COMPANIES
Current income from integrated companies was
€
2,687 million at December 31, 2002, compared to
€
787 million at December 31, 2001.
5.3.3.3 O
THER
NON
-
OPERATING
INCOME
/(
EXPENSE
)
At December 31, 2002, other non-operating income/(expense) amounted to an expense of
€
12,849 million, compared to an expense of
€
5,904 million at December 31, 2001. This
item includes capital gains or losses from sales of assets, income from dilution, other provision movements, costs of the sale of receivables and dividends and exceptional provisions.
Disposal Gains and Losses
At December 31, 2002, the principal divestitures included the capital gains realized on the sale of TDF for
€
486 million, the capital gains recorded for the sale of Panafon for
€
274 million, the capital gains made on the sale of the Group’s stake in Télévision Par Satellite (TPS) for
€
177 million, the capital gains made on the partial sale of Pramindo Ikat for
€
27 million, as well as the loss
of
€
41 million on the July 2002 settlement of the off-balance sheet commitment on CCIC securities. Furthermore, income from dilution
profit recorded for eresMas (rebranded Wanadoo Espana as of January 1, 2003, following merger) at Wanadoo totaled
€
35 million.
At December 31, 2001, sales of assets reflected capital gains of
€
1,068 million for the sale of the first part of the Group’s holding in STMicroelectronics,
€
401 million for Sema Group plc and
€
181 million for
Sprint Fon, net of exchange adjustments. The sale of a first portion of the Group’s real estate assets resulted in capital gains of
€
705 million, net of costs. In addition, other non-operating income and expenses at December 31, 2001 included dilution income totaling
€
1,086 million, following Wanadoo’s acquisition of Freeserve included in the United Kingdom and QDQ Media in Spain. It also included dilution income due to the contribution of Infostrada to Wind for
€
934 million, and a profit of
€
482 million following the final valuation of Global One in connection with the merger of Global One and Equant.
Provisions and Reversals of Provision Movements
Excluding capital gains, other non-operating income/(expense) included provisions for certain foreign holdings. It related to reassessment of the useful value of
these companies in connection with the strategic review in progress at December 31, 2002 and included:
-
Uni2 for
€
192 million;
-
Dutchtone for
€
212 million (
€
183 million for the Group share);
-
Connect Austria for
€
132 million (
€
114 million for the Group share);
-
Optimus for
€
30 million (
€
26 million for the Group share);
-
Telinvest securities for
€
61 million;
-
Globecast securities for
€
45 million; and
-
Novis and Clix securities for
€
45 million.
Furthermore, a provision for
€
285 million for NTL and MSCP current accounts relating to the Noos transaction and a provision for
€
52 million for the expected loss relating to the sale of Casema securities were recorded. Sprint securities were depreciated by
€
39 million and a provision for Intelig was recorded in Brazil in the amount of
€
145 million.
At December 31, 2001,
other provision movements included a net write-back of
€
396 million of the reserve that had been made at December 31, 2000 for the
Global One / Equant deal, a provision of
€
134 million for TESAM, and provisions relating to the realizable value of certain
non-strategic foreign subsidiaries, including
€
141 million for Intelig.
Lastly, other non-operating income and expenses at the end of December 2002 included costs related to debt and carry-back securitization operations for
€
62 million, costs for France Telecom S.A. securities in the amount of
€
60 million, and the costs of consolidation of Equant for
€
48 million. Furthermore, an additional cost for the distribution of free shares of Deutsche Telekom (price adjustment connected to the agreement for sale of Deutsche Telekom securities held by France Telecom) resulted in a
provision for
€
58 million.
Exceptional Provisions
Other non-operating income and expenses, at December 31, 2002, also included exceptional provisions for
€
11,963 million, including:
-
€
7,290 million for MobilCom (including a risk provision amounting to
€
7 billion to cover the risks related to the financing of the development of MobilCom’s UMTS activities, and an overall depreciation
of payments made during the first half of 2002 of
€
290 million);
-
€
1,641 million for an additional provision for NTL;
-
€
1,627 million for Wind (
€
1,404 million for the net Group share);
-
€
571 million for the commitment to buy back TP S.A. shares from Kulczyk
Holding;
-
€
490 million (
€
423 million for the net Group share) for restructuring costs within Orange; including
€
252 million related to the withdrawal from Sweden that was announced in December 2002; and
-
€
343 million (
€
244 million for the net Group share) for the depreciation of assets in the Ivory Coast (CI Telcom and Orange Ivory Coast).
At December 31, 2001, exceptional provisions amounted to
€
9,380 million, including (i)
€
5,910 million
in provisions for depreciation of NTL ordinary shares, preferred shares, convertible bonds and miscellaneous expenses; (ii)
€
2,077
million as a provision for risks and expenses relating to Equant CVRs and (iii)
€
1,393 million (
€
1,260 million for the net Group share) for the depreciation of MobilCom securities consolidated by the equity method.
5.3.3.4 I
NCOME
TAX
France Telecom S.A. files a consolidated tax return for its French subsidiaries that are at least 95% owned.
Following the public offering and listing of Orange in February 2001, Orange S.A. and its French subsidiaries formed their own consolidated tax group as of 2002.
Following the public offering and listing of Wanadoo in July 2000,
Wanadoo and its French subsidiaries formed their own consolidated tax group as of 2001.
The breakdown of the tax according to the tax consolidation groups and for the other subsidiaries is shown below:
(
€
millions)
Year ended December 31,
2002
historical
2001
historical
France Telecom S.A. tax group
(1,588
)
3,862
Orange S.A. tax group
(531
)
(593
)
Wanadoo S.A. tax group
68
(26
)
Other subsidiaries in France and outside France
(448
)
(311
)
Total income taxes
(2,499
)
2,932
The year’s corporate
income taxes are based on the application of the forecasted year-end effective tax rate on the result before tax at December 31, 2002. In France, deferred taxes are based on determined tax rates,
i.e.
, 35.43% for 2002 and thereafter.
The decrease in the market price of the France Telecom S.A. shares in
2002 led to the recording of tax-deductible provisions in the financial statements, and the NTL and MobilCom risks led to a significant increase in the losses carried forward within the France Telecom S.A. consolidated tax group. This extended the
forecasted recovery date of the deferred tax assets beyond the eight-year horizon used for the 2001 financial statements.
In this context, the application of the prudence concept, which, in accounting, prevails regarding the recognition
of deferred tax assets, led to a provision (for the France Telecom S.A. consolidated tax group) for the deferred tax assets generated during 2002 (
€
891 million) and a provision of
€
1,800 million for the amount of taxes deferred at December 31, 2001. The net
deferred tax charge of the France Telecom S.A. consolidated tax group amounted to
€
1,602 million after taking into account the tax
released to the 2002 dividends (
€
198 million recorded in reserves). The ability to do a reversal subsequently is essentially
dependent on the evaluation of the completion of the TOP Program and the completion of the capital increase.
France Telecom considered on the best of its budgets, business plans and financing plans reflecting the financial situation as of December 31, 2002, that the
deferred tax asset maintained in the balance sheet for France Telecom S.A. and the companies in its consolidated tax group would be able to be recovered through the existence of taxable income expected in the next eight years within its regularly
profitable activity as a fixed line operator in France. Moreover, given these results and given the possibilities to carry forward indefinitely certain tax losses relating from depreciation charges, the share of the tax loss carry forwards which is
not indefinitely carried forward should be completely used within the legal timeframe of five years, with the balance acquiring the status of losses indefinitely carried forward.
In 2001, France Telecom S.A. and its consolidated tax group showed a significant tax loss, resulting primarily from the effect of the
listing of Orange S.A. and the sale of France Telecom shares to SITA in connection with the acquisition of Equant. That tax loss has generated carry-back receivables of
€
1,630 million and a loss that can be carried forward of
€
2,231 million.
In December 2001, France Telecom sold to a financial institution the carry-back
receivables held on the French State, including
€
1,111 million in exchange for bills that were cashed under fiscal year 2002.
The breakdown of the tax on the France Telecom S.A. consolidated tax
group is as follows:
(
€
millions)
Year ended December 31,
2002
historical
2001
historical
Carry-back
0
1,630
Other current taxes
14
(26
)
Deferred taxes for the year
1,089
3,007
Provision for depreciation and restatement of deferred taxes
(2,691
)
(750
)
Effective tax of France Telecom S.A. consolidated tax group
(1,588
)
3,862
France Telecom S.A. and its
main French subsidiaries have been subject to a tax audit for the years 1998 and 1999. The tax audit is partly completed and the possible reassessments relate mainly to timing differences in taxable amounts. The impacted subsidiaries have
communicated their comments to the authorities. At December 31, 2002, France Telecom S.A. is waiting for a final decision from the tax authorities.
5.3.3.5 E
MPLOYEE
PROFIT
-
SHARING
Pursuant to the French law of July 26, 1996 and French labor regulations, France Telecom has been subject to employee profit-sharing requirements since January 1,
1997. The profit sharing agreement, signed with France Telecom’s labor unions, includes France Telecom’s French subsidiaries whose capital is owned directly or indirectly at more than 50%.
The charge calculated according to the terms and conditions of the agreement in effect
amounted to
€
148 million at December 31, 2002, compared to
€
131 million at December 31, 2001.
5.3.3.6 N
ET
INCOME
/(
LOSS
)
FROM
INTEGRATED
COMPANIES
Net loss from integrated companies amounted to
€
12,809 million for the period ended December 31, 2002, compared to a loss of
€
2,316 million for the
period ended December 31, 2001.
5.3.3.7 E
QUITY
IN
NET
INCOME
/(
LOSS
)
OF
AFFILIATES
As of December 31, 2002, the share in Equity in net income/(loss) of affiliates amounted to a loss of
€
367 million, compared to a loss of
€
890
million one year previously.
In comparison with the equity in net income/(loss) of affiliates as of December 31, 2001, there was an improvement
of
€
523 million which reflected primarily the following developments:
n
developments that had a positive impact on earnings:
-
the equivalency value of MobilCom, which was reduced to zero as of December 31, 2001; consequently, no share in earnings has been shown since January 1, 2002, compared to a loss of
€
178 million recorded for the year 2001;
-
the equivalency value of Telecom Argentina, which was reduced to zero as of December 21, 2001, after total depreciation of the company’s value; consequently, no share in earnings has
been shown since January 1, 2002, compared to a loss of
€
178 million recorded for the year 2001;
-
the share income recorded for Eutelsat, which was consolidated by the equity method as of January 1, 2002,
i.e.
, a positive impact of
€
70 million;
-
the discontinuance of consolidation of Technocom effective January 1, 2002, compared to a loss of
€
31 million recorded as of December 31, 2001;
-
the sale of TPS to TF1 on May 6, 2002 representing a positive impact on the earnings of companies consolidated by the equity method, in the amount of
€
25 million.
n
conversely, the
equity in net income/(loss) of affiliates shows:
-
the significant reduction in the share in earnings of TP Group (TP S.A. and PTK Centertel in Poland) which was fully consolidated as of April 1, 2002 while it has been consolidated by the
equity method since October 1, 2000,
i.e.
, a negative impact of
€
45 million;
-
the share in negative earnings of TA Orange (formerly BITCO), which can be explained by the increase in costs due to the commercial launch during the first half of 2002,
i.e.
, a
negative impact of
€
22 million.
5.3.3.8 G
OODWILL
AMORTIZATION
The amount of the provisions for goodwill amortization as of December 31, 2002 was
€
2,352 million, compared to
€
2,531 million as of December 31, 2001. Making major long-term investments in connection with the international expansion of the
Group, especially in 2000, generated a large volume of goodwill. Amortization, over a 20-year period, of that goodwill in 2002 concerned primarily Orange, including Orange PCS for
€
1,133 million, Orange Communications S.A. in Switzerland for
€
129 million, Wind for
€
47 million and BITCO in Thailand for
€
17 million. The figure for Equant was
€
511 million,
TP Group
€
130 million and Freeserve
€
97 million.
In connection with preparing the
financial statements for the year 2002, the current value of goodwill, defined as the highest value between the realizable value and the value in use, underwent an annual evaluation. The degree of analysis with which France Telecom assesses the
recoverable value of goodwill relating to its principal sub-groups is as follows:
-
the recoverable value of Orange is assessed at the level of the segment, resulting from the regrouping of the acquired wireless activities of Orange plc and those previously held by France
Telecom;
-
the recoverable value of Equant is assessed at the level of its sub-group, in which the previously held activities of Global One have been integrated;
-
the value of Wanadoo is assessed at the level of each of its two activities: the Internet activities (present specifically in France, England and Spain) and the directories activities
(present specifically in France and Spain);
-
the recoverable value of TP Group is assessed at the level of its sub-group.
France Telecom believes that this level of analysis reflects:
-
the business and market characteristics similar in each of the entities under review (technology, trademark, customers, marketing);
-
the sharing by these entities of common resources (tools, R&D, management, financing); and
-
the strategic premiums accepted by France Telecom to acquire activities in order to regroup them with those held previously within coherent sub-groups benefiting from increased development
potential.
Given the short-term volatility of stock
market valuations and the strategic nature of its investments, France Telecom gives preference to the discounted cash flow method when assessing value in use. These are determined using the economic assumptions and forecast operating conditions used
by the management of France Telecom as follows:
the cash flows are those of business plans resulting from the strategic planning process, and extended over an appropriate time frame of five to ten years;
-
beyond that time frame, cash flows are extrapolated by applying a perpetual rate of growth specific to each activity;
-
the discounting of these flows is performed using rates appropriate to the nature of these activities.
Within the context of the examination of the current value of goodwill, done at the 2002 closing,
-
the business plans used reflect an appreciation in the moderated growth assumptions compared to 2001; and
-
the perpetual growth rate and discount rate were reviewed together with a spread, “discount rate less perpetual growth rate”, which increased compared to 2001 to reflect the changes
in the economic conditions in the last six months of 2002 and a downward reassessment of the long-term growth hypothesis, with the special exception of Wanadoo directories due to the development of its on line activities:
Year ended December 31,
2002
2001
Time frame of
business plan
Discount
rate
Perpetual
growth rate
Spread
Discount
rate
Perpetual
growth rate
Spread
Orange
10 years
9
%
3
%
6
%
9
%
3.5
%
5.5
%
Equant
5 years
10.5
%
3
%
7.5
%
9.5
%
4
%
5.5
%
Wanadoo – Internet
10 years
12.5
%
4.5
%
8
%
10
%
5
%
5
%
Wanadoo – Directories
10 years
9
%
3.5
%
5.5
%
8
%
3
%
5
%
TP Group
10 years
(wireless)
5 years (fixed)
10.5
%
3
%
7.5
%
n/a
(1)
n/a
(1)
n/a
(1)
(1)
Take-over and full consolidation of TP S.A. in April 2002.
Realized cash flows resulting from the revision of business plans and the perpetual growth rate or discount rates remained higher than the consolidated accounting
values of the sub-groups’ activities with the exception of Equant for which a depreciation was recorded.
At December 31, 2002, the excess of estimated value in use over carrying value and the sensitivity of value in use to a one point change in one point of the
perpetual growth rate or discount respectively is as follows (France Telecom group share):
Excess of value in use
over carrying value
Impact of a one point decrease/increase
in the
(
€
billions)
Perpetual growth rate
Discount rate
Orange
12.4
7.1/
(5.0)
(8.2
)/11.4
Equant
0
(1)
0.2/
(0.1)
(0.2
)/0.2
Wanadoo – Internet
5
0.5/
(0.4)
(0.7
)/0.9
Wanadoo – Directories
3.3
0.5/
(0.3)
(0.5
)/0.8
TP Group
0.3
0.6/
(0.5)
(0.7
)/0.9
(1)
After depreciation.
At December 31, 2002, exceptional amortization of goodwill amounted to
€
5,378 million and related to:
n
Equant for an amount of
€
4,375 million (a net impact of
€
4,300 million on France Telecom’s share), bringing its book value at closing rate to
€
1,570 million.
n
Orange Communications S.A. (in Switzerland) in the amount of
€
872 million,
bringing its book value to
€
2,321 million, following the revision of its business plan and taking into account the goodwill in the
Consolidated Financial Statements of France Telecom which reflected a 100% valuation of Orange Communications S.A. on the basis of the buy-back of 42.5% of E.On’s holdings in November 2000.
n
JTC (in Jordan) for an amount of
€
131 million (
€
115 million on France Telecom’s share), bringing its book value at closing to
€
309 million.
5.3.3.9 N
ET
INCOME
/(
LOSS
)
OF
THE
CONSOLIDATED
GROUP
The net loss of the consolidated group was
€
20,906 million at December 31, 2002, compared to a loss of
€
8,994 million at December 31, 2001.
5.3.3.10 N
ET
INCOME
Taking into consideration minority interests, which amounted to an expense of
€
170 million as of December 31, 2002,
compared to an expense of
€
714 million one year previously, consolidated net loss was
€
20,736 million in 2002, compared to a loss of
€
8,280
million in 2001.
5.4. FINANCIAL DEBT, CAPITAL RESOURCES AND LIQUIDITY
This section is divided into two main parts: (i) a discussion of the Group’s financial debt and capital resources, including bonds, credit lines and cash and (ii) an analysis of liquidity, discussing net cash provided by
operating activities, net cash used in investing activities and net cash used in financing activities.
For information regarding risks related to France Telecom’s indebtedness, see “Item 3. Key Information – 3.3.1 Risk Factors Relating to France
Telecom’s Business – France Telecom may not be able to reduce its debt. If it is unable to reduce its indebtedness, France Telecom’s cash flow may be insufficient to meet its financing needs and its ability to invest in the
development of its business may be reduced”.
In addition, see
“Item 11. Quantitative and Qualitative Disclosures about Market Risk – 11.1 Exposure to Market Risks and Financial Instruments” for a discussion of certain risks affecting France Telecom’s debt portfolio, including interest rate
risk, foreign currency risk, liquidity risk and management of covenants.
5.4.1 F
INANCIAL
D
EBT
AND
C
APITAL
R
ESOURCES
In 2003, France Telecom accessed the bond market and issued
€
6.4 billion in long-term debt. At December 31, 2003, France Telecom recorded gross borrowings of
€
49.4
billion, including
€
47.8 billion in long- and medium-term debt and
€
1.6 billion in short-term debt. Cash and cash equivalents and marketable securities amounted to
€
5.2 billion in 2003, resulting in an amount of financial debt net of available cash of
€
44.2 billion, compared to
€
68.0 billion at December 31, 2002.
The amount by which debt was reduced, as compared to December 31, 2002, thus equaled
€
23.8 billion, driven principally by the
€
14.9 billion capital increase carried out in the first half of 2003,
€
6.4 billion in free cash flow
excluding asset disposals
generated over the course of the year (see “– 5.4.2 Liquidity”),
€
3.0 billion in
proceeds from asset disposals and
€
1.5 billion resulting from the favorable effects of changes in exchange rates on debt in foreign
currency.
The ratio of net financial debt to shareholders’ equity
amounted to 3.67 at December 31, 2003.
5.4.1.1 S
CHEDULE
OF
NET
FINANCIAL
DEBT
The following table provides a breakdown by category and year of maturity of gross borrowings and net financial debt, excluding accrued interest and after taking
into consideration the impact of currency swaps.
(
€
millions)
Year ended December 31,
2004
2005
2006
2007
2008
2009
and
beyond
2003
2002
2001
(on a historical basis)
Long-term and medium-term borrowings
9,057
8,415
4,192
2,834
5,282
18,041
47,821
60,393
56,139
Bonds
8,129
7,763
3,761
2,377
4,980
17,475
44,485
53,286
49,001
Capital leases
46
24
23
60
21
181
355
420
73
Other long-term borrowings
(1)
882
628
408
397
281
385
2,981
6,687
7,065
Other short-term debt
1,570
0
0
0
0
0
1,570
10,490
11,365
Bank loans
(2)
197
197
8,024
7,619
Accrued interest on perpetual bonds redeemable for shares (TDIRA)
253
253
–
–
Treasury bills
2
2
1,058
2,369
Overdrafts
973
973
1,273
995
Other short-term borrowings
145
145
135
382
Total gross borrowings
10,627
8,415
4,192
2,834
5,282
18,041
49,391
70,883
67,504
Total cash and cash equivalents and marketable securities
5,224
0
0
0
0
0
5,224
2,864
4,081
Marketable securities
1,874
1,874
45
1,138
Cash and cash equivalents
3,350
3,350
2,819
2,943
Net financial debt
5,403
8,415
4,192
2,834
5,282
18,041
44,167
68,019
63,423
(1)
Primarily including bank loans that were long-term from inception, and the long-term portion of current accounts of minority associates in subsidiaries.
(2)
At December 31, 2002, including
€
7,658 million in draw downs on
France Telecom S.A.’s long-term multicurrency syndicated credit lines. The
€
5 billion Tranche A, maturing in 2003, was replaced
by a new 3-year syndicated credit line of the same amount on February 6, 2003. The Tranche B of
€
10 billion matures in 2005.
In addition, France Telecom has negotiated cash collateral agreements which may result in monthly payments to
various banks, representing the mark to market impact of all off-balance sheet operations with these banks. Pursuant to these agreements, the two parties (France Telecom on one side and the banks on the other) complete an evaluation each month of
their off-balance sheet commitments. France Telecom may be obligated to make a collateral cash deposit based on the evaluation of its off-balance sheet position. In particular, France Telecom issued debt instruments in dollars in March 2001 and debt
instruments in yen in July 2001. These debt instruments were generally hedged against exchange risks with the help of derivative instruments. The market value of these derivatives is currently negative, taking into account the sharp drop of the
dollar and the yen relative to the euro (from 0.915 in March 2001 to 1.263 at the end of December 2003, for the dollar). In this manner, in 2003, the sustained fall of the dollar and the yen led to cash collateral payments by France Telecom. These
payments are a function of trends in currency exchange and are not subject to particular limits in terms of amount. The amounts paid for cash collateral amounted to
€
910 million in 2003 (
€
359 million in 2002). These amounts are included under
“Other long-term assets” (see Note 28.3.2 of the Notes to the Consolidated Financial Statements).
Certain investments and other assets held by the Orange Group have been pledged to, or used as collateral for, financial institutions to cover bank loans and credit
lines (see Notes 28 and 31 of the Notes to the Consolidated Financial Statements).
The table below presents net financial debt by maturity.
(
€
millions)
Long-
term
debt of
FT S.A.
(1)
Long-term
debt of
subsidiaries
Short-
term
debt
of FT
S.A.
Short-
term debt
of
subsidiaries
Total gross
borrowings
Marketable
securities
of FT S.A.
Marketable
securities
of
subsidiaries
Total net
financial
debt
2004
7,825
1,232
674
896
10,627
(3,068
)
(2,156
)
5,403
2005
7,887
528
8,415
8,415
2006
3,447
745
4,192
4,192
2007
2,182
652
2,834
2,834
2008
4,485
797
5,282
5,282
2009 and beyond
17,074
969
18,041
18,041
Total gross borrowings/Net financial debt
42,900
4,922
674
896
49,391
(3,068
)
(2,156
)
44,167
(1)
including convertible, exchangeable or redeemable bonds and capital leases.
The average maturity of net financial debt increased from 4 years at December 31, 2002 to approximately 6 years at December 31, 2003 (see “– 5.2.3.1
Interest Expenses, Net and Foreign Exchange Gain/(Loss), Net”).
5.4.1.2 N
ET
FINANCIAL
DEBT
BY
CURRENCY
The table below provides details of France Telecom’s net financial debt by currency at December 31, 2003, taking into account the effect of currency swaps.
France Telecom’s foreign operations are carried out by subsidiaries which mainly operate in their own countries. Therefore the exposure of subsidiaries to foreign currency risk on their commercial transactions is limited.
Breakdown of net financial debt vis à vis third parties, by currency
The table
below provides an analysis of bonds by issuer:
(
€
millions)
Year ended December 31,
2003
2002
historical
2001
historical
France Telecom S.A. – bonds convertible, exchangeable or redeemable into shares
6,838
11,192
10,750
France Telecom S.A. – other bonds
35,072
38,351
36,985
Orange Group
512
1,140
1,164
TP Group
2,021
2,559
—
Other issuers
42
44
102
Total other bonds
37,647
42,094
38,251
Total bonds
44,485
53,286
49,001
In 2003, France Telecom
accessed the bond market in order to reduce its short-term financing.
France Telecom issued an aggregate
€
6.38 billion in long-term bonds in January and February 2003:
n
a
€
1 billion issue maturing on September 28, 2007 with a 6% coupon
n
a
€
3.5 billion issue maturing on January 28, 2013 with a 7.25% coupon
n
a
€
1.5 billion issue maturing on January 28, 2003 with a 8.125% coupon
n
a £250 million (
€
384 million) issue maturing on December 20, 2017
with a 8% coupon (fungible with the pound sterling issue of December 2002)
In January 2004, France Telecom again accessed the bond
market, in an amount of
€
2.48 billion:
n
€
1 billion issue bearing interest at FRN to Euribor 3 months + 25 basis
points, maturing on January 23, 2007
n
€
750 million issue maturing on January 23, 2012 with a 4.625% coupon
n
£500 million (
€
726 million) issue maturing on January 23, 2034 with
a 5.625% coupon
The bonds are described in further detail
in Note 17 of the Notes to the Consolidated Financial Statements.
5.4.1.4 C
REDIT
LINES
On February 14, 2002, France Telecom entered into a
€
15 billion multi-currency syndicated line of credit to
replace the line of credit negotiated in the context of the acquisition of Orange plc. Under the terms of this syndicated line of credit, France Telecom is obligated to maintain the financial ratios described in “Item 11. Quantitative and
Qualitative Disclosures About Market Risk – 11.1.4 Management of Covenants”. This credit line constitutes France Telecom’s principal line of credit (see Note 18 of the Notes to the Consolidated Financial Statements “Lines of
Credit”).
The
€
5 billion tranche A of the
€
15 billion
multi-currency syndicated credit line matured on February 14, 2003. A new
€
5 billion credit line maturing in 2006 was put in place.
The covenants related to this credit line are described in “Item 11. Quantitative and Qualitative Disclosures About Market Risk – 11.1.4 Management of Covenants”.
€
5 billion of the
unused
€
10 billion tranche B of the France Telecom S.A. multi-currency syndicated credit line was canceled on February 12, 2004.
Bilateral 364 day renewable credit lines representing
€
1,800 million were set up (see Note 20.3 of the Notes to the Consolidated
Financial Statements).
5.4.1.5 C
ASH
AND
CASH
EQUIVALENTS
AND
MARKETABLE
SECURITIES
The France Telecom Group’s cash and cash equivalents and marketable securities
are as follows:
(
€
millions)
Year ended December 31,
2003
2002
historical
Loans due within three months
334
392
Certificates of deposit
202
306
Other
455
300
Short-term investments with a maturity at origin of three months
991
998
Banks
2,359
1,821
Cash and cash equivalents
3,350
2,819
Investments in mutual funds (
SICAV de trésorerie and Fonds Communs de Placement
)
1,839
6
Other
35
39
Total marketable securities
1,874
45
Total cash and cash equivalents and marketable securities
5,224
2,864
Cash and cash equivalents of the
Group are primarily held in the currencies of the countries where it operates. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk – 11.1.2 Foreign Currency Risk Management”. As a result, the cash and cash
equivalents of the Group are primarily held in euros.
5.4.2 L
IQUIDITY
The
following table is a simplified presentation of the France Telecom Group’s consolidated statement of cash flows.
(
€
millions)
Year ended December 31,
2003
2002
2001
historical
historical
Net cash provided by operating activities
11,322
11,839
7,076
Net cash used in investing activities
(3,737
)
(11,514
)
(10,824
)
Net cash provided by/(used in) financing activities
(6,868
)
(194
)
4,726
Cash and cash equivalents and marketable securities at period-end
3,350
2,819
2,943
At the time the “FT
Ambition 2005” plan was launched, France Telecom identified as one of the three components of the reinforcement of the Group’s financial structure the generation of over
€
15 billion in net cash provided by operating activities less net cash used in investing activities through the TOP Program. The following table shows the calculation of
this indicator and provides a basis to analyze changes between 2002 and 2003.
Free cash flow excluding asset disposals is presented below as additional information for France Telecom’s investors. France Telecom believes that such information should be considered in addition to, and not as a substitute for, net
cash provided by operating activities and net cash used in investing activities.
France Telecom considers free cash flow excluding asset disposals to be useful and relevant information for investors since it is the measure used by management to analyze France Telecom’s ability to generate net cash available for
debt repayment in the context of the TOP Program. As described, our calculation of free cash flow excludes cash provided by asset disposals. Free cash flow excluding asset disposals, as France Telecom defines it, may not be comparable to similarly
titled measures reported by other companies. See “– 5.9 Non-GAAP Financial Measures and Financial Glossary – Use of Non-GAAP Financial Measures”.
(
€
millions)
Year ended December 31,
2003
2002
historical
Net cash provided by operating activities
11,322
11,839
Net cash used in investing activities
(3,737
)
(11,514
)
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
9,418
325
Proceeds from asset disposals
(3,046
)
(1,436
)
Free cash flow, excluding asset disposals and the increase in short-term marketable securities
6,372
(1,111
)
(1)
Included in marketable securities as described in section 4.1.5 “Cash and cash equivalents and marketable securities.”
“Free cash flow” (net cash provided by operating activities less net cash used in investing activities)
reached
€
7,585 million in 2003, as compared to
€
325 million in 2002.
Free cash flow was
impacted, in an amount of
€
1,833 million, by the investment in short-term marketable securities of part of the proceeds of the
€
14.8 billion capital increase carried out in the first half of 2003.
Free cash flow excluding this increase in short-term marketable securities therefore amounted to
€
9,418 million in 2003.
Free cash flow in 2003 was also impacted by proceeds from asset disposals in an amount of
€
3,046 million, as compared to an impact of
€
1,436 million in 2002.
Excluding the increase in short-term marketable securities and proceeds from asset
disposals, free cash flow amounted to
€
6,372 million for 2003, compared to negative
€
1,111 million for the year-earlier period. This strong increase reflected the dynamic operating improvements generated by TOP and a control of investments.
5.4.2.1 N
ET
CASH
PROVIDED
BY
OPERATING
ACTIVITIES
Net cash provided by operating activities reached
€
11,322 million in 2003, compared to
€
11,839 million in 2002 and
€
7,076 million in 2001.
This change was due:
n
in part to the increase in operating income before depreciation and amortization of 16%, as well as to the decrease in income tax paid,
n
and in part to the negative impact from the change in working capital requirements, which recorded a decrease of
€
1,242 million in 2003, compared to a decrease of
€
3,261 million in 2002, mainly due to
the recording in 2002 of
€
1,111 million of gains from the sale of carry-back receivables realized in 2001 and to the net impact of
sales of commercial receivables in the amount of
€
797 million in 2002.
Excluding this impact and other items not arising from current trade activities (i.e.,
other receivables and accrued expenses and other payables), the change in working capital requirements (trade) (which comprises the balance of the line items inventories, trade accounts receivable and trade accounts payable) had a positive effect on
changes in net cash provided by operating activities. Working capital requirements recorded a decrease of
€
1,278 million in 2003,
compared to a decrease of
€
992 million in 2002.
Sale of trade receivables
Programs for the sale of trade receivables are in place for France Telecom S.A. and for the Orange group.
These programs cover receivables existing at the date the securitization transaction
was entered into and those receivables arising as services are rendered during the planned duration of the programs. The sellers ensure the servicing of such receivables for the purchasers.
The purchasers, whose legal form depends on the law applicable in each country, obtain
financing from third parties via securitization conduits with deferred price mechanisms or subordinated units subscribed by the sellers.
The deferred prices and subordinated units represent residual interests retained by the sellers in the receivables. These retained interests are intended to cover
the risk of non-recovery of the sold receivables that have been removed from the balance sheet. These residual interests are recorded under “Other long-term assets.” The accounting treatment for sales of receivables is presented in Note 2
of the Notes to the Consolidated Financial Statements.
Sale of trade
receivables by France Telecom S.A.
France Telecom S.A. has sold
trade receivables without recourse to Fonds Commun de Créances (“FCC”). The receivables related to fixed line telephony contracts with business customers and consumers in mainland France. The contractual term of this securitization
program for business customers runs through December 31, 2007 and the consumer securitization program should be renewed in 2004.
Early termination of this operation would result in a significant downgrading in the performance of the receivables portfolio and an assessment of France Telecom as
equal to or inferior to BB-.
The cap on financing for this operation is
€
550 million concerning “business” trade receivables, and
€
800 million with respect to “consumer” trade receivables.
Orange entered into programs for the sale of receivables in December 2002, under which
the receivables of the mobile activities of Orange France and Orange PCS in the United Kingdom have respectively been transferred without recourse to an FCC under French law and a trust established in Jersey under U.K. law.
These programs have a planned duration of five years, which can be reduced if the
funding is stopped in advance.
The programs for the sale of receivables
in France and the United Kingdom are subject to compliance with financial and operational clauses by Orange, which, in case of default, would result in accelerated amortization (the sales of receivables after this date are broken off). The terms of
the financial clauses require that the following ratios be respected:
n
the ratio of consolidated debt to EBITDA at an annual rate
(1)
of the Orange group, must be equal to or less than 6.0 and the ratio of EBITDA to interest charges at an annual
rate
(1)
, must be equal to or greater than 3.0. Compliance with these ratios is verified on a quarterly basis.
n
Orange France S.A.’s ratio of net financial debt to EBITDA at an annual rate
(1)
, must be equal to or less than 3.0 and the ratio of EBITDA to interest charges at an annual
rate
(1
)
, must be equal to or greater than 4.5. Compliance with these ratios is verified on a monthly basis.
The cap on financing for this operation is
€
800
million.
The impact of these securitization programs is as follows:
(
€
millions)
2003
2002
2001
historical
historical
Net receivables sold
3,180
3,078
1,765
– FT S.A. consumers
1,274
1,541
1,765
– FT S.A. business customers
1,229
823
– Orange
677
714
Net residual interests
1,722
1,367
851
– Interests in FCC and deferred price
1,946
1,679
1,049
– Amortization and provisions
(224
)
(312
)
(198
)
Translation adjustment
31
0
0
Impact on cash flow for the period (excluding costs of sale and excluding bad debt)
– For the period
(222
)
797
914
– Cumulated
1,489
1,711
914
5.4.2.2 N
ET
CASH
USED
IN
INVESTING
ACTIVITIES
Net cash used in investing activities includes purchases and sales of property, plant and equipment and intangible assets, purchases
and sales of investment securities and acquired businesses (net of cash acquired or sold), investments in and sales of affiliates, as well as net changes in marketable securities and other long-term assets.
Net cash used in investing activities amounted to
€
3,737 million in 2003, compared to
€
11,514
million in 2002 and
€
10,824 million in 2001.
Purchases and sales of property, plant and equipment and intangible assets
Purchases and sales of property, plant and equipment and intangible assets correspond
to investments in tangible and intangible assets including GSM and UMTS licenses (see Note 4 of the Notes to the Consolidated Financial Statements) and are presented on the consolidated statement of cash flows as net of changes in fixed assets
vendors. The amount of changes in fixed assets vendors is indicated in the table of supplementary disclosures beneath the consolidated statement of cash flows.
Purchases of property, plant and equipment and intangible assets, net of changes in fixed assets vendors, decreased by nearly
€
2.8 billion and amounted to
€
5,102 million
in 2003, compared to
€
7,943 million in 2002 (due mainly to the implementation of TOP Program, see the analysis of the decrease in
CAPEX (investments in tangible and intangible assets excluding UMTS and
(1)
EBITDA, as defined in the contracts with the financial lending establishments.
GSM licenses) in “– 5.1.2.2 Results of the ‘TOP’ Operational Improvements Program” and in “– 5.2.1.6 Capital Expenditures and
Financial Investments – Investments in Tangible and Intangible Assets Excluding UMTS/GSM Licenses (CAPEX)”).
In addition, proceeds from sales of real estate amounted to
€
419 million in 2003, compared to
€
2,550 million in 2002.
Acquisitions and Sales of Investment Securities and Acquired Businesses and
Investments and Sales of Affiliates
Financial investments amounted
to
€
237 million in 2003 (of which the three principal transactions were the tender offer for the shares of Orange, QDQ Media and
Wind, see the discussion in “– 5.2.1.6 Capital Expenditures and Financial Investments – Financial Investments”), compared to
€
7,250 million in 2002 (of which
€
2,228 excluding repurchases of treasury shares).*
The principal transactions in 2002 included the purchase of the balance of treasury
shares held by Vodafone following the Orange plc acquisition for an amount of
€
4,973 million, as well as the purchase for
€
950 million of Orange shares held by E.On as payment for the transfer to Orange of its equity interest in OCH (formerly Orange
Communications S.A., in Switzerland). In addition, the exercise of the option to purchase all of the NTL preferred stock held by financial institutions amounted to
€
1,092 million.
In 2003, net cash used
in investing activities recorded net proceeds from sales of investment securities of
€
3,046 million, compared to
€
1,436 million in 2002. These proceeds reflected principally the sale of the Wind shares for an amount of
€
1,537 million, Casema for an amount of
€
498
million, Eutelsat for an amount of
€
373 million, Sprint PCS for an amount of
€
286 million, CTE Salvador for an amount of
€
197
million and Telecom Argentina for an amount of
€
100 million. The proceeds of sales recorded in 2002 related mainly to the sale of
the investment in TDF for an amount of
€
1,290 million (net of the investment in Tower Participations).
Net change in marketable securities and other long-term assets
In 2003, net cash used in investing activities recorded the increase in short-term
marketable securities of
€
1,833 million, following the capital increase of
€
14,852 million (net of issuance costs and bank commissions) carried out in the first half (see the following paragraph). Overall, marketable securities and other
long-term assets increased by
€
2,041 million.
5.4.2.3 N
ET
CASH
PROVIDED
BY
/(
USED
IN
)
FINANCING
ACTIVITIES
Net cash used in financing activities amounted to
€
6,868 million in 2003, compared to
€
194
million in 2002, and compared to
€
4,726 million provided by financing activities in 2001.
These cash flows included the proceeds of the capital increase carried out in the
first half of 2003 for
€
14,852 million (net of issuance costs and bank commissions).
The other principal financing transactions in 2003 were the following bond issuances
by France Telecom S.A. (see also the discussion in “– 5.4.1.3 Bonds”):
n
bond issuance of
€
1 billion maturing in 2007,
n
bond issuance of
€
3.5 billion maturing in 2013,
n
bond issuance of 250 million in pounds sterling maturing in 2017,
n
bond issuance of
€
1.5 billion maturing in 2033.
In recent periods, France Telecom’s net cash used in financing activities has
been impacted by the debt it incurred during the period 1999 to 2002, as described in paragraph 5.4.1. Repayments of long-term debt and decreases in bank overdrafts and short-term borrowings amounted to
€
27,179 million in 2003.
France Telecom believes that its working capital is sufficient for its present requirements.
*
The tender offer for Orange shares is not extended into, nor can it be accepted in, the United States or in any other country in which such an offer would be illegal or subject to
restrictions (see “– 5.2.1.6 Capital Expenditures and Financial Investments – Financial Investments”).
5.5 CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
France Telecom’s contractual obligations are shown below using two tabular presentations, so as to distinguish those contractual obligations that constitute off-balance sheet arrangements (for example, certain purchase
obligations to fund networks).
As such, France Telecom’s
off-balance sheet arrangements are discussed in part by the means of the second table below, but also through the description (by category) of off-balance sheet arrangements that follows the table.
5.5.1 C
ONTRACTUAL
OBLIGATIONS
5.5.1.1. Contractual Obligations Reflected on the Balance Sheet
Payments due by maturity at December 31, 2003,
(
€
millions)
Note
Total
Before end of
December
2004
Between January
2005 and
December 2006
Between January
2007 and
December 2008
From
January
2009
Short-term borrowings
16
1,616
1,616
-
-
-
Long-term borrowings
16
47,827
9,057
12,613
8,116
18,041
- TP S.A. credit line draw downs
(1)
18
1,030
229
403
140
258
- Orange credit line draw downs
(2)
18
736
471
166
54
45
- Bonds convertible, exchangeable or redeemable into shares
(3)
17
6,838
3,553
3,285
-
-
- Capital leases
See below
355
46
47
81
181
Equant CVR
(4)
22
2,077
2,077
-
-
-
Early retirement plan
22
4,570
803
1,806
1,279
682
Total
56,090
13,553
14,419
9,395
18,723
(1)
Amount before swap:
€
1,065 million.
(2)
Amount before swap:
€
736 million.
(3)
Maximum amounts assuming no conversion or exchange.
(4)
As part of the Equant acquisition in 2001, France Telecom issued CVRs to certain beneficiaries. This commitment has been provisioned for maximum risk since December 2001 (see Note 22 of the
Notes to the Consolidated Financial Statements).
The following table summarizes off-balance sheet contractual obligations, except for the complex commitments described in “– 5.5.2 Other Off-Balance Sheet Commitments” and the commitments relating to assets
described in “– 5.5.3 Assets Covered by Commitments.”
Payments due by maturity at December 31, 2003,
(
€
millions)
Note
Total
Before end of
December
2004
Between
January
2005 and
December
2006
Between
January
2007 and
December
2008
From
January
2009
Operating lease
See below
6,766
1,036
1,878
1,730
2,122
Purchase obligations
(1)
- Investments re the Polish Treasury (TP Group)
See below
2,626
757
1,344
525
-
- Fixed assets
See below
826
792
27
-
7
- Other goods and services
See below
3,525
1,644
751
446
684
Commitments relating to the public service secondment plan
See below
76
38
38
-
-
Total
13,819
4,267
4,038
2,701
2,813
(1)
Off-balance sheet obligations relating to investments in non-consolidated companies are not included in this table (see “– 5.5.2.1 Commitments Related to Investment
Securities”).
The table below shows future minimum lease payments due under non-cancelable capital and operating leases at December 31, 2003:
At December 31, 2003,
(
€
millions)
Capital leases
(1),(2)
Operating leases
(3)
2004
57
1,036
2005
34
958
2006
32
920
2007
68
852
2008
28
878
2009 and beyond
206
2,122
Total minimum future lease payments
425
6,766
Less interest payments
(70
)
-
Net present value of minimum commitments
355
6,766
(1)
Included in the borrowings set out in Note 16 of the Notes to the Consolidated Financial Statements.
(2)
Not including lease payments on capital leases relating to Orange’s “in substance defeasance” transactions (see “– 5.5.3.1 Assets Held Under Capital Leases).
(3)
Lease payments taking the form of overhead (land, buildings, equipment, vehicles and other assets), including those relating to contracts entered into in connection with the sale of part of
France Telecom’s real estate (see below).
As part of
the divestment of certain of its real estate assets in 2001, 2002 and 2003 (see Note 10 of the Notes to the Consolidated Financial Statements), France Telecom is committed to re-lease these buildings except for certain assets to be vacated in the
short-term. Management expects that leases that expire may or may not be renewed or replaced by other leases in the normal course of business. Lease payments relating to the real estate divested as part of this program amounted to
€
290 million in 2003.
Lease payments under operating leases posted to the income statement in 2003 amounted to
€
1,211 million (
€
1,096 million in 2002).
n
Commitments related to network construction and operation
In connection with the awarding of licenses, concession contracts or the acquisition of businesses, France Telecom may be subject to certain obligations, not
included in the table above, imposed by administrative or regulatory authorities relating to network coverage, number of subscribers, quality of service and tariffs. Compliance with these regulations requires significant investments in future years
as part of network development plans in countries where a license was granted. Non-compliance with these obligations could result in fines and other sanctions ultimately including the withdrawal of licenses awarded. Management believes that France
Telecom has the ability to fulfill its obligations towards administrative or regulatory authorities.
Moreover, in certain exceptional cases, France Telecom is committed to perform or to vote in favor of valued investment programs. These include:
–
As part of the acquisition of TP Group by the France Telecom/Kulczyk Holding consortium (See Note 3 of the Notes to the Consolidated Financial Statements), France Telecom is committed towards
the Polish Treasury to vote in favor of a multi-annual investment program between January 1, 2001 and December 31, 2007. At December 31, 2003, the remaining amount to be invested by TP Group under this program amounted to
€
2,626 million (compared to
€
4,066 million at December 31, 2002).
–
In 1997, France Telecom (through its subsidiary FCR Vietnam) made a commitment to VNPT—the Vietnamese fixed line telephony operator—to provide and install new telephone lines in
Ho-Chi-Minh City. The investment initially provided for was U.S. $467 million over a period of 7 years. However, given the level of demand for new lines and the minimum 80% equipment usage rate, the total investment should not exceed U.S. $178
million. In view of the investments already incurred, the residual amount of the commitment is estimated at approximately U.S. $84 million at December 31, 2003.
–
On July 15, 2003, Orange and the two other mobile telephone operators in France signed a National Agreement (
Convention Nationale)
with the French government under
which they undertook to cover approximately 3,100 localities, representing deployment on approximately 2,250 sites, in connection with the French government’s requirements for coverage of certain low population zones (so called “white
zones”). An initial deployment phase concerning approximately 1,250 sites is to be
completed by the end of 2004. The amount of capital expenditure which is expected to be incurred by each of the three French mobile operators for this phase is
currently estimated at approximately
€
34 million, taking into account the French government’s contribution. The economic terms
and conditions of a second deployment phase concerning approximately 1,000 additional sites between 2005 and 2006 will be agreed during the first half of 2004.
n
Commitments relating to purchase and rental of network equipment, terminals and telecommunications lines
In the ordinary course of its activities, France Telecom enters into purchase contracts with network equipment manufacturers and
supply contracts with suppliers of terminals and other equipment, as well as various contracts with operators of telecommunications lines. Such purchases may form part of multi-annual contracts. The most significant commitments at December 31, 2003
relate to the following:
–
the rental of satellite transmission capacity for different engagements with maturities through 2015, depending on the contract, in an overall amount of
€
1,103 million.
–
the leasing of circuits by Equant in an amount of
€
439 million.
–
maintaining submarine cables for which France Telecom has joint ownership or user rights. These commitments amount to an overall estimated
€
308 million.
–
the outsourcing of certain customer services by Orange in France, in an amount of
€
104 million.
–
purchases of mobile telephone equipment by Orange, in an amount up to
€
381
million.
–
purchases of equipment relating to the deployment of Orange’s UMTS networks in France and the United Kingdom, in an amount of
€
130 million.
As the financial risks relating to leases are generally offset by income generated with clients and purchase commitments reflect the anticipated requirements of
France Telecom, the Group’s management considers that these commitments do not give rise to a material risk.
n
Commitments related to the public service secondment plan
On June 5, 2003, France Telecom signed a group level agreement with union representatives relating to employment and upstream skill-set management. This agreement
includes provisions applicable to the voluntary secondment, before December 31, 2005, of France Telecom’s civil service employees to other public service positions within local or national government or the hospital sector. As well as providing
for secondment, according to the agreement France Telecom will pay (i) training costs (based on a case-by-case review), (ii) an indemnity—paid at the time of secondment—intended to compensate for the difference between total remuneration
received at France Telecom and that received in the new position, where lower, over a period of two years (up to 60% of the former total annual base salary), and (iii) a bonus, paid at the time of the employee’s integration into the new public
service position, equivalent to four month’s remuneration. Similar provisions are included for private sector employees moving to the public sector.
Employees choosing secondment under this plan benefit from the provisions decided upon by the French government in decree no. 2003-1038 of October 30, 2003 setting
down specific conditions for the secondment of France Telecom civil servants to the public sector. The decree states that where France Telecom civil servants are seconded at their request to any government or public sector establishment or service,
none of the provisions in the specific bylaws regulating these establishments or services may prevent said secondment. It also sets down specific induction provisions for seconded civil servants. The decree also enables seconded civil servants to
take part in competitive examinations or other procedures for promotions relating to grades and categories within their new position based on their seniority and original grade within France Telecom. It also provides that the secondment of a France
Telecom civil servant is not taken into account in the determination of the number of work breaks used to calculate promotion possibilities.
Article 29-3 of the law of July 2, 1990, set up by law 2003-1365 of December 31, 2003 provides that France Telecom civil servants may be integrated, upon request,
into national or local government public sector positions or those in the hospital sector. This integration is subject to a preliminary training period, followed by a specific secondment period. Integration is based on the qualifications of the
civil servant concerned irrespective of the normal recruitment rules applicable to the public services accepting the new employees, except those for which a specific title or diploma is required. If the index obtained by the civil servant in the new
service is lower than that which he held in his original position, a lump-sum indemnity will be paid by France Telecom. In this case, at the time of his integration, the France Telecom civil servant may request to pay pension contributions based on
the salary on which his statutory pension contributions were based in his original position. This option is irrevocable and means that the payment of pension rights will be based on the same salary when the said salary is higher than that stated in
the first paragraph of article L15 of the Civil and Military Pension Code. The administrations or organizations accepting these employees also benefit from specific financial and other measures provided by France Telecom. The conditions for the
application of these provisions will be set by decrees issued by the
Conseil d’Etat.
The impact of the group level agreement and the provisions of the law of December 31, 2003 relating to secondment
to the public sector will depend on the career development aspirations of France Telecom employees and therefore on the number of volunteers. It will also depend on the volume and type of positions offered by the various public services and whether
those positions are suitable for the profiles of the secondment candidates. The consequences of the agreement will also be subject to the decisions made by the body responsible for the organization of integrations at the end of the secondment
period. Finally, the number of effective secondments carried out by volunteer civil servants will also depend on the legal and regulatory provisions applicable and the recruitment policies in place within the various public service organizations.
Therefore, the costs relating to these secondments are provisioned when
it is probable or certain that the obligation will result in an outflow of resources without an inflow of at least an equivalent amount and the amount concerned may be reliably measured. The provision is recorded based on the laws and regulations in
force when the secondment of a volunteer to a specific position is accepted by the secondment organization body.
In 2003, 709 employees were seconded to the public sector, of which 544 under the procedure set up by the agreement of June 5, 2003. Payments made amounted to
€
10 million and a provision of
€
9 million was recorded at December 31, 2003 to cover the remaining payments for secondment departures at December 31, 2003. If the volume of secondments observed in the second half of 2003 remains consistent through December
31, 2005 (the expiry date for secondments under the June 5, 2003 agreement), and based on the financial measures provided for under the agreement and the costs observed in 2003, the present value of costs to be incurred would amount to approximately
€
76 million. For the reasons mentioned above, at December 31, 2003 France Telecom was not in a position to accurately measure the
impact of this law.
5.5.2 O
THER
OFF
-
BALANCE
SHEET
COMMITMENTS
5.5.2.1 Commitments Related to Investment Securities
n
Commitments to acquire or sell securities
(a) As part of the tender offer for, followed by a compulsory purchase of, the outstanding shares in Orange launched on November 20, 2003 (see Note 3 of the Notes
to the Consolidated Financial Statements), France Telecom undertook to:
–
purchase all Orange shares not tendered to the offer at the price provided for during the offer and at the close thereof. At December 31, 2003, based on the number of Orange shares held by
minority shareholders (47.2 million), this commitment amounted to
€
448 million.
–
purchase all Orange shares issued prior to the closing of the offer upon the exercise of stock options. Based on the stock options outstanding at December 31, 2003 whose exercise period
started at the latest on March 31, 2004—the date on which the offer could have been closed if the legal claims to cancel the COB and CMF’s decisions were rejected (see Note 3 of the Notes to the Consolidated Financial Statements), France
Telecom estimated that this commitment would amount to
€
669 million.
After the close of the compulsory purchase, France Telecom intends to offer certain
Orange stock option holders and certain holders of Orange shares obtained upon exercise of stock options after the close of the offer, to enter into a liquidity contract no later than within three months following the publication date of the notice
stating the result of the offer. The terms and conditions for the implementation of the liquidity contract are described in Note 25 of the Notes to the Consolidated Financial Statements.
(b) As part of agreements between France Telecom and its partners within common subsidiaries or consortia, France Telecom has
undertaken to purchase shares held by such partners or to subscribe for new share issues. The most significant of these commitments are the following:
–
TP S.A.
Following the sale by the Polish government in 2000 and 2001 of shares in the Polish operator TP S.A., the consortium created by France Telecom and Kulczyk Holding has held 47.5% of TP S.A. since October 31, 2001. The Polish
government has undertaken that if it sells its TP S.A. shares as part of a public offer, it will grant a priority right of purchase to the consortium in relation to 10% of TP S.A.’s capital. At December 31, 2003, the Polish government’s
direct stake in TP S.A. was less than 4%. In addition the shareholders’ agreement between France Telecom and Kulczyk Holding includes the following clauses relating to the transfer of TP S.A. shares: (i) France Telecom has a preemption right
over any transfer of TP S.A. shares by Kulczyk Holding; (ii) France Telecom has a call option enabling it to purchase from Kulczyk Holding its original investment of 10% in TP S.A. (held through Tele-Invest) and its additional investment of 3.57%
(held through Tele-Invest II) after July 2006 or earlier in the event of a change of control or of violation of Kulczyk Holding’s obligations, at a price equal to the higher of the acquisition cost plus accrued interest and market value of the
shares; (iii) Kulczyk Holding holds a put option enabling it to sell to France
Telecom its original investment of 10% in TP S.A. and its additional investment of 3.57% until January 2007, at a price equal to its acquisition cost plus accrued
interest less dividends paid. In addition, under certain conditions (the insolvency of Kulczyk Holding or default on certain of its financial commitments, failure by France Telecom to respect certain financial ratios—see Note 20 of the Notes to
the Consolidated Financial Statements), the banks which financed the purchase of TP S.A. shares by Tele-Invest and Tele-Invest II—100% subsidiaries of Kulczyk Holding—can also demand that France Telecom take possession of all the shares
which the banks hold as security (or their rights over these shares) at a price equal to the residual amount due under the credit agreement plus interest. This commitment amounted to
€
2,155 million at December 31, 2003 and the commitment at term amounts to approximately
€
2.5 billion.
France
Telecom has recorded a provision for the difference between the commitment and the value in use of the TP S.A. shares to be received, i.e. a provision of
€
571 million in 2002, increased to
€
870 million at December 31, 2003 (See Notes 6 and 22 of the Notes to the
Consolidated Financial Statements).
If the Kulczyk Holding put option
had been exercised at December 31, 2003, France Telecom’s interest in TP S.A. would have increased from 33.93% to 47.50%. The main result would have been in an increase in borrowings of
€
2.2 billion, an increase in goodwill of
€
1.6
billion, and a decrease in minority interest of
€
0.6 billion. The provision of
€
870 million at December 31, 2003 would then have represented a partial write-down of the additional goodwill recognized on TP S.A.
–
Tower Participations
Pursuant to the agreements signed upon the sale of TDF and the acquisition of approximately 36% of the capital of Tower Participations SAS (See Note 3 of the Notes
to the Consolidated Financial Statements), France Telecom entered into a joint commitment with the other shareholders of the company to subscribe for convertible bonds and to exercise warrants prorata to its interest in the company, if Tower
Participations SAS so thinks fit. For France Telecom this represents a maximum commitment of
€
50 million.
–
Wirtualna Polska/TP Internet
TP Internet, a 100% subsidiary of TP S.A., has granted a put option on the shares of Wirtualna Polska S.A. held by the other shareholders. The exercise price is
indexed on the number of unique users of Wirtualna Polska S.A. up to a maximum of U.S. $66.40 per share. This option can be exercised between June 1, 2005 and June 1, 2006 provided the average number of users is above 3 million in the 12 months
preceding the exercise date of the option, or immediately if TP S.A. or one of its subsidiaries launches an Internet site in competition with Wirtualna Polska S.A.’s site. In 2003, TP Internet increased its stake in Wirtualna Polska S.A. from
50% to 80.46% by purchasing additional shares at a price of U.S. $15 per share, representing a total amount of U.S. $20 million. On December 9, 2003, minority shareholders holding 873,485 shares requested to exercise their option basing their claim
on the fact that TP S.A. had allegedly launched an Internet portal in competition with that of Wirtualna Polska. TP Internet however considers that the early exercise of the option is not justified. See “– 5.7.1 Subsequent Events”.
TP Internet has also granted a put option over shares of the company
Parkiet Media S.A. held by the other shareholders. As 279,164 shares were purchased by TP Internet in October 2003 , this option only concerns 40,400 shares. It is exercisable for up to 50% of the shares in 2004 and 50% in 2005 at a price indexed on
the sales and the net income of Parkiet Media S.A. for the year preceding the year during which the option is exercised. In 2003 the company had sales of
€
3 million and net income of
€
(0.2) million. France Telecom does not consider itself exposed to a significant
risk related to this option.
–
Orange Romania
On December 19, 2003, Wirefree Services Belgium (WSB), a wholly owned subsidiary of Orange, entered into a binding share sale and purchase agreement with one of its co-shareholders in Orange Romania S.A., whereby WSB agreed to
purchase 51,052,650 ordinary shares of Orange Romania S.A. (representing around 5.45% of its share capital) for a cash amount of U.S. $58.7 million, i.e. around
€
46 million. The completion of this transaction is subject to conditions precedent, i.e. the written consent of Orange Romania S.A.’s lenders and the notification of Orange Romania S.A. and its
shareholders. The closing is expected to take place by April 30, 2004 at the latest. In the event that, within a period of 12 months following the closing date, Orange acquires shares in Orange Romania S.A. from a third-party, for a consideration in
cash or tradable shares, and such acquisition price is greater than U.S. $1.15 per share in Orange Romania S.A., Orange would be obliged to pay a price adjustment to the seller equaling to the excess price per share.
–
Orange Dominicana
Orange’s co-shareholder in Orange Dominicana has a put option, exercisable on a quarterly basis between 2003 and 2007 at market value as determined by an
independent investment bank, whereby it can sell its 14% shareholding in this company. In 2003, the company had
€
90 million in sales
and 562,000 subscribers.
(c) France Telecom has agreed with its
partners in certain companies to various clauses for the compulsory or optional transfer of shares. The main objective of these clauses is to ensure that the parties concerned respect their commitments and to resolve differences between them. Most
of these clauses provide for the determination of a transfer price on the basis of market value, generally as fixed by an expert. France Telecom considers that the start up status of many of the companies concerned gives a
spread of values too large to be pertinent and that their publication would be prejudicial to France Telecom’s interests in normal negotiations between the
parties in the event of the transfer clauses being applied.
–
Orange Slovensko
The shareholders’ agreements which govern the relationships between Orange and its partners in Slovakia, which hold 36% of the company’s capital, provide
for the exercise of put and call options in the event of serious breach by one of the shareholders or if the partners cannot reach an agreement on a major issue even after a process of mediation. These options are in general exercisable at market
price. If Orange defaults on its commitments in Slovakia, the exercise price includes the estimated compensation payable to the other shareholders. In 2003, the company had
€
392 million in sales and 2,065,000 subscribers.
–
BITCO (Thailand)
If one shareholder of BITCO claims that one of its co-shareholders has committed a material breach under the terms of the shareholders’ agreement and that
claim is confirmed after dispute resolution procedures have been followed, the non-defaulting shareholder has a right to exercise a call option to buy the defaulting party’s shares at 80% of market value or exercise a put option to sell its own
shares to the defaulting party at 120% of market value. An act of insolvency of either party also entitles the other to exercise put or call options on the same basis. However, neither party can be compelled to complete a share transfer in
contravention of Thai law or without all applicable regulatory approvals. Thai law currently restricts foreign ownership of a Thai telecommunication company to less than 50%, so Orange cannot effectively either exercise a call or be compelled to
accept a put which would increase its present 49% stake to 50% or above. See “– 5.7.1 Subsequent Events”.
France Telecom wrote down in full the value of its stake in this company at December 31, 2003 (see Note 11 of the Notes to the Consolidated Financial Statements).
–
Mobinil (Egypt)
The shareholders’ agreements which govern relationships between Orange and Orascom provide for the exercise of put options in the event of a serious
disagreement between the parties or change of control of one party. In the event of a serious disagreement, the options are exercisable at market price. In the event of a change in control of the shareholders, the exercise price corresponds to 115%
of the market value, which is based on ECMS’ stock price (a listed company 51%-owned by Mobinil, which in turn is 71.25%-held by Orange) in accordance with calculation terms detailed in the shareholders’ agreement. With regard to Orange,
this clause would only apply to a change of ownership of 51% or more of France Telecom. For information purposes, ECMS’s market capitalization, based on the ECMS share price at December 31, 2003, amounted to
€
978 million for 100% of the shares.
–
Sweden
Orange’s co-shareholders in 3G Infrastructure Services AB (“3Gis”), a joint venture formed by Orange and two other operators in Sweden, have a call option on the interests held by Orange in 3Gis in the event of a
breach by Orange of its financing obligations to 3Gis or if the UMTS license held by Orange Sverige AB is transferred to a third party. The exercise price is the par value of the shares held by Orange Sverige AB in 3Gis. Following Orange’s
decision to withdraw from the Swedish market, Orange’s interests in 3Gis were written down in full at December 31, 2002 (see Note 6 of the Notes to the Consolidated Financial Statements). Orange Sverige AB terminated the 3Gis joint-venture
agreement as well as all other related contracts (see Note 29 of the Notes to the Consolidated Financial Statements), issued formal notice of this decision on May 8, 2003 and entered into an agreement to sell its UMTS license on December 29, 2003.
See “– 5.7.1 Subsequent Events”.
–
Denmark
In the event of material default by Orange on its significant obligations under the shareholders’ agreement for Orange Holding A/S, a 67.2%-held Denmark subsidiary, the other shareholders can force Orange to purchase their
shares in Orange Holding A/S at market value or, where the default is notified before July 20, 2002, at a price corresponding to the higher of market value and the initial investment amount plus 15% per year. Minority shareholders notified Orange of
such a default before July 20, 2002 and are claiming
€
127 million in damages, excluding interest (see the description of this
dispute in Note 29 of the Notes to the Consolidated Financial Statements). In the event of a default by the other shareholders on their obligations, Orange and the non defaulting parties can purchase the shares of the defaulting shareholders at 75%
of market value.
–
Darty France Telecom
Orange’s partner in the capital of Darty France Telecom S.N.C. has a put option relating to its 50% interest in the joint venture, exercisable in the event
that a dispute between the partners cannot be settled amicably or if Orange terminates the management agreement with the joint venture. The exercise price of the option is based on a contractual price formula and at December 31, 2003 was estimated
to amount to some
€
35 million.
–
Novis/Clix
The shareholders’ agreement of the Portugal-based Clix which governs the relationship between France Telecom and its partner Sonae, provides for the exercise of put or call options in the event of a material failure by one
of the shareholders to comply
with its obligations under the agreement, a change of control, or a serious disagreement between the parties. The options are subject to separate provisions relating
to matters such as their exercise period and price determination. Therefore the exercise price may be determined either by reference to market value (plus or minus 20% depending on the case), freely by the parties within the framework of a
“Texan clause”, or through an auction procedure.
Clix’s
2003 sales were
€
34 million and at December 31, 2003, it had 180,696 subscribers.
The shareholders’ agreement of Novis, which set out similar provisions, expired
on December 31, 2003 and France Telecom has notified Sonae that it does not intend to renew the agreement.
–
Noos
France Telecom holds the right to dispose of its Noos shares if Suez sells its stake in Noos
(“Tag Along”)
. Suez may compel France Telecom to sell its shares in Noos if: (i) Suez sells its entire interest or a
major part of its interest in Noos, (ii) such a sale involves at least 50% of Noos’s share capital
(“Drag Along”)
. Finally, Suez and Morgan Stanley Dean Witter Capital Partners IV LLC hold a pre-emptive right on these Noos
shares
(“Right of First Refusal”)
. The net book value of France Telecom’s stake in Noos was written down in full at December 31, 2003 (see Note 12 of the Notes to the Consolidated Financial Statements).
n
Commitments related to sale of investments
The asset and liability warranties generally granted by France Telecom in connection with the sale of investments are described in “– 5.5.2.2
Guarantees”. In exceptional cases, France Telecom has given or received other commitments, the most significant of which are as follows:
–
TDF
As part of the sale of
Telediffusion de France
(TDF), the shareholders’ agreement concluded between France Telecom, the investment funds and Caisse des Dépôts et Consignations gives control over Tower
Participations SAS to the investment funds who have the majority of representatives on the Supervisory Board. In the event of non respect of contractual provisions relating to the composition of the Supervisory Board or majority rules for the
general meetings of Tower Participations SAS shareholders are committed to pay a penalty of
€
400 million to the investment funds on
a pro rata basis.
Moreover, the shareholder agreement governs
shareholder liquidity rights, setting out certain preemption rights for joint exit and joint divestment.
Finally, upon future divestment of the shares of Tower Participations France, the shareholders have committed to share the gain on their investment as follows:
–
between 0 and 12.5% of internal rate of return (IRR), the gain is shared pro rata to the shareholders’ contribution
–
between 12.5 and 25% of IRR, France Telecom will pay to the financial investors 65% of its additional gain beyond the 12.5% of IRR,
–
once the financial investors reach an IRR of 25%, they will pay France Telecom 50% of their additional gain up to a ceiling of
€
300 million bearing interest at 7% per annum.
–
Eutelsat
In the context of the Eutelsat divestiture, France Telecom entered into an agreement with Eurazeo and financial investors of BlueBirds related to the distribution of cash resulting from the disposal by BlueBirds of its Eutelsat
shares (see Note 3 of the Notes to the Consolidated Financial Statements).
5.5.2.2. Guarantees
Commitments due by maturity at December 31, 2003,
Note
Total
Before end
of
Between
January
Between
January
From
January
December 2004
2005 and
2007 and
2009
(
€
millions)
December
2006
December
2008
Guarantees given to third parties by France Telecom
- as part of operating activities
(1)
See below
322
183
36
8
95
- in relation to disposals
(2)
See below
2,494
1,315
375
712
92
- as part of the TP S.A. acquisition
(3)
See
Note 28.2.1
2,460
2,460
- sale of carry back receivables
See below
1,706
-
-
1,706
-
- “QTE leases”
See below
1,506
-
-
-
1,506
Total
8,488
1,498
411
4,886
1,693
(1)
These concern warranties granted to cover the commitments of non-consolidated companies and companies accounted for by the equity method.
(2)
Limited guarantees.
(3)
Guarantees relating to the purchase commitment on Kulczyk shares.
The main commitments of France Telecom relating to borrowings are set out in Notes 16, 17 and 20 of the Notes to the Consolidated Financial Statements.
In the course of its business, the Group grants certain guarantees to third parties
(financial institutions, customers, partners and government agencies). These guarantees—which are given to ensure the proper performance of contractual obligations by France Telecom S.A. or its consolidated subsidiaries in the normal course of
their business—do not increase the Group’s commitments unless material minority interests exist in the subsidiaries whose obligations are guaranteed. In December 2003, France Telecom S.A. undertook to guarantee all of Equant’s
obligations under an outsourcing agreement. France Telecom’s maximum liability under this guarantee is $500 million. As indicated in footnote (1), this commitment is not included in the table above.
France Telecom grants guarantees relating to the commitments of non-consolidated
companies or companies accounted for by the equity method on an exceptional basis. France Telecom has also granted guarantees to certain banks and co-shareholders which have participated in financing certain subsidiaries. If a claim was made under
these guarantees, France Telecom would be required to reinvest in the subsidiaries concerned.
At December 31, 2003, the main guarantees given were as follows:
Ÿ
In February 2002, Orange and one of its co-shareholders in BITCO entered, on a joint and several basis, into a sponsor support deed in favour of equipment suppliers and a pool of Thai banks
in connection with a 24-month bridge loan facility of THB 27 billion (increased to THB 33 billion in November 2002, i.e.
€
659
million as at 31 December 2003) granted to TA Orange Company Limited (owned at 99.86% by BITCO). Under this agreement, Orange and one of its co-shareholders in BITCO:
–
have agreed to inject cash in TA Orange Company Limited up to a maximum amount of $175 million under limited circumstances (the main one being in the event of a cash shortfall in that
company).
–
might incur additional funding commitments towards TA Orange Company Limited in the event of changes in the regulatory environment prevailing in Thailand and if these were combined with a
cash shortfall in TA Orange Company Limited. Those additional funding commitments would represent the incremental costs that may be incurred by TA Orange Company Limited as a result of such regulatory changes, over and above the regulatory costs
already estimated as agreed with the lenders. The Thai authorities have expressed their intention to establish a competitive regime for the telecommunications industry, however uncertainties relating to the timing, nature and economic impact on TA
Orange Company Limited of such changes currently exist.
–
have committed to procure that TA Orange Company Ltd continues to operate and maintain its network, develop its business and its retail activities in a commercially prudent manner, and not
abandon the project regardless of the basis of its entitlement to operate its network.
In addition Orange must maintain control of WSB, the wholly owned subsidiary of Orange currently holding a 49% stake in BITCO, and WSB’s shareholding or voting
rights in BITCO should always be, directly or indirectly, more than 40%.
TA Orange Company Limited’ s bridge loan facility (drawn down in an amount of
€
638 million as at 31 December 2003)
matures on March 15, 2004. TA Orange Company Limited has sought the consent of all third-party lenders in order to obtain an extension of the maturity date of the bridge loan from March 15, 2004 to June 30, 2004. In addition, TA Orange Company
Limited has entered into negotiations with third-party lenders in order to substitute a long-term credit facility to the existing bridge loan facility. Under the existing sponsor support deed, Orange and one of its co-shareholders in BITCO could be
requested, as part of this new financing arrangement and subject to prevailing market conditions, to provide undertakings to third-party lenders on substantially the same terms as those described above. If TA Orange Company Limited was unable to
secure a new long term facility or sufficient alternative capital resources or loan facilities by the maturity date of the bridge loan, TA Orange Company Limited would be subject to a cash shortfall that could trigger the sponsors’ commitment
(on a joint and several basis) to inject cash in the company up to a maximum amount of $175 million, i.e. around
€
139 million.
Orange has initiated discussions with its co-shareholders in BITCO,
with a view to examine the possibility to reduce its current 49% shareholding in BITCO (see “– 5.7.1 Subsequent Events”). However, all the existing commitments of Orange under the financing arrangements of TA Orange Company Limited,
as described above, remain in place as long as these discussions have not led all concerned parties to enter into a legally binding agreement.
In the event that Orange had to make new contributions in favour of TA Orange Company Limited, Orange’s
ability to recover such contributions would depend upon several conditions, and particularly upon the commercial and financial achievements of TA Orange Company Limited.
Ÿ
Pursuant to a shareholder support agreement, Orange is required to make a shareholder contribution available to ONE GmbH (previously Connect Austria), a 17.45% owned investment, up to a
maximum amount of
€
68 million. Orange’s obligation under this agreement will be extinguished in 2009.
Ÿ
Following the sale of Wind which became effective on July 1, 2003 (see Note 11 of the Notes to the Consolidated Financial Statements), all agreements governing relationships between France
Telecom, Enel and Wind were terminated (including call and put options on shares) and Enel is committed to release France Telecom from all financial commitments related to its 26.58% stake in Wind (including funding commitments and guarantees) which
resulted from these agreements.
n
Asset and liability guarantees granted on disposals
As part of the agreements between certain Group companies and the acquirers of certain assets, subsidiaries or investments, France Telecom has accepted ordinary
warranty clauses relating to assets and liabilities in the event of a failure to comply with certain declarations made at the time of divestment. All material sale agreements provide for ceilings on these warranties. Management believes that the
risk of these warranties being called upon is unlikely or that the potential consequences of their being called upon are not material with regard to France Telecom’s results and financial situation.
The following table sets out the term and limits of the main guarantees granted:
(
€
millions)
Guarantee ceilings and expiry dates as of
December 31, 2003
Asset/investment sold
Beneficiary
Ceiling
Before end of
December
2004
Between
January
2005 and
December
2006
Between
January
2007 and
December
2008
Beyond
January
2009
– TDF
Tower Participations and subsidiaries
645
553
92
– Eutelsat
Eurazeo Blue Birds
462
462
– KPN Orange
(1)
KPN Mobile International
399
399
– Casema
Cable Acquisitions
250
250
– Stellat
Eutelsat
180
180
– Real estate
Financial institutions
168
168
– Pramindo Ikat
PT Indonesia
130
130
– France Televisions
Entreprises (TPS)
TF1
129
129
(1)
This guarantee was released on February 6, 2004.
n
Sale of carry back receivables
As part of the sale of carry back receivables resulting from the choice to carry back tax losses for the years 2000 (
€
235 million) and 2001 (
€
1,471 million), as set out
in Note 7 of the Notes to the Consolidated Financial Statements, France Telecom has accepted a habitual clause relating to the existence of sold receivables to the credit institution and is committed to indemnify it for any error or inaccuracy
identified in the amounts or nature of the receivables sold. The conformity of receivables sold has been guaranteed for a 3 year period from June 30, 2006 (2000 carry back) and June 30, 2007 (2001 carry back).
n
QTE Leases
As part of cross-leasing transactions (“QTE leases”) with different third parties, France Telecom has leased out and then leased back certain telecommunications equipment. The crossed flow of lease payments and France
Telecom’s remuneration were prepaid at the outset of the contracts and, for this reason, are not shown in the table concerning minimum future lease payments (see “– 5.5.1.2 Off-Balance Sheet Contractual Obligations”). Of the
remuneration, the portion which pays for the guarantee against third party commitments given by France Telecom is recognized as income over the period of the guarantee. France Telecom estimates that the risk of the guarantee being called upon is
negligible. At December 31, 2003 the guarantee represented
€
1,506 million.
The table below shows the Company’s capacity to freely use its assets as at December 31, 2003.
At December 31, 2003,
(
€
millions)
Note
Total
Assets held under capital leases
See below
896
Fixed assets pledged or mortgaged
(1)
See below
10,844
Collateralized assets
See below
785
Outstanding sold receivables
(2)
13
1,722
Total
(3)
14,247
Pledged consolidated shares
(4)
See below
246
(1)
Value in the consolidated accounts of assets given as securitycapi (including pledged non-consolidated shares).
(2)
Subordinated portion and deferred prices retained by the Group in relation to sold receivables.
(3)
Including
€
788 million corresponding to assets of companies whose shares
have been pledged (see below).
(4)
Value based on their contribution to consolidated net assets in the Group’s balance sheet.
5.5.3.1 Assets Held Under Capital Leases
n
Assets held under capital leases amounted to
€
896 million at December 31,
2003 including
€
370 million relating to “in substance defeasance” operations.
n
As part of the capital lease agreements concluded in 1995 and 1997, Orange in the United Kingdom has deposited amounts equal to the present value of its rental obligations with U.K. financial
institutions to secure letters of credit issued by these institutions to the lessors in connection with Orange’s rental obligations. These funds, which totaled
€
1,063 million at December 31, 2003 (
€
1,157 million at December 31, 2002), together with
the interest earned thereon, will be used to settle Orange’s rental obligations under the leases.
These operations, which in substance are the same as early extinguishments of capital lease commitments, result in the offset of the deposit amount and the capital
lease obligation. Accordingly the related capital lease obligations are not shown in the table in “– 5.5.1.2 Off-Balance Sheet Contractual Obligations”. The operations resulted in a net gain which has been recorded in the consolidated
balance sheet as deferred income and will be amortized to the statement of income over the lease term on a straight-line basis. The net gain was calculated by deducting a provision recorded to cover future costs relating to probable changes in
interest or tax rates, as estimated by the company’s management.
Orange plc has received guarantees from its former shareholders, Hutchison Whampoa and British Aerospace, and has third party liability insurance, to cover the payments under the 1995 finance leases, should the deposit banks become
insolvent. In respect of the 1997 finance leases, the lessors bear the risk in the event of insolvency.
5.5.3.2 Pledges, Mortgages and Other Securities
n
Various fixed and current assets of the France Telecom group have been pledged or awarded as guarantees, representing an amount of
€
11,875 million at December 31, 2003.
Out of this total,
€
10,885 million concerns
assets owned by Orange awarded as guarantees to financial institutions in order to guarantee the repayment of bank loans and credit lines, the used portion amounting to
€
736 million for the France Telecom Group (
€
927 million for Orange) and totaling
€
1,812 million for the France Telecom Group (
€
2,002 million for Orange) at December 31, 2003.
The main pledged assets relate to the following at December 31, 2003:
–
substantially all of Orange Holdings UK’s and its subsidiaries’ fixed assets in an amount of
€
8,723 million, as well as current assets and cash balances of Orange subsidiaries in the United Kingdom in an amount of
€
578 million. On February 4, 2004 the security over these assets was released following the cancellation of the related credit facility;
–
real estate owned by Mobistar S.A (Belgium) in an amount of
€
485 million,
in order to guarantee the payment of a credit line which was repaid before December 31, 2003. However this guarantee has not yet been released;
all or part of Orange’s consolidated investments in Romania, Egypt, Cameroon, Botswana, the Dominican Republic and Madagascar and its non consolidated investments in Portugal and Sweden
(i.e. the interest held by Orange Sverige AB in 3Gis exclusively) ;
–
current assets of the Orange Group in Romania.
n
As part of swaps contracts, France Telecom may be required to deposit cash collateral, of which the amount recorded at December 31, 2003 was
€
910 million (see Note 16.1 of the Notes to the Consolidated Financial Statements).
At December 31, 2003, Management considers that, to the best of its current knowledge, there are no existing commitments likely to
have a material impact on the current or future financial situation of France Telecom, other than those listed above.
5.6 CRITICAL ACCOUNTING POLICIES AND ESTIMATES UNDER FRENCH GAAP
France Telecom’s discussion and analysis of its financial condition and results of operations are based upon France Telecom’s Consolidated Financial
Statements, which have been prepared in accordance with accounting principles generally accepted in France. France Telecom’s reported financial condition and results of operations are sensitive to accounting methods, assumptions, estimates and
judgments that underlie the preparation of its financial statements. France Telecom bases its estimates on its experience and on various other assumptions deemed reasonable, the results of which form the basis for making judgments about the carrying
values of its assets and liabilities. Due to different assumptions and situations, actual results may differ significantly from these estimates.
The selection and application of the accounting policies by France Telecom, the judgments and other uncertainties affecting application of those policies and the
sensitivity of reported results to changes in conditions and assumptions of management are factors to be considered when reviewing France Telecom’s Consolidated Financial Statements.
Critical accounting policies and estimates under French GAAP
France Telecom’s management believes the critical accounting policies described
below involve the most significant judgments and estimates used in the preparation of its Consolidated Financial Statements under French GAAP. For a discussion of certain critical accounting policies under U.S. GAAP, see “– 5.8 Information
Related to U.S. Generally Accepted Accounting Principles (U.S. GAAP)”.
Accounting for long-lived assets
Property, plant and
equipment and intangible assets other than goodwill are recorded at their acquisition cost. When such assets are acquired in a business combination, purchase accounting requires judgment in determining the estimated fair value of the assets at the
date of the acquisition and their useful lives over which the costs of acquiring these assets are charged to the income statement. As at December 31, 2003, 2002 and 2001, total Property, plant and equipment amounts to total
€
30.6,
€
36.2 and
€
31.7 billion and total intangibles assets (mainly telecom licences,
trademarks, customer relationships and rights of use) amounts to
€
16.5,
€
18.4 and
€
18.2 billion.
Other intangible assets and plant, property and equipment are depreciated when the
causing events and circumstances arise over the period. The determination of such impairments involves the use of estimates, which include but are not limited to the cause, the timing and the amount of the impairment. Among impairment indicators,
France Telecom typically considers obsolescence, physical damage, significant changes in their usage, performance below forecast, decreasing revenues and other external indicators. As described in Note 9
of the Notes to the Consolidated
Financial Statements, such events have led France Telecom to test for impairment the United Kingdom UMTS license at December 31, 2003, as it did at December 31, 2002.
When impairment is deemed necessary in the light of those indicators, the recoverable value of the assets is estimated by France
Telecom’s management. The recoverable value is the higher of the realizable value and the value in use. Impairment tests are performed by group of assets by comparing the recoverable value and the carrying value (when a depreciation charge
appears necessary, the amount recorded is equal to the difference between the carrying value and the recoverable value).
For assets destined to be kept and used, the recoverable value is most often determined on the basis of the value in use, representing the value of expected future
economic advantages from its use and disposal. It is assessed notably by reference to discounted future cash flows determined using economic assumptions and forecast operating conditions used by the management of France Telecom or by reference to
the cost of replacement taking into account asset ageing or cost of technology.
For assets destined to be divested, the recoverable value is determined on the basis of the realizable value, and this is assessed on the basis of market value.
As indicated above, the discounted future cash flows used for determining the value in use are evaluated based on
management’s forecasts. Those forecasts could differ significantly considering several factors composed primarily of:
– telecommunications market regulations;
– influence
of competitors;
– evolution and utilization of new technologies;
– level of appeal of these new technologies and related services to the customers; and
– discount rate.
Goodwill
The determination of goodwill is dependent on the allocation of the purchase price to the tangible and intangible assets acquired and
the liabilities assumed. Such an allocation is based on management’s judgment. The useful lives assigned to different goodwill are estimates based on management’s assumptions and defined objectives at the time of the acquisition. As of
December 31, 2003, 2002 and 2001 the net book value of goodwill amounted respectively to approximately
€
25.8,
€
28.8,
€
38.9 billion.
The recoverable value
of goodwill is subject to review annually and when events or circumstances occur indicating that an impairment may exist. Such events or circumstances include significant, other than temporary, adverse changes in the business environment, or in
assumptions or expectations considered at the time of the acquisition.
France Telecom generally analyzes recoverable value based on the grouping of activities within its principal subgroups.
France Telecom considers that this level of analysis reflects:
n
the fact that the entities have similar business or market (technology, trademark, customers, marketing),
n
the fact that the entities share common resources (IT platforms, research and development, management, financing),
n
the strategic premiums accepted by France Telecom to acquire these activities in order to regroup them with those held previously within coherent sub groups benefiting from increased growth
potential.
For the other consolidated companies,
including equity accounted companies, the recoverable value is assessed on an individual basis.
The assessment of whether or not an impairment charge is necessary is done by comparing the consolidated carrying value of the activity with its recoverable value.
Recoverable value is the higher of the realizable value and the value in use.
The realizable value is determined as the best estimate of the sales value net of costs of exiting the activity within a transaction at normal market conditions. This
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