Item 4. INFORMATION ON FRANCE TELECOM
4.1 HISTORY AND DEVELOPMENT
History and Development
Formerly a part of the French Telecommunications Ministry, France
Telecom was created as a legally distinct public sector operator in 1991. Since December 31, 1996 it has operated as a corporation (
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:
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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;
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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
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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.
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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:
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to provide all electronic communication services in domestic and international relations;
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to satisfy missions related to public service and, in particular, to provide, where applicable, a universal telecommunications service and other mandatory services;
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to establish, develop and operate electronic communications networks open to the public necessary for providing said services and to interconnect the same with other French and foreign
networks open to the public; and
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to provide all other services, facilities, terminal equipment, electronic communications networks, and to establish and operate all networks distributing audiovisual services, and especially
radio, television and multimedia broadcasting services.
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17
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:
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(1)
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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.
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(2)
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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.
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(3)
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France Telecom holds 70.6% of Wanadoo S.A.’s share capital and 71.1% of voting rights (after adjustment for treasury shares).
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(4)
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As part of a consortium with Kulczyk Holding.
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(5)
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This percentage represents the share of the capital held by France Telecom in Jordan Telecommunications Company via Jitco which holds 40.0% of Jordan Telecommunications Company which is in
turn 88.0% owned by France Telecom.
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18
4.2 STRATEGY
4.2.1 “A
MBITION
FT 2005” P
LAN
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:
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“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”.
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“15+15+15”: a plan to strengthen the Group’s financial structure:
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more than
€
15 billion in net cash generated through the TOP Program and
allocated to reduce debt, as described above;
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€
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;
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€
15 billion from refinancing the Group’s debt.
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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.
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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.
19
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.
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Cash flow (in
€
millions)
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2003
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2002
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Net cash provided by operating activities
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11,322
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11,839
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Net cash used in investment activities
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(3,737
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)
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(11,514
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)
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Net cash flow provided by operating activities less cash flow used in investing activities (free cash flow)
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7,585
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325
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Increase in short-term marketable securities linked to the capital increase
(1)
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1,833
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0
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Free cash flow excluding the increase in short-term marketable securities
(1)
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9,418
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325
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Proceeds from asset disposals
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(3,046
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)
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(1,436
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Free cash flow excluding asset disposals
(1)
and the increase in short-term marketable securities
(2)
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6,372
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(1,111
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)
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(1)
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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” .
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(2)
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Included in investment securities.
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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.
20
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:
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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
”).
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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.
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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.
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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.
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With regards to information systems, actions undertaken within the framework of the TOP Program have three goals:
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reduction in information system expenses of the Group;
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implementation of a Group-wide information system;
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establishment of governing principles for the entire Group.
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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.
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In order to decrease advertising and communications expenses and other related activities, in relation to their 2002 levels, with an objective of decreasing costs by
approximately
€
200 million in 2003 and approximately
€
600 million over the period
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from 2003 to 2005, an advertising investment committee is coordinating France Telecom’s policy and is refocusing expenditure on sales advertising. A committee has
also been formed to examine sponsorship and to coordinate and optimize expenditure at the group level.
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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.
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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.
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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.
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2002
(in %)
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2001
(in %)
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2000
(in %)
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1999
(in %)
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1998
(in %)
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France**
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2.9
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2.9
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2.7
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2.4
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2.1
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United Kingdom*
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N/A
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3.9
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3.8
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3.5
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3.1
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Germany*
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N/A
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3.1
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2.7
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2.4
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2.3
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**
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Source: Calculation provided by the Company based on INSEE’s data.
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Trends in the World Market
The world market for telecommunications services, valued at $1128 billion by Idate, grew by 5.6% in value in 2003 compared to 5.2% in 2002. Based on forecasts for
the coming years, growth is expected to continue at an annual rate of approximately 5% between now and 2007 (source: Idate).
The momentum of the sector is mainly driven by the Internet (17% increase in value in 2003 and an expected 12% increase between now and 2007), wireless telephony
(11% increase in value in 2003 and an expected 7% increase annually for the period from 2004 to 2007) and by data services (6% increase in 2003). The number of mobile telephones in service in 2003 exceeds the number of fixed lines: 1.3 billion
mobile telephones compared to 1.2 billion fixed lines throughout the world. The number of Internet users should reach 1.1 billion by 2007 compared to 700 million in 2003 (source: Idate).
Steady Growth in Europe
In 2003, the European market continued to grow more quickly in value than the North American market (4% compared to 1%) (source: Idate). According to Idate, this
difference is likely to continue over the coming years: 3.4% compared to 2.9% annually by 2007 (4.9% in France).
With an 82.5% penetration rate in 17 countries in Western Europe, wireless telephony has become the sector’s biggest segment with 46% of the market in 2003.
The continued growth of wireless services will be spurred on by higher speed services (GPRS then UMTS) along with the arrival of new services (MMS, content), with expected growth of more than 4% in value per year between 2003 and 2007. However, the
strongest growth will come from broadband and the Internet which will rise by more than 14% in value annually between 2003 and 2007 (source: Idate).
Germany and the United Kingdom are still the biggest markets in Europe with 21% and 18% of the Western European market (17 countries), followed by Italy and France
with 14% and 13%, respectively (source: Idate).
In 2003, the French
market grew by 5.2% in value. The fixed line market fell slightly by 1% while wireless telephony rose by 6.5% and the wireless penetration rate reached 65% (source: Idate). The Internet and broadband market grew very sharply by over 50% in value
between 2002 and 2003, although it only accounts for 6% of the total market. France has the second largest number of broadband customers after Germany (source: Idate).
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Usage Trends
The technological momentum of the telecommunications sector has put into the hands of its customers a variety of means of communication, which represent for the
customers the characteristics and benefits shown in the table below:
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Type of service
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Main customer benefits (key words)
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Fixed line telephony
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Real time, reliable, low cost
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Wireless telephony
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Personalized, ubiquitous, modern, many functions
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SMS
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Personalized, private, fast, cheap, always available
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Email, Internet
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Always available, efficient, cheap, worldwide
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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.
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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);
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several identities are required for the services – telephone numbers, email addresses;
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applications can be incompatible with those of their contacts, as is the case with instant messaging programs at present;
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there are numerous online payment methods, which are not universally accepted by businesses.
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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:
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messaging services that can forward messages to each other according to the customer’s instructions;
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n
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notification that an address book contact is present and available;
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n
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access to services on any access network or terminal.
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23
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
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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.
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n
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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.
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.
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n
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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.
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n
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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.
|
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n
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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:
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n
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new, advanced Internet services (online games, photo albums, image messaging);
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n
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image services (TV through ADSL, VOD);
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n
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advanced telephony services (personal communications, videophony);
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n
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advanced wireless services (Image messaging, videophony, UMTS).
|
24
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:
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n
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In terms of business areas, the core areas will be wireless services and broadband access services, providing multi-service offerings;
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n
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In terms of services, the three services of the Group are the following:
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n
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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;
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n
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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:
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n
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personal communications;
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n
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new broadband services;
|
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:
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n
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manage identity and authentication procedures independently of the access network (cross-company project: identity/authentification);
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n
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have a single address book that can be used from any terminal or service (cross-company project: address book);
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n
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know that an address book contact is present and available (cross-company project: contact);
|
25
|
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n
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contact someone on their chosen network or terminal regardless of which network or terminal they are being contacted on (cross-company project: availability); and
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n
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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:
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n
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Network technologies: very high speed transmission on fixed line networks, optimized use of the Hertz spectrum, new generations of IP networks;
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n
|
Functional middleware: communications middleware (identity, presence, localization, contact list, profile management), security technologies, payment mechanisms, technologies to manage
conditional access and rights;
|
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n
|
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:
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|
n
|
networks and information systems support technologies;
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|
n
|
terminal equipment (for example in the wireless sector with signature devices developed by suppliers according to ergonomic specifications defined by Orange);
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n
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content (for example with regards to new offers on ADSL);
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n
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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,
26
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:
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|
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”.
|
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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.
27
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
|
extended range of connectivity;
|
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
|
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
28
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:
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n
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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;
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n
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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);
|
|
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n
|
widely use IP as a unifying means of intra- and inter-company exchanges;
|
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n
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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;
|
|
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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;
|
|
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n
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offer application solutions that rely on France Telecom’s network solutions (network security services, hosting of messaging systems and websites);
|
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|
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;
|
29
|
|
n
|
expand its direct and indirect sales networks;
|
|
|
n
|
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:
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:
|
|
-
|
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.
|
|
|
-
|
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”.
30
4.3 BUSINESS OVERVIEW
4.3.1 D
ESCRIPTION
OF
THE
G
ROUP
Structure
The Group structure was simplified in December 2002 by creating clear distinctions between the operational divisions and the central functions. On March 30, 2004, France Telecom modified its organizational structure. The new
structure is shown in the following table:
Organizational structure of France Telecom
(Divisions
and Functions)
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”).
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|
n
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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.
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|
|
n
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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.
|
31
|
|
n
|
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.
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|
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.
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|
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:
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|
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
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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”.
32
Wanadoo
France Telecom carries out most of its multimedia and Internet activities through its subsidiary Wanadoo S.A. Wanadoo is a major player on the European Internet and
directories market. At December 31, 2003, Wanadoo had 9.153 million active customers (8.535 million active customers at December 31, 2002 and 6.067 million active customers at December 31, 2001) (source: Wanadoo), 17.159 million single visitors over
all of its properties in December 2003 (14.352 million in December 2002) (source: Nielsen – panel Home) and 641,000 directory advertisers (638,000 in December 2002 and 650,000 in December 2001). Wanadoo is the market leader for Internet
services in France and in the United Kingdom, and the second biggest in Spain and in The Netherlands (sources: Idate, ART, European Commission,
Conseil de la concurrence
, AFA, Interview NSS). At December 31, 2003, Wanadoo had 2.453 million
broadband customers via cable and ADSL in France (compared to 1.374 million at December 31, 2002 and 545,000 at December 31, 2001) and 275,000 online advertisers in its directories (compared to 238,000 at December 31, 2002 and 202,000 at December
31, 2001) (source: Wanadoo). Wanadoo S.A. shares have been listed on the
Premier 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
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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;
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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
33
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
34
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:
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n
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the increasing needs of France Telecom customers for integrated services on a fixed line/wireless platform;
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|
|
n
|
a growth strategy based on developing new innovative services;
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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
35
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.
36
France and the United Kingdom
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|
|
|
|
|
Country
|
|
Operator
|
|
Percentage
controlled
by Orange
S.A.(%)
(1)
|
|
Total number of customers
(in millions)
|
|
2G
|
|
3G licenses
(6)
allocation
date/Renewal date
|
|
|
|
|
At
December 31,
2003
|
|
At
December 31,
2002
|
|
At
December 31,
2001
|
|
|
|
|
France
|
|
Orange France
(mainland)
|
|
100.0
|
|
19.6
|
|
18.53
|
|
17.2
|
|
GSM900/1800
|
|
August 2001/
August 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orange
Caraïbe
|
|
100.0
|
|
0.58
|
|
0.54
|
|
0.5
|
|
GSM900/1800
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orange
Réunion
|
|
100.0
|
|
0.16
|
|
0.13
|
|
0.1
|
|
GSM900/1800
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
Orange UK
|
|
100.0
|
|
13.65
|
|
13.3
|
|
12.4
|
|
GSM1800
|
|
September 2000/
December 2021
|
|
Rest of World
Wholly Owned Subsidiaries and Majority Interests
(5)
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Country
|
|
Operator
|
|
Percentage
controlled
by Orange
S.A.(%)
(1)
|
|
|
Total number of customers
(in millions)
|
|
2G
|
|
3G licenses
(6)
allocation
date/Renewal date
|
|
|
|
|
At
December 31,
2003
|
|
At
December 31,
2002
|
|
At
December 31,
2001
|
|
|
|
|
Belgium
|
|
Mobistar
|
|
50.8
|
|
|
2.6
|
|
2.3
|
|
2.5
|
|
GSM900/1800
|
|
March 2001/
March 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denmark
|
|
Orange
Denmark
|
|
67.2
|
|
|
0.6
|
|
0.5
|
|
0.6
|
|
GSM1800
|
|
September 2001/
October 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luxembourg
|
|
Orange
Luxembourg
|
|
100.0
|
|
|
–
|
|
–
|
|
–
|
|
–
|
|
June 2002/
June 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netherlands
|
|
Orange
Nederland
|
|
100.0
|
|
|
1.3
|
|
1.0
|
|
1.1
|
|
GSM900/1800
|
|
July 2000/
December 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rumania
|
|
Orange Romania
|
|
67.8
|
|
|
3.3
|
|
2.2
|
|
1.6
|
|
GSM900
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Slovakia
|
|
Orange
Slovensko
|
|
63.9
|
|
|
2.1
|
|
1.7
|
|
1.2
|
|
GSM900/1800
|
|
June 2002/
July 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Switzerland
|
|
Orange
Communications
S.A.
|
|
100.0
|
|
|
1.09
|
|
0.96
|
|
0.9
|
|
GSM1800
|
|
December 2000/
December 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Egypt
|
|
ECMS (MobiNil)
|
|
71.25
(2
|
)
|
|
2.1
|
|
1.6
|
|
1.4
|
|
GSM900
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Botswana
|
|
Orange
Botswana
|
|
51.0
|
|
|
0.16
|
|
0.1
|
|
0.1
|
|
GSM900
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cameroon
|
|
Orange
Cameroun
|
|
70.0
(3
|
)
|
|
0.5
|
|
0.3
|
|
0.21
|
|
GSM900
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ivory Coast
|
|
Orange Côte
d’Ivoire
|
|
85.0
|
|
|
0.6
|
|
0.5
|
|
0.34
|
|
GSM900/1800
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Madagascar
|
|
Orange
Madagascar
|
|
65.9
(4
|
)
|
|
0.14
|
|
0.1
|
|
0.1
|
|
GSM900
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominican Republic
|
|
Orange
Dominicana
|
|
86.0
|
|
|
0.6
|
|
0.4
|
|
0.28
|
|
GSM900
|
|
–
|
|
37
Minority Shareholdings
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Country
|
|
Operator
|
|
Percentage
controlled by
Orange
S.A.(%)
(1)
|
|
Total number of customers
(in millions)
|
|
2G
|
|
3G licenses
(6)
allocation
date/Renewal date
|
|
|
|
|
At
December 31,
2003
|
|
At
December 31,
2002
|
|
At
December 31,
2001
|
|
|
|
|
Austria
|
|
ONE
|
|
17.5
|
|
1.4
|
|
1.3
|
|
1.4
|
|
GSM1800
|
|
November 2000/
December 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portugal
|
|
Optimus
|
|
20.2
|
|
2.0
|
|
1.9
|
|
1.9
|
|
GSM900/1800
|
|
December 2000/
January 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
India (Mumbai)
|
|
BPL Mobile
|
|
26.0
|
|
0.85
|
|
0.6
|
|
0.38
|
|
GSM900
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thailand
|
|
TA Orange
|
|
48.9
|
|
1.8
|
|
1.3
|
|
–
|
|
GSM1800
|
|
–
|
|
|
|
(1)
|
At December 31, 2003, directly or indirectly.
|
|
|
(2)
|
Orange holds MobiNil under joint control with Orascom Telecom. Accordingly under MobiNil’s French GAAP, MobiNil’s financial and operating data are proportionally consolidated at
71.25%. MobiNil’s total customer base (at 100%) was 3 million at December 31, 2003.
|
|
|
(3)
|
France Telecom holds the remaining 30% of the shares of Orange Cameroun.
|
|
|
(4)
|
Orange holds 51% of Telsea, a holding company which owns 65.9% of Orange Madagscar. This is the percentage used in the table.
|
|
|
(5)
|
Orange owns 100% of Orange Sverige AB (Sweden) but has announced that it intends to withdraw from this market.
|
|
|
(6)
|
For more information on the cost of acquiring UMTS licenses, see “Item 5. Operating and Financial Review and Prospects – 5.2.2.1 Orange Segment”.
|
|
|
(7)
|
Orange also holds a minority interest of 28.3% in MobilCom (Germany) and has announced that it intends to withdraw from this market. Orange sold its shareholding in Wind (Italy) on July 1,
2003. (See “– 4.4 Divestitures”).
|
Controlled Wireless
Operations in France
On December 31, 2003, France was the fourth
largest market for wireless telecommunications in western Europe after Germany, Italy and the United Kingdom. The French market grew by 8% in 2003 (4.3% in 2002 and 24.6% in 2001). The penetration rate of 69.1% (64% at December 31, 2002 and 61.6% at
December 31, 2001) is one of the lowest in western Europe. Nevertheless, the priority on the French market has shifted from customer acquisition to creating value and developing customer loyalty.
At December 31, 2003, Orange France had approximately 20.3 million registered
customers (including French overseas departments) (19.2 million at December 31, 2002 and 17.8 at December 31, 2001) with a market share of 48.8% (49.8% at December 31, 2002 and 48.2% at December 31, 2001) (source: ART).
Prior to June 2001, Orange France offered its services under three main brands:
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
38
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
39
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.
|
40
Sales, Distribution and Customer Service
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.
41
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
42
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.
|
43
|
|
n
|
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.
44
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.
45
The Netherlands
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.
|
46
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.
47
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)
|
|
1.09
|
|
0.96
|
|
0.9
|
|
|
|
|
|
|
|
|
Orange Communications S.A. market share (%)
(1)
|
|
18.0
|
|
17.0
|
|
17.1
|
|
|
|
|
|
|
|
|
Orange Communications S.A. revenues (
€
millions)
(2)
|
|
775
|
|
694
|
|
587
|
|
|
|
|
|
|
|
|
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.
48
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).
49
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
50
(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
51
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).
|
52
Services and Content
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
|
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.
53
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.
54
Subscriptions
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.
|
55
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.
56
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
”,
57
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
58
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
59
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
60
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
61
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;
|
|
|
n
|
advanced access called OCTOPUS XL (30B+D) for medium and large sized companies.
|
62
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.
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“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.
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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”.
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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
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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.
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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:
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disposals of subsidiaries and consolidated shareholdings: Casema, Eutelsat, Wind, CTE Salvador and Nortel/Telecom Argentina;
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disposals of other shareholdings: Sprint PCS, Bull (bonds with option of conversion into new or existing shares), Immarsat.
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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”.
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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.
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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.
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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
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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).
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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.
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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).
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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:
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international Internet access providers, whether or not associated with telecommunications operators, such as AOL, T-Online (Club Internet), Tiscali and 9Telecom;
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companies operating cable networks (Noos);
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independent Internet access providers with national (Free) or local coverage;
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market players that propose Internet access as a means of acquiring audiences associated with services such as banks and large retailers.
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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.
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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:
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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;
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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);
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other medias such as newspapers, television, radio and other advertising media (advertising displays, etc.).
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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
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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:
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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.
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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.
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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.
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“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.
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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:
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telephone lines: approximately 90%;
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domestic long distance communications: approximately 86%;
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international communications: approximately 90%;
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fixed line communications toward mobile telephones: approximately 99%.
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For fixed line services, the main competitors of TP Group were the following:
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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);
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Netia, whose capital is held by financial investors;
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Tele 2, a subsidiary of Tele 2 AB, which is among the principal shareholders of the Swedish group, Kinnevik.
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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
70
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%
71
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.
Equant
Equant registered a large number of domain names including:
“
equant.com
”, “
equant.net
”, “
equant.co.jp
”, “
equant.de
”, “
equant.jp
”, “
equant.ru
”, “
equant.as
”, “
equant.bt
”,
“
equant.ca
”, “
equant.cc
”, “
equant.ch
”, “
equant.co.uk
”, “
equant.com.ar
”, “
equant.com.au
”, “
equant.it
”,
“
equant.li
”, “
equant.se
”, “
equant.tm
”, “
equant.ur
”, “
equant.uz
”, “
its.co.jp
”, “
sitaequant.com
”, “
equantsita.com
”.
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TP Group
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:
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Consolidation of procurement volumes;
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Assessment of the best price;
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Globalization in terms of procurement;
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Streamlining technical specifications;
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Joint improvement of processes shared with suppliers;
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Restructuring of supplier relationships.
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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:
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a reduction from 50 to 13 in the number of data storage configurations;
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a reduction from 68 to 30 in the number of service provider profiles in the information system;
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-
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a reduction from 116 to 55 in the number of wireless models purchased.
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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.
73
4.10 PROPERTY, PLANTS AND EQUIPMENT
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).
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Asynchronous Transfer Mode (ATM)
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.
75
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:
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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;
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it accelerates the development of new services by reducing the number of infrastructures on which they are based; and
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it facilitates international deployment by providing the company’s best technologies to all its companies and subsidiaries.
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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
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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
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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.
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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 t
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