Cablegate: France Telecom's Transformational Strategy

DE RUEHFR #1418/01 1001406
R 101406Z APR 07





E.O. 12958: N/A
SUBJECT: France Telecom's Transformational Strategy

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1. (SBU) On March 30, France Telecom (FT) executives told us that FT
had to expand into new areas, both geographically and functionally,
since telecom services were minimally profitable in France. FT
emphasized that value-added services delivered through broadband and
mobile telephony would be the most profitable businesses in
developed countries, while developing countries had greater yields
in mobile telephony. On services, FT has developed a new "triple
play" offering, combining telephony with broadband Internet and
television, under its well-known mobile telephone "Orange" brand.
FT is building out its fiber network to offer high value services,
such as video on demand. Geographically, FT is putting more
emphasis on growing its cellular business in higher-yielding
emerging markets, such as Eastern Europe, Africa, and China.
However, FT pointed out that that new European Commission
recommendations forcing providers to share cutting-edge broadband
infrastructure with rivals would slow down incumbents' investment in
very high-speed internet by diminishing rates and profit margins.
End Summary.

2. (U) On March 30, France Telecom Senior Executive Vice President
Louis-Pierre Wenes in charge of FT's transformation and French
operations, and International Business Development Executive Vice
President Anne Bouverot told econoffs that FT had to expand into new
areas, both geographically and functionally. Wenes noted that
telephone penetration growth rate in the EU and U.S. was less than
one percent. Telecom services were minimally profitable in France.
Market participants were providing minimal service in a bid to lower
costs on razor-thin profits and gain market share. While such a
situation should drive consolidation between incumbent EU operators,
member state politicians would not allow national champions to fall
into foreign hands. (Note: This conversation took place before the
press reported on AT&T and America Movil's bid for Telecom Italia.
End note.)

FT's Broadband Plan

3. (U) Wenes said that FT has a huge data base of current and former
customers, and the firm seeks to leverage that information by
offering new content. FT is targeting more than 12 million clients
for broadband fixed-line connections by 2008, including more than 8
million subscribers for its Livebox "triple play" offer. With the
Livebox, FT offers broadband internet access at 100 Mbps with Wi-Fi
capability, unlimited telephone calls to fixed lines within France
through Voice over Internet Protocol (VoIP), and a range of digital
television channels. FT expects more than 12 million customers by
2008 for broadband mobile services (including third-generation
services), with 6 million customers in France, another 5 million in
the UK, and another million elsewhere. FT is hoping to gain more
than one million subscribers for MaLigne TV in France, its offering
for television via the internet, with more than 400 million euros
(USD 483 million) in revenue from direct paid content. As of
year-end 2006, FT was serving 5.9 million ADSL Orange customers in
France for an estimated 49 percent share of the French broadband

Internet Access: Margins Squeezed

4 (SBU) According to Wenes, French consumers are very interested in
broadband triple play - and they enjoy the most advanced and
competitive ADSL-based triple-play market in Western Europe. FT had
changed the branding of its internet offering from Wanadoo to Orange
to capitalize on its better known mobile telephone brand name. But
Wenes wondered whether Orange would be able to make money on its
triple-play offering, given that strong competition had pushed
prices down and limited revenue growth. Inexpensive "triple play"
services, which average 30 euros a month, have helped push broadband
adoption to more than 75 percent of all French Internet users - the
highest in Western Europe.

Fiber to the Home in Paris

5. (U) FT has only recently stepped up its deployment of fiber to
the home (FTTH). By allowing other operators to access its fiber
network, FT hopes to avoid the regulatory problems that have plagued

PARIS 00001418 002 OF 003

Deutsche Telekom AG (which requested a regulatory holiday on
providing access to its fiber networks to recoup its investment
costs). Wenes confirmed that FT's early FTTH deployment phase would
run from 2007 to 2008 in many cities, including Paris, Lyon,
Marseille, Poitiers and Toulouse, with the aim of having 150,000 to
200,000 customers connected by the end of 2008 out of a potential
client base of one million. Orange will be offering internet access
with symmetrical speeds of up to 100 megabits/second, several
high-definition TV channels, and unlimited calls. He believes that
within five years, French consumers would use this network to choose
their own programs with the video on demand such bandwidth would
allow. According to Wenes, fourth generation mobile networks (4G)
would cover the parts of France that fiber would not be able to
reach. He believed that 4G had more potential in France than either
WiMAX or Wi-Fi.

6. (SBU) Wenes and Bouverot argued that the current battle between
Deutsche Telekom and the EU Commission over access to fiber networks
does not bode well for investment in high-speed networks. FT agrees
with Deutsche Telekom's policy of exclusive access to help it recoup
costs by selling new services, including internet protocol
television (IPTV). At the same time, FT is aware that the idea of a
"regulatory holiday" is "doomed" since the European Commission has
threatened the German government with legal action over Deutsche
Telekom's stance.

7. (SBU) Wenes and Bouverot believe it is unwise of the European
Commission to require former state-run monopolies to form separate
companies to manage their service business and access to their
infrastructure. This would make investment unviable, particularly
since the new investment was in fiber networks and not the old
copper network. The more the European Commission squeezed
incumbents' profits through overzealous regulation, the less money
they would invest in fiber networks and the slower the roll-out of
new infrastructure and associated services. Furthermore, they say,
the European Commission proposals go in the opposite direction of
U.S. policy, which encourages investment by removing obligations on
telephone operators to share fiber networks with rivals for a period
of time.

Cellular Operations in Emerging Markets

8. (U) FT, in addition to offering new services, wants to expand its
businesses in markets with higher growth rates and yields. It
already has significant market share in various wireless markets,
including the United Kingdom, Poland, Spain, Belgium, Egypt,
Romania, Slovakia, and Moldavia. Wenes expects that FT's wireless
operations in mature markets such as the U.K., Spain, and France to
continue to expand with the introduction of new higher-margin 3G
services. However, he stressed that the real driver of cellular
growth over the next few years would come from the company's
international assets in the fast-growing, emerging markets of
Eastern Europe and Africa.

9. (U) FT reported that its Eastern European subscriber base grew
some 23 percent between 2005 and 2006, while Africa, the Middle East
and other emerging markets recorded a 51 percent increase in
customers. As a result, the company's cellular operations in nations
such Poland, Slovakia, and Romania posted double-digit gains in
revenue, a trend that is likely to continue for the foreseeable
future. Since growth was so much faster in these emerging markets,
FT was not seeking to acquire any mobile telephony firms in the U.S.
or EU.

Looking to China

10. (U) Orange is looking to invest in Asia in general and in China
in particular. The firm entered into a long-term Strategic
Partnership with China in 2004 to cooperate in the research and
development of technologies and applications, exchanging personnel
and training Chinese staff. Last year, FT was the first foreign
telecoms carrier to join the TD-SCDMA Forum, an industry group
promoting China's homegrown standard for 3G mobile wireless

11. (SBU) Wenes said that becoming a profitable player in the
Chinese market was extremely difficult, but the market was "too big
to ignore." He noted that just five years ago, Chinese telephone
equipment manufacturers were too saturated with domestic orders to
respond to international orders in a timely way, and the equipment

PARIS 00001418 003 OF 003

did not use the latest technology. Now, however, the Chinese were
responding very rapidly, and their technology was among the best
available. Leading manufacturers could afford to staff their
research laboratories with approximately 10,000 staff.

12. (SBU) Wenes wondered how Western firms could compete with
companies from a country that has three times as many people working
in research and development as FT. Western firms would have to
consolidate and focus on certain technologies and products, and
develop niche markets. He predicted that as the automobile industry
faces difficulties today, telecom equipment manufacturers would face
difficulties in the future. He predicted that each technology niche
would have two to three manufacturers, and no more than four to five
would operate in each line of production. On the service side, he
expected European incumbent operators would merge as soon as
politically viable.


13. (SBU) Broadband growth in France, although more robust than
elsewhere, has come at a price -- that of very poor customer
service. There are some 20,000 pending law suits against the major
operators for shoddy practices and poor service. That number could
rise very quickly as operators cut customer service costs to lower
prices and gain market share. FT believes customer service will be
the next battleground, and it is one that FT is poised to win.


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