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Cablegate: France: Telecom and Information Technology Update

This record is a partial extract of the original cable. The full text of the original cable is not available.

290914Z Jul 05




E.O. 12958: N/A
SUBJECT: France: Telecom and Information Technology Update


1. This is another in a series of periodic updates on the
French telecommunications and information technology
sectors, including internet and e-commerce.

-- Two Members Added to ARCEP Board (para 2)
-- France Telecom changes strategy to buy Spanish telecom
operator (para 3)
-- Spanish reaction to French purchase (para 4)
-- France Telecom outperforms market expectations (para 5)
-- European Commission approves regulation of French
broadband (para 6)

2. Two Members Added to ARCEP Board: With regulatory
oversight of postal services added to the responsibilities
of the telecom regulator, ART not only changed its name to
ARCEP (see 24 June 2005 edition, Paris 4444), but also
expanded its board from five to seven. The two additional
board members, Joelle Toledano and Nicolas Curien, were
named by the French National Assembly and by the Senate in
late June. Toledano worked for the French postal services
group "La Poste" from 1993 to 2005, first in the directorate
for strategic affairs and later as the director for national
and European regulation. Since February 2005, she has been
a professor at the University of Supelec, a leading
engineering school in France for energy and information
services. Curien founded the International
Telecommunications Society. Until his nomination to ARCEP,
he was professor of economics at the National Conservatory
of Arts and Trades (Conservatoire National des Arts et
Metiers or CNAM) and also taught at the prestigious French
engineering school Ecole Polytechnique. His research and
teaching interests were in the fields of market organization
and regulation in network industries, especially
telecommunications. He has published several books and a
number of academic papers on networks economics.

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3. France Telecom changes strategy to buy Spanish mobile
operator: France Telecom (FT) has reportedly agreed to buy
80% of Amena, the Spanish mobile phone group, for 6.4
billion euros. The French group fought off competing offers
from two powerful private equity consortiums in the final
stages of a four-month auction. The acquisition - set to be
funded with cash and shares - comes less than three years
after FT flirted with financial disaster after spending more
than 100 billion euros on expansion. The group, which had
nearly 50 billion of net debt in 2004, stabilized under
former-CEO Thierry Breton with a strategy to reverse FT's
excessive (and financially disastrous) foreign investments
and focus on its core businesses in France: fixed-line
(FT), mobile (Orange), internet services (Wanadoo), and
corporate services (Equant). After being named French
finance minister in February, Breton was succeeded as
chairman and chief executive by Didier Lombard, who has
wasted little time securing FT's largest takeover of a
foreign operator in more than four years and one that will
significantly expand the company's presence in neighboring

4. Spanish reaction to FT purchase: The Orange brand will
replace Amena and merge with Wanadoo, FT's existing fixed-
line operation in Spain. Combined, the new company will
represent Spain's largest integrated telecommunications
group behind Telefonica, the former state monopoly. During
a recent visit to Spain, FT CEO Didier Lombard promised that
the management team would remain "mainly Spanish" and that
there would be no job cuts. Lombard said he spoke with Jose
Montilla, the Spanish industry minister, before launching
the Amena bid. He was told Madrid would not intervene in the
auction, but would react favorably to a bid from a foreign
industrial group. "It is very important to know there is no
(Spanish) government opposition," said Lombard. His
comments appeared to be an implicit criticism of the French
government for launching a barrage of protectionist rhetoric
(septel) in response to this month's rumors about a possible
bid by PepsiCo for French food group Danone.

5. France Telecom outperforms market expectations: On June
28, FT announced a profitable first six months of 2005. The
telecom group said its net income more than tripled from one
billion to 3.4 billion euros compared to last year, thanks
in large part to growth in its mobile division Orange as
well as asset sales, including Mobilcom and PagesJaunes (the
French "Yellow Pages" directory services). From January 1
to June 30, FT increased its mobile phone customers by 16.3%
percent to 66.7 million, while broadband customers rose 80%
to 6.4 million. FT is hoping to raise revenues three to
five percent annually through 2008 by integrating mobile
phone, internet, and fixed line services into single
packages. Growth in third-generation mobile phone usage
coupled with integrated services for homes and businesses
should more than make up for the decline in revenues from
fixed-line services. FT offers "triple play" services with
TV over DSL, as well as voice telephony and internet
services. Currently, only two other operators (Neuf Telecom
and Free) offer TV over DSL in France via wholesale
broadband deals with FT. Other operators are worried that
FT will effectively stifle competition in France with
bundled "triple play" offerings.

6. European Commission approves regulation of French
broadband: France Telecom will be required to provide other
market players with wholesale nationwide high-speed access
to France's telecommunications network. On July 27, the
European Commission authorized this regulatory measure,
which had been proposed by the French national regulatory
authority for electronic communications (ARCEP). The
measure will apply until competing network operators have
built a sufficiently wide backbone network and a large
enough customer base to enable them to invest further in
regional high-speed (broadband) services. FT's large market
share, its capacity to supply the whole range of broadband
products at both wholesale and retail level, its size and
its control of the local infrastructure, led ARCEP to
conclude that FT is dominant on the wholesale nation-wide
broadband access market. ARCEP considered that competition
in this market will be facilitated if FT is obliged to
ensure internal accounting transparency between its
wholesale "network" branch and its retail "ISP" entity as
the recent reintegration of Wanadoo into France Telecom may
have potential consequences on retail competition. The
Commission asked ARCEP to review this market again within a
year to review new market developments, which could enhance
competition in the wholesale broadband market in France.


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