20-F 1 d20f.htm ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2005 ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2005

As filed with the Securities and Exchange Commission on May 22, 2006


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 20-F


 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file no. 1-14712


FRANCE TELECOM

(Exact name of Registrant as specified in its charter)

Not applicable   6, place d’Alleray   French Republic
(Translation of Registrant’s   75505 Paris Cedex 15   (Jurisdiction of incorporation
name into English)   France   or organization)
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class:


 

Name of each exchange on which registered:


American Depositary Shares, each representing one Ordinary Share, nominal value €4.00 per share

  New York Stock Exchange

Ordinary Shares, nominal value €4.00 per share*

  New York Stock Exchange

* Listed, not for trading or quotation purposes, but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

 

Indicate the number of outstanding shares of each of the issuer ’s classes of capital or common stock as of the close of the period covered by the annual report:

 

Ordinary Shares, nominal value €4.00 per share: 2,603,059,797 at December 31, 2005

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes  x  No  ¨

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes  ¨  No  x

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

 

Yes  x  No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨

 

Indicate by check mark which financial statement item the Registrant has elected to follow:

 

Item 17  ¨  Item 18  x

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ¨  No  x

 



TABLE OF CONTENTS

 

                      Page

PRESENTATION OF INFORMATION      1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS      2
PART I      3
Item 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      3
Item 2.    OFFER STATISTICS AND EXPECTED TIMETABLE      3
Item 3.    KEY INFORMATION      3
     3.1    SELECTED FINANCIAL DATA      3
     3.2    EXCHANGE RATE INFORMATION      4
     3.3    RISK FACTORS      5
Item 4.    INFORMATION ON FRANCE TELECOM      17
     4.1    HISTORY AND DEVELOPMENT      17
     4.2    STRATEGY      18
          4.2.1    From the “Ambition FT 2005” Plan to the “Next” program      18
          4.2.2    A market undergoing fundamental transformation      21
          4.2.3    The strategy of France Telecom: a new experience in telecommunications      23
          4.2.4    Main actions for implementing the Group’s strategy      26
     4.3    PRESENTATION OF THE BUSINESS      31
          4.3.1    Overview      31
          4.3.2    Personal communication services      35
          4.3.3    Home communication services      55
          4.3.4    Enterprise communication services      70
          4.3.5    Directories      77
     4.4    ISSUER DEPENDENCY IN RELATION TO PATENTS      79
     4.5    DIVESTITURES      79
     4.6    COMPETITION      80
          4.6.1    Personal communication services      80
          4.6.2    Home communication services      84
          4.6.3    Enterprise communication services      87
          4.6.4    Directories      89
     4.7    REGULATION      90
          4.7.1    Applicable European laws and regulations      90
          4.7.2    French legislative and regulatory system      96
          4.7.3    Legislative and regulatory conditions in the United Kingdom      108
          4.7.4    Polish legislation and regulations      113
          4.7.5    Spanish legislation and regulations      116
     4.8    SUPPLIERS      118
     4.9    INSURANCE      119
     4.10    PROPERTY, PLANT AND EQUIPMENT      120
          4.10.1    Networks      120
          4.10.2    Real Property      124
     4.11    RESEARCH AND DEVELOPMENT AND INTELLECTUAL PROPERTY      124
     4.12    SEASONALITY      126
     4.13    ENVIRONMENTAL POLICY      126
          4.13.1    General environmental policy      126
          4.13.2    Environmental risk analysis approach      127
          4.13.3    Environmental Management System (EMS)      128

 

i


                      Page

Item 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS      129
     5.1    OVERVIEW      129
          5.1.1    General information      129
          5.1.2    Business and Profitability of the Group      136
          5.1.3    The “Ambition FT 2005” Plan      143
          5.1.4    Outlook: The “NExT” program and trends for 2006      150
     5.2    ANALYSIS OF THE GROUP’S INCOME STATEMENT AND CAPITAL
EXPENDITURES
     153
          5.2.1    From Group net revenues to gross operating margin      153
          5.2.2    From Group gross operating margin to operating income      159
          5.2.3    From Group operating income to net income      164
          5.2.4    Group capital expenditures      167
     5.3    ANALYSIS OF OPERATING INCOME AND CAPITAL EXPENDITURES ON
TANGIBLE AND INTANGIBLE ASSETS BY BUSINESS SEGMENT
     171
          5.3.1    Personal Communication Services (PCS)      173
          5.3.2    Home Communication Services (HCS)      184
          5.3.3    Enterprise Communication Services (ECS)      198
          5.3.4    Directories      203
     5.4    CASH FLOWS, CAPITAL RESOURCES AND FINANCIAL DEBT      206
          5.4.1    Liquidity and cash flows      206
          5.4.2    Total equity      210
          5.4.3    Financial debt and financing resources      210
     5.5    OFF-BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS      214
          5.5.1    Investment, purchase and leasing commitments      214
          5.5.2    Guarantees      216
          5.5.3    Commitments in respect of securities      218
          5.5.4    Commitments relating to employees other than pensions and other post-employment benefits      220
          5.5.5    Assets covered by commitments      221
     5.6    CRITICAL ACCOUNTING POLICIES AND ESTIMATES UNDER IFRS AND
U.S. GAAP
     222
     5.7    ADDITIONAL INFORMATION      227
          5.7.1    Subsequent events      227
          5.7.2    Inflation      227
     5.8    INFORMATION RELATED TO U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (U.S. GAAP)
     227
     5.9    NON-GAAP FINANCIAL MEASURES      236
     5.10    FINANCIAL GLOSSARY      237
Item 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      240
     6.1    DIRECTORS AND SENIOR MANAGEMENT      240
          6.1.1    Board of Directors      240
          6.1.2    Senior management      249
     6.2    COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT      251
          6.2.1    Remuneration and benefits paid to the Chairman and Chief Executive Officer      251
          6.2.2    Remuneration and benefits paid to Directors (attendance fees)      253
          6.2.3    Provisions for pensions, retirement or other benefits      253
          6.2.4    Share ownership and stock options      254
     6.3    BOARD PRACTICES      254
          6.3.1    Preparation and organization of the work of the Board of Directors      254
          6.3.2    Responsibilities and operations of the Board Committees      256
          6.3.3    Principal differences between France Telecom’s Corporate Governance Practices and the New York Stock Exchange Standards Applying to U.S. companies      258

 

ii


                      Page

     6.4    EMPLOYEES      259
          6.4.1    Personnel trends      259
          6.4.2    Profit-sharing and stock options      260
Item 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      266
     7.1    MAJOR SHAREHOLDERS      266
          7.1.1    Distribution of capital and voting rights at March 31, 2006      266
          7.1.2    Direct or indirect control over France Telecom      267
     7.2    RELATED PARTY TRANSACTIONS      268
Item 8.    FINANCIAL INFORMATION      270
     8.1    FINANCIAL STATEMENTS      270
     8.2    LITIGATION AND ARBITRATION      270
     8.3    DIVIDEND POLICY      270
Item 9.    THE OFFER AND LISTING      272
Item 10.    ADDITIONAL INFORMATION      274
     10.1    SHARE CAPITAL      274
          10.1.1    Issued capital      274
          10.1.2    Shares not representing capital      277
          10.1.3    Treasury shares held by the issuer, in its name or by its subsidiaries      277
          10.1.4    Convertible, exchangeable securities and securities with subscription warrants      277
          10.1.5    History of the share capital      279
     10.2    MEMORANDUM OF ASSOCIATION AND BY-LAWS      280
          10.2.1    Corporate purpose (Article 2 of the by-laws)      280
          10.2.2    Provisions concerning administrative and management bodies      281
          10.2.3    Rights, preferences and restrictions attached to each class of existing shares (Article 11 of the by-laws)      283
          10.2.4    Form, Holding and Transfer of Shares      283
          10.2.5    Actions necessary to modify the rights of shareholders      284
          10.2.6    Rules for admission to and calling of annual shareholders’ meetings and extraordinary shareholders’ meetings (Article 21 of the By-laws)      284
          10.2.7    Provisions having effect to delay, defer or prevent a change in control      286
          10.2.8    Declarations of ownership thresholds (Article 9 of the by-laws)      286
          10.2.9    Changes in the capital (Article 7 of the by-laws)      286
     10.3    MATERIAL CONTRACTS      286
     10.4    EXCHANGE CONTROLS AND OTHER LIMITATIONS ON PAYMENTS TO
SECURITY HOLDERS
     287
     10.5    TAXATION      287
          10.5.1    French taxation      287
          10.5.2    Taxation of U.S. Holders      289
          10.5.3    Procedure for reduced withholding rate      291
     10.6    DOCUMENTS ON DISPLAY      291
Item 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      292
     11.1    INTEREST RATE RISK MANAGEMENT      292
          11.1.1    Management of fixed-rate/variable-rate debt      292
          11.1.2    Analysis of the Group’s sensitivity to changes in interest rates      292
     11.2    FOREIGN CURRENCY RISK MANAGEMENT      292
     11.3    LIQUIDITY RISK MANAGEMENT      293
     11.4    MANAGEMENT OF COVENANTS      294
     11.5    CREDIT RISK MANAGEMENT      295
     11.6    MARKET RISK ON SHARES      295
Item 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      296

 

iii


                      Page

PART II                     297
Item 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      297
Item 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
     297
Item 15.    CONTROLS AND PROCEDURES      297
Item 16.    [Reserved]      297
Item 16A.    AUDIT COMMITTEE FINANCIAL EXPERT      297
Item 16B.    CODE OF ETHICS      297
Item 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES      297
Item 16D.    EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES      299
Item 16E.    PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
     300
PART III                     301
Item 17.    FINANCIAL STATEMENTS      301
Item 18.    FINANCIAL STATEMENTS      301
Item 19.    LIST OF EXHIBITS      302
GLOSSARY OF TECHNICAL TERMS      303
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM      F-1
FRANCE TELECOM CONSOLIDATED FINANCIAL STATEMENTS      F-3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS      F-8

 

iv


PRESENTATION OF INFORMATION

 

Since January 1, 2000, France Telecom has published its consolidated financial statements in euros. Solely for the convenience of the reader, this annual report on Form 20-F (“Form 20-F”) contains translations of certain Euro amounts into U.S. dollars. These translations should not be construed as representations that the converted amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated or at any other rate.

 

Unless otherwise stated, translations of Euros into U.S. dollars have been made at the rate of 0.8445 to $1.00 (or $1.1842 to 1.00), the noon buying rate in New York City for cable transferts in Euro as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”), on December 30, 2005. See Item 3. “Key Information – 3.2 Exchange Rate Information” for information regarding the U.S. dollar/Euro exchange rate since January 1, 2001.

 

Unless otherwise indicated, the financial information contained in this Form 20-F has been prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) as adopted for use by the European Union, which differs in certain significant respects from U.S. GAAP. See Note 38 to the consolidated financial statements included elsewhere in this Form 20-F for a description of the principal differences between IFRS and U.S. GAAP, as they relate to France Telecom and its consolidated subsidiaries, and a reconciliation to U.S. GAAP of net income and shareholders’ equity.

 

This Form 20-F contains certain information presented on a “comparable basis”. The basis for the presentation of this financial information is set out in “Item 5. Operating and Financial Review and Prospects – 5.1.2.1 Principal Operating Data”. There can be no guarantee that France Telecom would have achieved results similar to those set forth in the financial information presented on a comparable basis. The unaudited financial information presented on a comparable basis is not intended to be a substitute for, and should be read in conjunction with, the consolidated financial statements included in Item 18, including the Notes thereto.

 

In this Form 20-F, references to the “EU” are to the European Union, references to the “Euro” or “” are to the Euro currency of the EU, references to the “United States” or “U.S.” are to the United States of America and references to “U.S. dollars” or “$” are to United States dollars.

 

As used herein, the terms “Company”, “France Telecom”, “France Telecom group” and the “Group”, unless the context otherwise requires, refer to France Telecom together with its consolidated subsidiaries, and “France Telecom S.A.” refers to the parent company, a French société anonyme (corporation), without its subsidiaries. References to “shares” are to France Telecom’s ordinary shares, nominal value 4.00 per share, and references to “ADSs” are to France Telecom’s American Depositary Shares, each representing one share, which are evidenced by American Depositary Receipts (“ADRs”).

 

1


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 20-F contains forward-looking statements about France Telecom (within the meaning of Section 27A of the U.S. Securities Act of 1933 or Section 21E of the U.S. Securities Exchange Act of 1934), including, without limitation, certain statements made in the sections entitled 5.1.4 “Outlook: The NExT program and trends for 2006”. Forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “is expected to”, “will”, “will continue”, “should”, “would be”, “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by the forward-looking nature of discussions of strategy, plans or intentions. Although France Telecom believes these statements are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties and there is no certainty that anticipated events will occur or that the objectives set out will actually be achieved. Important factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements include, among other things:

 

  n   the success and market acceptance of the “NExT (New Experience in Telecommunications) Program” and other strategic initiatives based on the integrated operator business model, as well as operating and financial initiatives, the level and timing of the growth and profitability of new initiatives, start-up costs associated with entering new markets, the successful deployment of new systems and applications to support new initiatives, and local conditions and obstacles;

 

  n   changes in the competitive and regulatory framework in which France Telecom operates, and in particular the effects of full competition in the European telecommunications industry;

 

  n   fluctuations in telecommunications usage levels, including the number of access lines, traffic and customer growth;

 

  n   competitive forces in liberalized markets, including pricing pressures, technological developments and France Telecom’s ability to retain market share in the face of competition from existing and new market entrants;

 

  n   regulatory developments and changes, including with respect to the levels of tariffs, the terms of interconnection, customer access and international settlement arrangements, and the outcome of legal proceedings related to regulation;

 

  n   the impact of regulatory or competitive developments on capital outlays and France Telecom’s ability to achieve cost savings and realize productivity improvements;

 

  n   the effect and outcome of the roll out of UMTS networks and their performance;

 

  n   the effect and outcome of the roll out of new technologies and services, in particular, broadband-related services;

 

  n   risks related to information and communication technology systems generally;

 

  n   the effects of mergers and consolidations within the telecommunications industry, the risks of completing acquisitions or divestitures and integrating acquired businesses and the costs associated with possible future acquisitions and planned dispositions;

 

  n   the success of France Telecom’s domestic and international investments, joint ventures and strategic relationships;

 

  n   uncertainties related to the award, the extension, or the temporary unavailability of, certain licenses, particularly in the area of wireless communications;

 

  n   the availability, terms and deployment of capital, particularly in view of France Telecom’s debt refinancing needs;

 

  n   exchange rates fluctuations;

 

  n   changes in general economic and business conditions in the markets served by France Telecom and its affiliates;

 

  n   risks and uncertainties attendant to doing business in numerous countries that may be exposed to, or may have recently experienced, economic or governmental instability; and

 

  n   other risks and uncertainties discussed in section 3.3 “Risk Factors” of this document.

 

2


PART I

 

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

Item 3. KEY INFORMATION

 

3.1 SELECTED FINANCIAL DATA

 

The following table sets forth selected consolidated financial and other operating data of France Telecom. The selected financial data set forth below should be read in conjunction with the consolidated financial statements and “Item 5. Operating and Financial Review and Prospects” appearing elsewhere in this Form 20-F. France Telecom’s consolidated financial statements were prepared in accordance with IFRS for the years ended December 31, 2004 and 2005 and in accordance with French GAAP for the years ended December 31, 2001, 2002, 2003 and 2004. IFRS differ in certain significant respects from U.S. GAAP. See Note 38 to the consolidated financial statements for a discussion of the principal differences between IFRS and U.S. GAAP as they relate to France Telecom and a reconciliation of its net income and shareholders’ equity to U.S. GAAP.

 

The selected financial information presented below relating to the years ended December 31, 2004 and 2005, is extracted or derived from the consolidated financial statements audited by Ernst & Young Audit and Deloitte & Associés, for the years ended December 31, 2004 and 2005.

 

Periods prior to 2004 (except required U.S. GAAP information) are not presented as such financial information was prepared in accordance with French GAAP and, pursuant to SEC Release 33-8567, ‘‘First-Time Application of International Financial Reporting Standards,’’ is not required to be included because it is not comparable to the IFRS information provided below. See Note 37 to the consolidated financial statements for more information on the conversion from French GAAP to IFRS.

 

CONSOLIDATED STATEMENT OF INCOME

 

(millions of euros, except share data)   2005      2005     2004     2003    2002      2001  
    $(2)                                

Amounts in accordance with IFRS

                                   

Net revenues

  58,067     49,038     46,158     n.a    n.a      n.a  

Gross operating margin

  21,807     18,416     17,923     n.a    n.a      n.a  

Operating income/(loss)

  13,362     11,284     9,312     n.a    n.a      n.a  

Finance costs, net

  (3,974 )   (3,356 )   (3,625 )   n.a    n.a      n.a  

Net income attributable to equity holders of

                                   

France Telecom S.A.

  6,760     5,709     3,017     n.a    n.a      n.a  

Net income per share /(loss) - basic

  2.70     2.28     1.23 (1)   n.a    n.a      n.a  

Net income per share /(loss) - per share - diluted

  2.70     2.20     1.22 (1)   n.a    n.a      n.a  

Amounts in accordance with US GAAP

                                   

Net income (loss)

  6,746     5,697     2,959     5,318    (33,556 )    (19,278 )

Earning (loss) per share / ADS (basic)(1)

  2.70     2.28     1.21 (1)   2.71    (26.62 )    (14.82 )

Earning (loss) per share / ADS (diluted)(1)

  2.59     2.19     1.19 (1)   2.56    (26.62 )    (14.82 )

 

3


 

CONSOLIDATED BALANCE SHEET

 

(millions of euros)      2005     2005    2004    2003      2002      2001
       $(2)                             
Amounts in accordance with IFRS                                    
Intangible assets, net (3)      62,275    52,591    43,221    n.a      n.a      n.a
Property, plant and equipment, net      33,831    28,570    26,502    n.a      n.a      n.a
Total assets      129,485    109,350    98,963    n.a      n.a      n.a
Net financial debt      56,656    47,846    49,822    n.a      n.a      n.a
Equity attributable to equity holders of France                                    
Telecom S.A.      29,437    24,860    14,451    n.a      n.a      n.a
Amounts in accordance with US GAAP                                    
Shareholders’ equity (deficit)      15,572    13,150    4,029    (467 )    (26,751 )    11,411

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

(millions of euros)      2005      2005     2004     2003    2002    2001
       $(2)                            
Amounts in accordance with IFRS                                   
Net cash provided by operating activities      15,837     13,374     12,697     n.a    n.a    n.a
Net cash used in investing activities      (13,827 )   (11,677 )   (5,591 )   n.a    n.a    n.a
Purchases of property, plant and equipment and intangible assets      (7,273 )   (6,142 )   (5,141 )   n.a    n.a    n.a
Net cash used in financing activities      (1,018 )   (860 )   (7,346 )   n.a    n.a    n.a
Cash and cash equivalents at end of year      4,851     4,097     3,153     n.a    n.a    n.a
RATIOS                                   
(millions of euros)      2005      2005     2004     2003    2002    2001
       $(2)                            
Dividend per share for the year      1.18     1.00     0.48     0.25       1.00
  (1) Earnings per share calculated on a comparable basis.
  (2) In millions. The U.S. dollar amounts presented in the table above have been translated solely for the convenience of the reader using the Noon Buying Rate on December 30, 2005 of €0.8445 to $1.00.
  (3) Includes goodwill and the other intangible assets.

 

OPERATIONAL DATA

 

     2005    2004    2003    2002
Number of fixed telephone lines (in millions)    49.2    49.6    49.3    49.5
Number of wireless customers of controlled entities (in millions)    84.3    62.7    56.2    49.9
Number of ADSL lines in France* (in millions)    9.4    6.3    3.3    1.4
Number of employees (workforce end of period, in thousands)    203,008    206,485    218,523    243,573
  * including unbundled lines and wholesale sales to third party ISPs

 

3.2 EXCHANGE RATE INFORMATION

 

Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro-denominated prices of the shares and, as a result, will affect the market price of the ADSs in the United States. In addition, exchange rate fluctuations will affect the U.S. dollar equivalent of any cash dividends received by holders of ADSs.

 

The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate in New York City for cable transfers for foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York expressed in U.S. dollars per 1.00. Such rates are provided solely for the convenience of the reader and are not necessarily the rates used by France Telecom in the preparation of the

 

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Consolidated Financial Statements included elsewhere in this Form 20-F. No representation is made that the euro could have been, or could be, converted into U.S. dollars at the rates indicated below or at any other rate. See Item 3. “Key Information – 3.3.3 Risk Factors Relating to the Financial Markets – France Telecom’s performance and cash flow are exposed to fluctuations in exchange rates”.

 

U.S. dollars per 1.00    Period end
rate
     Average
rate (1)
     High      Low
Yearly amounts                                  
2001    $ 0.8901      $ 0.8909      $ 0.9535      $ 0.8370
2002    $ 1.0485      $ 0.9495      $ 1.0485      $ 0.8594
2003    $ 1.2597      $ 1.1411      $ 1.2597      $ 1.0361
2004    $ 1.3538      $ 1.2478      $ 1.3625      $ 1.1801
2005    $ 1.1842      $ 1.2400      $ 1.3476      $ 1.1667
Monthly amounts                                  
October 2005    $ 1.1995      $ 1.2022      $ 1.2148      $ 1.1914
November 2005    $ 1.1790      $ 1.1789      $ 1.2067      $ 1.1667
December 2005    $ 1.1842      $ 1.1861      $ 1.2041      $ 1.1699
January 2006    $ 1.2158      $ 1.2126      $ 1.2287      $ 1.1980
February 2006    $ 1.1925      $ 1.1940      $ 1.2197      $ 1.1860
March 2006    $ 1.2139      $ 1.2028      $ 1.2197      $ 1.1886
April 2006    $ 1.2624      $ 1.2273      $ 1.2624      $ 1.2091
May 2006 (through May 19, 2006)    $ 1.2750      $ 1.2748      $ 1.2888      $ 1.2607
  (1) The average of the Noon Buying Rates on the last day of each month during the relevant period.

For information regarding the effects of currency fluctuations on France Telecom’s results, see Item 5. “Operating and Financial Review and Prospects – 5.1.2 Business and Profitability of the Group”.

 

3.3 RISK FACTORS

 

In addition to the other information contained in this Form 20-F, prospective investors should carefully consider the risks described below before making any investment decisions. These risks, or any one of them, could have an adverse effect on the business, financial condition or the results of operations of France Telecom. Moreover, additional risks not currently known to France Telecom, or risks that France Telecom currently deems immaterial, may have a similar adverse effect and investors could lose all or part of their investment.

 

The risks described below concern:

 

  n   Risks related to France Telecom (see section 3.3.1);

 

  n   Risks related to the telecommunications sector (see section 3.3.2);

 

  n   Risks related to financial markets (see section 3.3.3);

 

Risks related to France Telecom, the telecommunications industry and financial markets are described below by category, in order of decreasing importance, according to France Telecom’s current assessment. The occurrence of new external or internal events may lead France Telecom to modify this order of importance in the future.

 

3.3.1 RISKS RELATED TO FRANCE TELECOM

 

France Telecom’s profitable growth strategy is based on establishing an integrated operator business model in connection with the NExT (New Experience in Telecommunications) program, which covers the period 2006-2008. If France Telecom failed to implement this integrated operator model in connection with the NExT program, or if it failed to integrate it completely, or if the development of integrated and convergent services failed to meet customer expectations, then the objectives of the NExT program may not be achieved, and the business, the financial position and the results of France Telecom would be adversely affected.

 

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France Telecom’s strategy of profitable growth is based on the implementation of an integrated operator model. The core activities of this model are mobile and broadband activities, which form the basis of a multi-service offering. (See section 4.2 “Strategy”)

 

For the period 2006-2008, this strategy of the Group is now implemented as part of the NExT (New Experience in Telecommunications) program. This program, which was unveiled in June 2005, is a three-year transformation program designed to provide access by the Group’s customers to a universe of enriched and simplified services and to enable the Group to pursue its transformation into an integrated operator. The purpose of the NExT program is to make France Telecom the operator of reference for the new telecommunications services in Europe.

 

The success of this strategy and of the NExT program is contingent on the following: Relevance to customer expectations of the growth strategy for the integrated and convergent services offering;

 

  - The ability to develop, put in place and market innovative, integrated, “multi-network” and “multi-handset” services, shifting from a network access approach to a services access approach;

 

  - The ability to take full advantage of the services potential offered by Broadband, through constant innovation in terms of telecommunications services, customer services and network services;

 

  - The ability to make full use of the Group’s drivers of growth and efficiency: Research and Development and strategic partners; centralized strategic marketing; launching convergent offers;

 

  - The ability to implement the new brand policy, based on a simplification of the branding system and the use of a single brand name (Orange) for mobile, fixed broadband, television on ADSL, multi-services offers and the Enterprise market. This simplification may encounter reluctance on the part of the customers attached to the brands previously used;

 

  - The ability to pool the different networks, information systems, services platforms, shared services centers, and call centers by enhancing the integration of the Group in all areas;

 

  - The ability to carry out the accelerated transformation of the Group’s structures, operating procedures and cost structure, with savings on purchasing and network costs;

 

  - The ability to upgrade the Group’s skills, thanks in particular to the “ACT” (Anticipation and Skills for Transformation) program and to proceed, notably in France, with the hiring (6,000 new hires) and redundancies (22,000) planned.

 

If France Telecom failed to implement this integrated operator model in connection with the NExT program, or if it failed to implement it completely, or if the development of integrated and convergent services failed to meet customer expectations, then the objectives of the NExT program may not be achieved, and the business, the financial position and the results of France Telecom would be adversely affected.

 

In order to make the implementation of its integrated operator strategy fully effective, in 2004 and 2005, France Telecom acquired all the equity and assets of Orange, Wanadoo and Equant. If France Telecom failed to thoroughly integrate these entities and activities to implement the Group’s strategy, then its business, its financial performance and its results could be adversely affected.

 

In connection with its integrated operator strategy, in 2004 France Telecom bought the minority interests of Orange S.A. and Wanadoo S.A., and then merged Wanadoo S.A. and Wanadoo France, whose main business was that of Internet access provider, with France Telecom S.A. in September 2004. In May 2005, France Telecom also acquired all Equant’s assets and liabilities.

 

France Telecom’s success in fully integrating these entities and activities is a key factor in the success of its integrated operator strategy, especially in key areas such as:

 

  - strategic marketing,

 

  - the development of new services, especially convergent offers,

 

  - brand policy,

 

  - pooling of networks, information systems, services platforms, and,

 

  - centralized purchasing.

 

Owing to its broad geographic coverage, the full integration of Equant could entail special problems regarding the running of the business and the application of the Group’s rules and procedures.

 

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If France Telecom failed to thoroughly integrate these entities and activities (Orange, Wanadoo, and Equant) perfectly to implement the Group’s strategy, its activities, financial performance and results could be adversely affected.

 

France Telecom may not succeed, in whole or in part in integrating the companies that it has acquired into the Group or in achieving the planned synergies.

 

In November 2005, France Telecom acquired nearly 80% of the mobile operator Amena in Spain for 6.4 billion euros. This deal paves the way for a top-ranking operator to be established in Spain with the merger of the third largest mobile operator and the second largest ADSL operator. In addition, France Telecom aims to achieve synergies of more than 1.1 billion euros in current value with a positive impact on net cash flows of around 130 million euros per year from 2008 on.

 

In January 2005, France Telecom acquired the remainder of the stock in Polish operator TP S.A. held by its partner Kulczyk. Since that date, France Telecom has held directly 47.5% of the equity and the voting rights of TP S.A. As part of its strategy, France Telecom continues to consolidate TP Group and to have its standards, controls and procedures applied, while complying with the governance rules applicable to TP S.A. In particular, in 2005, TP Group adopted the Orange brand for its mobile activities.

 

Amena and TP Group are strategic assets for the Group. Successfully consolidating Amena and achieving the synergies planned, as well as the continued consolidation of TP Group, are therefore major challenges for the success of the NExT program.

 

In the process of consolidating the companies acquired and realizing the anticipated synergies, France Telecom could, however, in the case of Amena, TP Group or other companies acquired by it:

 

  n   have difficulty integrating the operations and personnel of the acquired entities;

 

  n   fail to successfully incorporate networks or acquired technology into its network and product offerings;

 

  n   fail to implement in those companies the marketing strategy and brand policy set under the NExT program.;

 

  n   fail to generate the anticipated synergies;

 

  n   fail to maintain uniform standards, controls, procedures and policies; or

 

  n   fail to maintain satisfactory relations with the employees of the acquired entities as a result of changes in management and ownership.

 

Any major difficulties related to the consolidation of Equant or the TP Group or other businesses acquired by France Telecom could have an adverse effect on its business, financial position and results.

 

France Telecom faces risks relating to certain subsidiaries and joint ventures in which it shares control or does not hold a controlling interest.

 

In some of the Group’s activities, France Telecom has an interest that does not give it control.

 

Under the documents or agreements governing certain of these entities, certain key matters such as the approval of business plans and decisions as to the timing and amount of dividend distributions require the agreement of France Telecom’s partners, and in some cases, decisions regarding these matters may be made without France Telecom’s approval. For example, after the problems encountered with MobilCom, 28.3% of whose equity was held by France Telecom, the Group had to depreciate fully its investment in MobilCom in 2002.

 

Such risks may involve the following companies specifically, in which France Telecom shares control with another shareholder: ECMS (Mobinil), a subsidiary of Orange in Egypt, which is consolidated at 71.25%, as well as operators in Mauritius (Mauritius Telecom) and Jordan (JTC), in both of which France Telecom has a 40% controlling interest. In addition, France Telecom owns a minority interest in telecommunications companies in Europe such as ONE (17.5%, Austria, mobile business) and Sonaecom (23.7%, Portugal, mobile, fixed and Internet). Lastly, when it divested from Eutelsat, France Telecom owned 20% of the equity in Bluebird Participations on December 31, 2005.

 

The occurrence of the risks relating to certain subsidiaries and joint ventures in which France Telecom shares control or does not hold a controlling interest, the main examples of which have been mentioned above, could have an impact on France Telecom’s ability to pursue its stated strategies with respect to those entities or have a material adverse effect on its financial results or financial position.

 

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France Telecom is involved in inquiries, legal proceedings and disputes with regulatory authorities, competitors and/or other parties. Developments in or the outcome of some or all of these proceedings could have a significant impact on its results or its financial position.

 

France Telecom’s position as the main operator and provider of networks and telecommunications services in France and one of the leading telecommunications operators worldwide, attracts the attention of competitors and French as well as European competition authorities. In addition, France Telecom is frequently involved in legal proceedings with its competitors due to its preeminent position in their market. For proceedings before the competition authorities, the maximum amount of the fines prescribed by law is 10% of the consolidated revenues of the responsible company. In 2005, the competition authorities imposed on France Telecom two fines of 40 million and 80 million for unfair trade practices and abuse of dominant position and a fine of 256 million for collusion. These three decisions are now being appealed. The main proceedings in which France Telecom is involved are described in Note 33 “Litigation and claims” of the Notes to the Consolidated Financial Statements. Developments in or the outcome of some or all of the proceedings underway could have a significant impact on its results or its financial position.

 

France Telecom’s technical infrastructure is vulnerable to damage or interruptions caused by floods, storms, fires, power outages, war, acts of terrorism, intentional misdeeds and other similar events. Technical network and information technology system failures may result in reduced user traffic, reduced revenues and harm to France Telecom’s reputation.

 

A natural catastrophe, like the December 1999 storms, which disrupted service in France in early 2000, and other unexpected occurrences affecting its facilities or any other damage or failure of its networks may lead to service disruptions. In 2000, such damage amounted to approximately 150 million euros. In certain circumstances, France Telecom has no insurance for damage to its aerial lines in certain conditions and must finance this damage itself. Information technology system (hardware or software) failures, human error or computer viruses could also affect the quality of its services and cause temporary service interruptions. Currently, there is an increased risk of failure of the information system due to the acceleration of the implementation of new services or new applications relating to invoicing and customer relations management. In particular, incidents may occur during the course of installing new applications or new software. While the risk cannot be quantified, such events could result in customer dissatisfaction and reduced traffic and revenues for France Telecom.

 

France Telecom recorded significant goodwill following the acquisitions it made between 1999 and 2002. Impairment of this goodwill liable to have a material adverse effect on France Telecom’s results may be recorded in the accounts.

 

France Telecom has recorded significant goodwill in connection with its acquisitions since 1999, particularly for the acquisitions of Orange, Equant and TP Group. Goodwill amounted to approximately 33.7 billion at December 31, 2005.

 

Pursuant to IFRS, the current value of the goodwill is reassessed annually and, when events and circumstances indicate that a decrease in value may occur, France Telecom impairs this goodwill, particularly in the case of events and circumstances which involve lasting material adverse changes affecting the economic environment or affecting the assumptions and objectives used at the time of the acquisition. For example, France Telecom impaired its investments in Equant and in some subsidiaries of Orange and Wanadoo in 2002, 2003 and 2004. France Telecom cannot guarantee that new events or adverse circumstances will not occur that would cause France Telecom to review the current value of its goodwill and to record significant new impairments which could have a material adverse effect on France Telecom’s results.

 

In addition, in reviewing the current value of goodwill, France Telecom conducts impairment tests on groups of cash-generating units, i.e. at the level at which the Group receives the return on investment in goodwill. These groups of cash-generating units, which correspond either to business activities or to countries, are liable to be modified based on changes in the Group’s structure. Furthermore, with the possibility that new rules will be adopted for a definition of business segments, the Group may have to modify the groups currently defined. Such changes would have an impact on the results of impairment tests and therefore on the impairments recorded.

 

For more information on impairment of goodwill, see section 5.2.2.4 “Impairment of goodwill”.

 

8


The value of France Telecom’s international investments in telecommunications companies outside Western Europe may be materially affected by political, economic and legal developments in those countries.

 

France Telecom has made investments in telecommunications companies in countries in Eastern Europe, the Middle East, Asia and Africa. These companies contribute significantly to the growth of the Group. The political, economic and legal systems of the countries in these regions of the world may evolve in an unpredictable manner, as was the case in Ivory Coast. Furthermore, some changes planned, which should have a positive or stabilizing influence on France Telecom’s business and results, such as the adoption of the euro by Poland and Slovakia and Romania’s entry into the European Union, could be delayed. Such political or economic changes and some legislative changes could harm the business of the companies in which France Telecom has invested. This could affect the value of those investments or France Telecom’s results.

 

If France Telecom failed to meet the commitments made under its UMTS licenses, its licenses could be withdrawn or it could be charged penalties, which would have an adverse effect on its business, its results or its financial position.

 

Under the terms of its UMTS licenses, France Telecom has agreed to make significant investments in its networks in order to be able to offer new products and services. In addition, if France Telecom were unable to meet those commitments or have them changed, the licenses could be revoked and France Telecom could in certain cases be liable for damages to the State that awarded the license, or to its partners in UMTS development in these countries, as well as to its creditors or its suppliers. All of these risks could have a material adverse impact on France Telecom’s financial position and results.

 

France Telecom’s debt rating in 2001 and 2002 was downgraded by rating agencies, affecting the cost of its debt. Despite the fact that the rating was upgraded from 2003 to 2005, the lowering of the debt rating may limit France Telecom’s borrowing capacity and raise the cost of its access to the capital markets.

 

In 2001 and 2002, the rating agencies evaluating France Telecom’s debt lowered their ratings on its short and long-term debt owing to their doubts concerning the ability of France Telecom to implement its debt reduction policy.

 

As a large part of the debt has step-ups, i.e. coupon or margin revision clauses in the event of a change in France Telecom’s rating, the downgrading of the France Telecom rating resulted in an increase in bond coupons. The downgrading of France Telecom’s rating in 2002 increased its interest expense by around 40 million in 2002 and 164 million in 2003.

 

Furthermore, France Telecom S.A.’s securitization programs require, where applicable, a rating above BB-. In the event of a ratings downgrade, certain derivative contracts and certain contracts related to cross-transactions for leases with third parties may be terminated or may require cash collateral to be given. France Telecom has already been required to give additional security cash collateral for certain of these contracts.

 

After the “Ambition FT 2005” Plan was launched in 2002 and successfully implemented, the rating agencies raised France Telecom’s debt rating from 2003. At March 1, 2006, the long-term debt ratings were A- with a positive outlook, A3 with a stable outlook and A- with a stable outlook by Standard & Poor’s Rating Services (“S&P’s”), Moody’s Investor Service (“Moody’s”) and Fitch Ibca, respectively.

 

Activating the step-downs following the successive improvements in ratings from 2003 to 2005 resulted in a reduction in 2004 interest expense of around 61 million euros compared with 2003 and a reduction in 2005 interest expense of around 73 million euros compared with 2004.

 

France Telecom cannot guarantee that its credit risk will not be downgraded again by the rating agencies, particularly in the event that the NExT program does not produce the anticipated results or in the event that France Telecom fails to reduce its debt. In addition, factors outside France Telecom’s control, including factors relating to the telecommunications industry or specific countries or regions in which it operates, may affect the rating agencies’ assessment of France Telecom’s credit profile.

 

For information purposes, France Telecom believes that a decrease of one notch in its long-term debt rating by S&P’s and Moody’s would automatically increase its annual interest expense by approximately 38 million euros, based on its current level of indebtedness, and would also adversely affect its ability to access, and the conditions of access to, the financial markets.

 

9


France Telecom applied the new IFRS accounting standards in 2005, which forced it in some cases to take positions to apply in the absence of specific information from the standardization agencies.

 

In June 2002, the European Union adopted new regulations requiring all listed companies, including France Telecom, to apply IFRS (International Financial Reporting Standards) to their accounts starting on January 1, 2005. In some cases, in the absence of specific information from the standardization agencies, France Telecom had to take positions, which are mentioned in Note 2 to the consolidated financial statements. France Telecom cannot guarantee that those positions will be confirmed by those standardization agencies, or, as the case may be, by market authorities. In addition, the comparability of France Telecom’s accounts with those of other companies may be affected by the accounting options or methods adopted by each company as part of the first application of IFRS.

 

Environmental risks

 

France Telecom believes that its activities as a telecommunications operator present no major risks for the environment. In fact, the operations of France Telecom do not use any production process that seriously threatens scarce or non-renewable resources, natural resources (water, air), or biodiversity (see “section 4.13 “Environmental policy”).

 

However, France Telecom uses some facilities, products or substances that are liable to pose a danger or disadvantage for the environment. The corresponding risks have led to the adoption of prevention programs.

 

Generally, France Telecom applies the accounting rules relating to environmental liabilities and in particular those concerning provisions for regeneration and dismantling of sites, in accordance with current legislation and regulations. However, France Telecom cannot exclude the possibility of a change in legislation or regulations that would require it to incur additional expenditure and to set aside larger provisions in this respect.

 

3.3.2 RISKS RELATED TO THE TELECOMMUNICATIONS SECTOR

 

The thorough transformation of the telecommunications sector is gathering pace, which could make existing technology obsolete. A deficiency in France Telecom’s appropriate response to technological advancement could lead to the loss of customers or market share in the sectors in which France Telecom operates and could have an adverse impact on its revenues and financial results.

 

The telecommunications industry has undergone profound changes in the past few years, and France Telecom believes these changes are occurring at a faster pace, particularly with the development of Voice over IP. If France Telecom fails to rapidly adapt, at a reasonable cost, its structure, business, networks and technologies (including the technologies acquired from third parties thanks to patents and licenses), and its services to respond to the developments of the telecommunications industry and to the expectations of its customers, it may be unable to compete effectively and its business activities, financial condition and results may suffer. Furthermore, the new technologies that France Telecom chooses to develop may engender significant costs and may turn out not to be as successful as anticipated. Therefore, France Telecom could lose customers or market share or be required to incur substantial costs to keep its customers.

 

The intense competition in the telecommunications industry in Europe may strain France Telecom’s resources.

 

France Telecom faces intense competition in all areas of its business. For further information regarding competition within each of the business segments in which the France Telecom Group operates, see section 4.6 “Competition”.

 

In the mobile telecommunications business, France Telecom faces intense competition in all of its principal markets (particularly in France and the United Kingdom) from existing and new market participants. France Telecom’s position in comparison with its competitors is mainly dependent upon rates, quality of service, variety of services offered, adaptation to customers’ needs and the nature of innovation. In addition, in certain countries, and particularly in France and the United Kingdom, France Telecom must compete with new virtual mobile network operators entering the market that offer mobile communications services on third-party networks. Although competition based on handset subsidies has diminished in France and the United Kingdom, competition based on rates, subscription options offered, coverage and service quality remains intense. As these markets have become increasingly saturated, the focus of competition is starting to shift from

 

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customer acquisition to customer retention, which could lead to higher expenses for customer loyalty initiatives. Mobile call prices have dropped in the past few years and may continue to fall on the main markets in which France Telecom does business, especially due to decisions by national regulatory authorities on lower call termination prices.

 

In the French market for fixed telephony services, France Telecom is facing competition which has resulted in a massive lowering of rates, as well as a reduction in its market share. Recent changes in regulations, such as the unbundling of the local loop, the pre-selection of operators, and the portability of numbers, have made it easier for customers to use the services offered by rival operators. Furthermore, France Telecom expects a further decrease of its market share and continued rate decreases in the fixed-line sector in France, where it currently enjoys the greatest market share. In addition, according to France Telecom, an increasing proportion of calls that would previously have been made over the fixed-line network are now being made on mobile telephones (“fixed-mobile” substitution). Similarly, telephone calls which had been carried via the switched telephone network will increasingly be carried via the Internet (“Voice over IP”). The arrival on the electronic communications market of Internet market players such as Yahoo, Google, MSN, and Skype is contributing to this trend. Similar changes are being observed in Poland, which affect TP Group. France Telecom also faces competition in the market for Internet and multimedia services, particularly in France. In the Internet access provider market, the sharp growth of broadband has fostered more competition. This is resulting in pressure to lower prices, which may be influenced by regulations, especially in France.

 

In the enterprise communication services market, France Telecom faces intense competition. The success of the France Telecom group in this market will depend on its ability to compete with the other large telecommunications operators, IP and data specialists, and new arrivals in this market, including operators from competing networks and Internet service providers or other high value-added services. France Telecom believes that the number of competitors, the vertical and horizontal concentration of this activity, the pressure on rates and the competition in terms of market share could increase in the future.

 

PagesJaunes faces competition in the printed directories sector from publishers that offer regional directories in France, while the market for online directories remains highly competitive with many market participants.

 

Competition in any or all of France Telecom’s lines of business could lead to:

 

  n   price and profits erosion for France Telecom’s products and services;

 

  n   an inability to increase market share or a loss of market share;

 

  n   loss of existing or prospective customers and greater difficulty in retaining existing customers;

 

  n   more rapid deployment of new technologies and obsolescence of existing technologies;

 

  n   the increase of costs related to investments in new technologies that are necessary to retain customers and market share;

 

  n   increased pressure on France Telecom’s profit margins, preventing it from maintaining or improving its current level of operational profitability; and

 

  n   difficulties repaying the debt it incurred to finance its acquisitions and strategic and technological investments if it cannot generate sufficient profits and cash flow.

 

If the growth in revenues from mobile telephony and the Internet slows down, and if revenues from fixed-line calls continue to fall, France Telecom’s revenues may fail to increase or may even drop, which would harm its profitability.

 

In recent years, the growth in France Telecom’s revenues, on a like-for-like basis, has been due in a large part to the rapid expansion in its Internet and mobile communications businesses, in line with growth in the Internet and mobile markets in Europe.

 

If these markets do not continue to expand, particularly in France, Poland, the United Kingdom and Spain, France Telecom’s revenue may not grow or may even decrease, which in turn could affect its financial condition and results, in particular if the revenues of the fixed-line services were to continue to decrease.

 

For more information on changes in France Telecom’s revenue and its components in 2005, see section 5.2.1.1 “Revenues”.

 

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France Telecom continues to do business in highly regulated markets, where it has reduced maneuverability to manage its activities, and where it is experiencing increased regulatory pressure.

 

France Telecom must comply with a whole series of regulatory requirements relating to the supply of its products and services, and with oversight by regulatory authorities, which are responsible for making certain that effective competition is maintained on the electronic communications markets. Furthermore, France Telecom faces a number of regulatory constraints as a result of its dominant position in the fixed-line telecommunications market in France and Poland, including certain obligations that lead to significant costs. For example, France Telecom is required to provide interconnection services to other operators under terms that must be approved by the regulatory authority, to provide local loop access at prices approved by the regulatory authority, and to have its rates for fixed-line voice telephony services approved by the regulatory authority prior to implementation. France Telecom believes that, in general, it fulfills the requirements imposed by the applicable regulations, but it cannot predict any assessments that may be made by regulatory or judicial authorities, which could be asked to review or which have already been asked to review France Telecom’s compliance.

 

France Telecom’s activities and operating income may be impacted significantly by legislative, regulatory or government policy changes and, in particular, by decisions made by regulatory authorities and competition authorities in relation to:

 

  n   granting, modifying and renewing licenses;

 

  n   rates or the possibility of extending activities to new markets;

 

  n   network access for virtual network operators and other service providers; or

 

  n   access to third-party networks.

 

Such decisions could significantly and adversely impact France Telecom’s financial results.

 

Furthermore, in the European Union, the national laws enacted pursuant to EU directives provide for the national regulatory authorities to draw up a list of relevant markets for which they will perform market analyses. After analyzing the markets, the national regulatory authorities will be entitled to impose remedies on operators that exert significant market power. In relation to wholesale markets, such remedies may include publication of a standard offer, access to network components and related resources, and accounting separation for certain interconnection or access activities. With regard to retail prices, the national regulatory authorities will be able to prohibit bundling considered to be unreasonable, impose prices reflecting costs, or strictly oppose the implementation of a rate. Therefore, the regulator possesses tools that could enable it to increase the burden of regulatory constraints on France Telecom. Owing to their position in some markets, France Telecom S.A. in France and TP Group in Poland are particularly likely to be affected by greater regulatory pressure.

 

In France, ARCEP is endowed with oversight and sanction powers in that it may conduct targeted on-site investigations in connection with its missions and can issue injunctions without prior notice.

 

Overall, the regulatory, investigative and sanctioning powers allocated to national regulatory authorities have been strengthened, which may have a material adverse impact on France Telecom’s business and results.

 

Furthermore, licenses are required in most countries to provide telecommunications services and operate networks. These licenses frequently impose requirements regarding the way the operator conducts its business, including, in particular, minimum service requirements, roll-out completion deadlines, and network quality and coverage. Non-compliance with these obligations could result in fines and other sanctions up to and including the withdrawal of licenses awarded.

 

For further information regarding regulations, see section 4.7 “Regulations”.

 

Alleged health risks in relation to mobile communications devices could lead to decreased mobile communications usage or increased difficulty in obtaining sites for radio bases or litigation, which may have adverse effects on the financial results of France Telecom.

 

In some countries in which France Telecom conducts its mobile telephony business, concerns have been expressed in recent years as to the possible health risks to humans caused by exposure to radio-frequency emissions or electromagnetic fields emitted by mobile telephones and mobile transmission sites, at exposure levels lower than the existing permitted thresholds. These concerns have been relayed by opinion campaigns but at present they do not reflect the opinion of the experts in the countries in which France Telecom does business.

 

12


While to date France Telecom is not aware of any health risks associated with mobile telephony, potential health risks or risks perceived by the public may have a material adverse effect on France Telecom’s results or financial position through a reduction in the number of customers, reduced usage per customer, a slowdown in the deployment of transmission sites, exposure to potential litigation or other reasons, including acts of vandalism at transmission sites. In the event that future evidence is considered to show that health risks do exist, the use of mobile phones could be subject to regulations which, for example, could limit emission levels from handsets or transmitter sites. Such regulations could have an adverse effect on France Telecom’s operations and performance.

 

In April 2003, the Agence Française de Sécurité Sanitaire Environnementale (the “AFSSE”) issued an opinion on mobile telephony. That opinion indicated that there was no demonstrable risk involved in living near to a base station, and that there was no cause to invoke the “principle of precaution” (principe de précaution) in such respect. With regard to the use of mobile telephones, the AFSSE considered that the “principle of precaution” should be applied and again recommended that research be continued, taking into account the existing doubts regarding the biological studies. In October 2003, the French Health Ministry required mobile network operators to provide their customers with recommendations on the use of mobile telephones and information on the existing uncertainties relating to potential health risks. In April 2004, Orange France signed, together with other mobile operators and the Association of Mayors of France, a “Guide des bonnes pratiques” (good practice guide) for the installation of transmitter sites. In May 2005, AFSSE reviewed and updated its position based on the progress of worldwide scientific research. This position reinforces the opinions expressed in 2003, described above.

 

The effect of mobile telephony on children is a recurring issue in some countries where Orange operates. In a statement issued in July 2005, the World Health Organization (WHO) confirmed its position that in fact there are no harmful effects on health due to radio frequencies below the thresholds defined in 1998 by the International Commission for Protection from Non-ionizing Radiation. These thresholds include a safety margin for the protection of the public, including children.

 

Scientific research findings on these issues should be published in 2006. France Telecom cannot be certain that these publications or that medical research in general, will dismiss any link between radio frequency emissions and health risks. If such a link were discovered, it could have an adverse impact on France Telecom’s business and performance.

 

3.3.3 RISKS RELATED TO FINANCIAL MARKETS

 

France Telecom’s performance and cash flow are exposed to fluctuations in exchange rates.

 

  n   A significant portion of France Telecom’s revenues and expenses are accounted for in currencies other than the euro. The main currencies for which France Telecom is exposed to a significant foreign exchange risk are the British pound, the Polish zloty and the US dollar. Fluctuations in the average exchange rate of a particular currency from one period to another can have a marked effect on revenues as well as expenses in that currency, which could significantly affect France Telecom’s results. For example, based on 2005 data, the theoretical effect of a 10% depreciation against the euro of all the currencies in which the Group’s subsidiaries do business would have meant a 3.2% reduction in consolidated revenues and a 2.7% reduction in the gross operating margin.

 

  n   In addition, France Telecom manages the exchange risk of commercial transactions (involved in operations) and financial transactions (involved in borrowing) under the conditions set out in Note 24 to the consolidated financial statements “Exposure to market risks and financial instruments: management of currency risks”. The currency risk on commercial transactions is limited since France Telecom’s activities around the world are conducted by subsidiaries that for the most part operate in their own country. France Telecom usually hedges the exchange risk on loan issues. However, since borrowing is not hedged in its entirety, France Telecom is exposed to an exchange risk on financial transactions in the event of a fall in the value of the euro against other currencies, especially the dollar, the zloty, the pound sterling and the Swiss franc. A fall of 10% in the value of the euro against all the other currencies would result in an exchange loss of an estimated 57 million euros for all the entities of the Group bearing the main exchange risks (France Telecom S.A., Orange and TP Group).

 

Generally, France Telecom enters into derivative instruments to hedge underlying exposures to changes in exchange rates, but France Telecom cannot guarantee that these derivative transactions will effectively or

 

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totally hedge its risks. To the extent that France Telecom has not entered into any derivative instruments to hedge some of that risk, or if its strategy of using such instruments does not succeed, France Telecom’s cash flow and results could be adversely affected.

 

  n   For the purposes of consolidation, the assets and liabilities of the foreign subsidiaries are converted to euros at the year-end exchange rate. This conversion, which does not affect the income statement, has an impact on consolidated balance sheet items, assets and liabilities, against the lines for shareholders’ equity currency translation differences, for amounts that may be significant.

 

In this respect, the following table presents the amount of net assets before and after factoring in net financial debt, with a breakdown by currency, in million euros at December 31, 2005 (unaudited data).

 

Breakdown of assets, liabilities and net assets by currency
At December 31, 2005
(in million euros)
  EUR   GBP   PLN   USD     CHF   Other
currencies
    Total non-
euro
currencies
  Total
Assets per currency(1)   43,926   19,029   6,880   2,199     1,819   2,430     32,357   76,283

 
 
 
 

 
 

 
 
Liabilities per currency(2)   39,305   5,775   2,894   (61 )   386   (453 )   8,541   47,846

 
 
 
 

 
 

 
 
Net assets per currency   4,621   13,254   3,986   2,260     1,433   2,883     23,816   28,437
  (1) The figure for assets per currency represents the net assets for each currency excluding components contributing to net financial debt.

 

  (2) The figure for liabilities per currency represents the net financial debt contributed by each currency, as presented in Note 19.5 to the consolidated financial statements.

 

EUR refers to the euro, GBP pound sterling, PLN the Polish zloty, USD the US dollar, and CHF the Swiss franc.

 

The figure for assets per currency (net assets excluding components contributing to net financial debt) in currencies other than the euro, primarily pound sterling and the zloty, came to 32.4 billion euros at December 31, 2005, representing 42% of net assets excluding debt. A 10% depreciation of all currencies other than the euro would have resulted in a 3.2 billion euro reduction in net assets excluding debt, down 4.2%.

 

The figure for liabilities per currency at December 31, 2005 represents the net financial debt contributed by each currency after management, in other words after factoring in any derivative instruments put in place, as presented in Note 19.5 to the consolidated financial statements. For currencies other than the euro, this primarily concerns the pound sterling and the zloty. On this date, it came to 8.5 billion euros, representing 18% of net financial debt. A 10% appreciation in relation to the euro for all currencies other than the euro would have resulted in a 0.9 billion euro increase in net financial debt recorded on the balance sheet, up 1.8%.

 

The figure for net assets in currencies other than the euro came to 23.8 billion euros at December 31, 2005. A 10% depreciation of all of these currencies in relation to the euro would have resulted in, due to the conversion of currencies into euros, without any impact on the income statement or cash flow, a 2.4 billion euro reduction in net assets, down 8.2%.

 

France Telecom’s business may be affected by fluctuations in the financial markets, including changes in interest rates.

 

In the ordinary course of its business, France Telecom is exposed to trends in the financial markets, especially changes in interest rates. Where appropriate, France Telecom enters into derivative instruments to hedge underlying exposures to changes in interest rates, but France Telecom cannot guarantee that such derivatives transactions will effectively or completely hedge such risk. To the extent that France Telecom has not entered into any derivative instruments to hedge some of that risk, or if its strategy of using such instruments does not succeed, France Telecom’s cash flow and results of operations could be adversely affected.

 

Managing interest rate risk and analyzing the sensitivity of the Group’s position to changes in interest rates are described in Note 24.1 to the consolidated financial statements “Exposure to market risks and financial instruments: management of currency risks”.

 

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There are risks relating to the volatility of France Telecom’s share price.

 

France Telecom S.A.’s share price may fluctuate due to a large number of factors, including:

 

  n   a change in France Telecom’s credit rating, or level of indebtedness or sales of assets;

 

  n   changes in financial analysts’ recommendations regarding France Telecom;

 

  n   changes in analysts’ forecasts regarding the sector in which France Telecom operates;

 

  n   an announcement by France Telecom or one of its competitors regarding strategic partnerships, financial results, changes in capital structure or other important changes in activity;

 

  n   the recruitment or departure of key employees; and

 

  n   general stock market fluctuations.

 

France Telecom did not own any of its own shares at December 31, 2004. It did not own any at December 31, 2005.

 

In addition, the share prices of France Telecom’s listed subsidiaries, particularly TP S.A., PagesJaunes and Mobistar may fluctuate. This could negatively impact France Telecom’s financial position or its share price.

 

Future sales by the French State of its shares in France Telecom may impact France Telecom’s share price.

 

At December 31, 2005, the French State held, directly or indirectly through the ERAP, 32.45% of the share capital of France Telecom (see section 7.1.2 “Direct or indirect control over France Telecom”). If the French State decides to further reduce its shareholding in France Telecom, such a sale by the French State, or even the perception that such a sale is imminent, could have an adverse impact on France Telecom’s share price.

 

The price of France Telecom’s ADSs and the U.S. dollar value of any dividends will be affected by fluctuations in the U.S. dollar/euro exchange rate.

 

The ADSs are quoted in U.S. dollars. Fluctuations in the exchange rate between the euro and the U.S. dollar are likely to affect the market price of the ADSs. For example, because France Telecom’s financial statements are reported in euro, a decline in the value of the euro against the U.S. dollar would reduce France Telecom’s earnings as reported in U.S. dollars. This could adversely affect the price at which the ADSs trade on the U.S. securities markets. Any dividend that France Telecom might pay in the future would be denominated in euro. A decline in the value of the euro against the U.S. dollar would reduce the U.S. dollar equivalent of any such dividend.

 

Holders of ADSs may face disadvantages compared to holders of France Telecom’s shares when attempting to exercise voting rights. Holders of shares wishing to exercise their voting rights must block their shares for at least five days prior to the shareholders’ meeting pursuant to French law.

 

In order to vote at shareholders’ meetings, ADS holders who are not registered on the books of the depositary are required to transfer their ADSs for a certain number of days before a shareholders’ meeting into a blocked account established for that purpose by the depositary. Any ADS transferred to this blocked account will not be available for transfer during that time. ADS holders who are registered on the books of the depositary must give instructions to the depositary not to transfer their ADSs during this period before the shareholders’ meeting. ADS holders must therefore receive voting materials from the depositary sufficiently in advance in order to make these transfers or give these instructions. There can be no guarantee that ADS holders will receive voting materials in time to instruct the depositary to vote. Also, the depositary is not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. It is possible that ADS holders, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote at all.

 

In order to participate in any general meeting, owners of shares registered in an account must have their shares registered in their name in a shareholder account maintained by France Telecom or on France Telecom’s behalf by an agent appointed by France Telecom by no later than 3:00 p.m. (Paris time) the day before the meeting. Owners of bearer shares must obtain a certificate (certificat d’immobilisation) from the accredited intermediary with whom the holder has deposited its shares, and the certificate must state that the shares are not transferable until the time fixed for the meeting. The owner must deposit this certificate at the place specified in the notice to convene for meeting by no later than 3:00 p.m. (Paris time) the day before the meeting.

 

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Preemptive rights may be unavailable to holders of France Telecom’s ADSs.

 

Holders of France Telecom’s ADSs or U.S. resident shareholders may be unable to exercise preemptive rights granted to France Telecom’s shareholders, in which case holders of France Telecom’s ADSs could be substantially diluted. Under French law, whenever France Telecom issues new shares for payment in cash or in kind, France Telecom is usually required to grant preemptive rights to its shareholders. However, holders of France Telecom’s ADSs or U.S. resident shareholders may not be able to exercise these preemptive rights to acquire shares unless both the rights and the shares are registered under the Securities Act of 1933 or an exemption from registration is available.

 

If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case no value will be given for these rights.

 

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Item 4. INFORMATION ON FRANCE TELECOM

 

4.1 HISTORY AND DEVELOPMENT

 

4.1.1 LEGAL NAME AND COMMERCIAL NAME

 

“France Telecom”

 

4.1.2 REGISTRATION LOCATION AND NUMBER

 

Trade Register No. 380 129 866 R.C.S. Paris

 

APE Code: 642 C

 

4.1.3 DATE OF INCORPORATION AND DURATION

 

France Telecom S.A. was incorporated as a French société anonyme on December 31, 1996 for a term of 99 years from that date. Barring early liquidation or extension, the Company will expire on December 31, 2095.

 

4.1.4 REGISTERED OFFICE, LEGAL FORM AND GOVERNING LAW

 

6, place d’Alleray, 75015 Paris

 

Telephone: +33-1 44 44 22 22

 

France Telecom, which was formerly part of the French Postal and Telecommunications Ministry, was formed as a public operator on January 1, 1991. Having become a société anonyme pursuant to French law No. 96-660 of July 26, 1996, France Telecom S.A. is governed by French corporate law, subject to specific laws governing the Company, particularly French law No. 90-568 of July 2, 1990 relating to the organization of public postal and telecommunications services, as amended by French law No. 96-660 of July 26, 1996 and by French law No. 2003-1365 of December 31, 2003. France Telecom is also regulated by its by-laws.

 

The transfer from the public sector to the private sector of France Telecom, authorized by decree No. 2004-387 of May 3, 2004 issued pursuant to French law No. 2003-1365 of December 31, 2003, took place on September 7, 2004 following the sale by the French state of 10.85% of France Telecom share capital.

 

The regulations applicable to France Telecom as an operator are set forth in section 4.7 “Regulations”.

 

4.1.5 IMPORTANT EVENTS IN THE DEVELOPMENT OF THE COMPANYS BUSINESS

 

France Telecom has been listed on the Euronext Paris Eurolist Market and on the New York Stock Exchange since October 1997, the date on which the French State sold 25% of the shares it held to the public and to France Telecom employees. At December 31, 2005, the State held, directly or indirectly, 32.45% of the capital of France Telecom.

 

In recent years, France Telecom’s business and the regulatory and competitive environments in which it operated have experienced significant changes that have affected the composition of its revenues, its businesses and its internal organization. All segments of the telecommunications sector in France have been opened up to competition since January 1, 1998 (with the exception of local communications, which were opened up to competition on January 1, 2002), while previously France Telecom held a monopoly on the provision of fixed telephony services. In addition, competition has evolved in keeping with decisions adopted by the Electronic and Postal Communications Regulation Authority (Autorité de régulation des communications électroniques et des postes, “ARCEP”).

 

In this context of deregulation and increased competition, from 1999-2002 France Telecom pursued a strategy of developing new services and accelerated its international development through external growth. By pursuing this strategy, France Telecom extended its activities towards new services, such as mobile telephony, the Internet, and data transmissions services in France and internationally. In this context, France Telecom has made numerous strategic investments (acquisitions, minority investments, UMTS licenses). In particular, it acquired Orange plc. in 2000, Global One and Equant in 2000 and 2001, acquired interests in NTL between 1999 and 2001, in the Polish operator TP S.A. in 2000 and 2001, and in MobilCom in 2000, as well as the acquisition of UMTS licenses in different European countries.

 

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For the most part, these strategic investments were unable to be financed by share issues. This led to a significant increase in the Group’s debt and to a downgrading of the rating assigned to France Telecom’s debt by rating agencies.

 

Mr. Thierry Breton, appointed to head up France Telecom in October 2002, immediately commissioned a team of experts to perform a complete review of the Group’s activity and financial situation (the “State of France Telecom” audit) (Mission Etat des lieux)). Taking into account the results of these inventories, in December 2002 France Telecom launched the “Ambition FT 2005” plan, in order to fundamentally transform the Group, over the period from 2003-2005, based on three major priorities:

 

  n   The “TOP” operational improvement program;

 

  n   The strengthening of the Group’s financial structure;

 

  n   A strategy focused on customer satisfaction and integrated operational management of the Group’s assets.

 

See section 4.2.1 “From the “Ambition FT 2005” plan to the “NExT” program” below.

 

The launching of the “Ambition FT 2005” plan in late 2002, the success of the parts of this plan involving the refinancing of the Group’s debt and the strengthening of equity, and the good results of the “TOP” operational improvement plan obtained by 2003 allowed the Group to reduce the financial pressure, pursue significant debt reduction, and devote itself fully to developing its strategy as an integrated global operator in anticipation of the changes in the telecommunications industry.

 

This integrated operator strategy materialized at the end of 2003 notably with the acquisition of the entirety of the stakes of the minority shareholders of Orange and of Wanadoo, the acquisition of the entirety of the assets and liabilities of Equant, the purchase of minority interests in the subsidiaries of Orange (Romania, Slovakia, and Dominican Republic), the integration of Wanadoo into France Telecom S.A., the implementation of a new organization for the Group consistent with this strategy, and the sustained launch of new services.

 

At the same time, France Telecom streamlined its portfolio of assets, selling non-strategic assets, such as the following subsidiaries or holdings:

 

  - in 2003: Casema, Eutelsat, Wind, CTE (Salvador), Telecom Argentina;

 

  - in 2004: Noos, decrease to 10% of the interest in the capital of BITCO (Thailand), Orange Denmark, Radianz (Equant holding), ST Microelectronics (3.3% of the capital);

 

  - in 2005: Tower Participations (the company holding TDF), Intelsat, cable network businesses, MobilCom AG.

 

Finally, PagesJaunes Group, the Group’s directories subsidiary, was listed on the stock market (Euronext Paris) in 2004. In 2005, 8% of the capital was sold, with France Telecom’s interest in the capital of PagesJaunes Group being brought down to 54%.

 

To follow up on the Ambition FT 2005 plan, in June 2005 France Telecom presented the Group’s program for 2006 – 2008. The “NExT” (New Experience in Telecommunications) program is a program for transformation over three years which aims to make France Telecom the benchmark operator in new telecommunications services in Europe.

 

In this context, France Telecom acquired close to 80% of the capital of Spanish mobile operator Amena in November 2005 for 6.4 billion euros. This transaction allows the France Telecom group to strengthen its integrated operator strategy in Europe and to be in a position henceforth to launch convergent offers based on fixed and mobile broadband in another key European market.

 

4.2 STRATEGY

 

For a definition of financial terms, especially free cash flow, organic cash flow, net financial debt and gross operating margin (GOM), see section 5.10 “Financial Glossary”.

 

4.2.1 FROM THE “AMBITION FT 2005” PLAN TO THE “NEXT” PROGRAM

 

The “Ambition FT 2005” plan

 

In December 2002, France Telecom launched the “Ambition FT 2005” plan, in order to fundamentally transform the Group, over the 2003-2005 period, giving preference to three major priorities:

 

  n   A “TOP” operational improvement plan, with the aim of freeing up over 15 billion euros in free cash flow (net cash provided by operating activities, less net cash used in investing activities) over the 2003-2005 period and to attain excellence in the performance of all company procedures by 2005.

 

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  n   A strengthening of the Group’s financial structure, with the “15 + 15 + 15” plan:

 

  - Over 15 billion euros in net cash flow, generated thanks to the “TOP” program;

 

  - 15 billion euros in strengthened equity: a capital increase of 14.9 billion euros was made by April 2003;

 

  - 15 billion euros in Group debt refinancing: the debt refinancing was carried out during the period between December 2002 and February 2003 for over 14 billion euros.

 

  n   A strategy focusing on customer satisfaction and integrated operational management of the Group’s assets, leaders on their principal markets. In addition, the Group decided to sell assets in a weak strategic and financial position and to develop strategic partnerships in areas that do not derive from its core business and where it cannot achieve critical size alone.

 

These three initiatives were implemented in parallel with the objective of reaching by the end of the year 2005 a ratio of net financial debt to gross operating margin (GOM) of under 2.5 under IFRS, giving the Group greater strategic and operational flexibility.

 

The financial objectives of the “Ambition FT 2005” plan were achieved, both in terms of the generation of available cash flow, as well as in terms of the improvement of the ratio of net financial debt to gross operating margin (GOM). The free cash flow, accrued over the 2003-2005 period, generated thanks to the “TOP” program, reached over 16.6 billion euros, compared to the target of over 15 billion euros. The ratio of net financial debt to GOM reached 2.48 at December 31, 2005, taking into account the GOM of Amena over 12 months in 2005.

 

The “NExT” program

 

France Telecom presented the Group’s program for 2006 – 2008 on June 29, 2005. The “NExT” (New Experience in Telecommunications) program is a three-year transformation program that will give the Group’s customers access to a universe of enriched and simplified services and that will allow the Group to pursue its integrated operator strategy supported by a renewed model of profitable growth. The “NExT” program aims to make France Telecom the benchmark operator for new telecommunications services in Europe, in terms of innovation, quality of service, and economic performance.

 

Based on a complete portfolio of services and solutions, on its mastery of all networks and its capacity for integrated innovation, France Telecom intends to develop a new world of services in the area of everyday communication, information and entertainment, as well as business services, to respond to the expectations of all customers (general public, professionals, companies, local governments), in all situations (mobile, home, office) and regardless of the network, the platform or the terminal used.

 

Four major stakes structure the strategy for the NExT program over the 2005-2008 period:

 

  n   To switch from a logic of access to networks to a logic of access to services;

 

  n   To innovate in terms of telecoms services, customer services and network services;

 

  n   To strengthen the Group’s integration;

 

  n   To develop the Group’s capabilities.

 

Acceleration of the implementation of the “NExT” program in 2006

 

In 2006, France Telecom is going to accelerate its transformation around 3 axes:

 

  n   tighter control of the business with:

 

  - the creation of a Group Management Committee of nine people given the task of the creation of organic cash flow and the achievement of the twenty key objectives of the “NExT” program;

 

  - and the implementation of integrated management of business units by country;

 

  n   an accelerated transformation of France Telecom with:

 

  - the deep transformation of the Group’s structures and methods of functioning;

 

  - the adjustment of the cost structure;

 

  - and the mobilization of capabilities within key areas for the Group, with the “ACT” (Anticipation and Capabilities for the Transformation) program;

 

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  n   and an acceleration of the placement of convergent offerings on the market, with:

 

  - an integrated structure for steering offers : Group Strategic Marketing;

 

  - and a powerful tool for determining and launching offers: a “Technocenter” with 1,500 dedicated people, operational as of January 1, 2006.

 

The major objectives of the “NExT” program

 

The “NExT” program has defined twenty major objectives in six separate areas: Revenues and finance, Products and services, Subscriber base, Customer relations, Efficiency and performance, and Human Resources. Among these objectives, the main operational and financial objectives of the “NExT” program for 2008 are the following:

 

  n   Revenues and finance:

 

  - maintain the generation of organic cash flow;

 

  - generate over 400 million euros in revenues from direct content sales;

 

  - generate over 30% of Enterprise revenues in ICT services.

 

  n   Products and services:

 

  - roll out the dedicated portal for Group customers in Europe ;

 

  - generate 5% to 10% of revenues from convergent offerings;

 

  - include over 30% of handsets under the “Orange” brand in the Group’s global mobile terminal base;

 

  - accelerate innovation by allocating up to 2% of revenues on Research and Development.

 

  n   Subscriber base:

 

  - over 85 million mobile subscribers in 2008, in addition to Amena subscribers (10.3 million as of December 31, 2005)

 

  - over 12 million mobile broadband customers in 2008;

 

  - over 1 million “Business Everywhere” customers in 2008;

 

  n   Customer relations:

 

  - implement the new brand policy in 2006.

 

  n   Efficiency and performance:

 

  - generate 2 billion euros in total gains over the 2006-2008 period on purchasing and support functions;

 

  - achieve savings on network and information system expenses representing a gain of 2 points in the ratio of gross operating margin to revenues.

 

  n   Human Resources:

 

  - implement the mobilization of Group capabilities within the “ACT” program.

 

In addition, the debt reduction target is confirmed with a ratio of net financial debt to GOM less than 2 by the end of 2008.

 

By nature, these objectives are subject to numerous risks and uncertainties, which may lead to differences between announced objectives and actual results. The most important risks are set forth in Chapter 3.3, “Risk Factors.”

 

Steering of the transformation and mobilization of capabilities

 

In order to ensure the success of the NExT program, France Telecom is implementing rigorous steering of the transformation, adapting its human resources and mobilizing and developing its capabilities.

 

Steering the transformation

 

A member of the Group Management Committee is in charge of steering the Group’s transformation and of guiding the team dedicated to “NExT Transformation”. In giving priority to the integration of networks and to the integration of countries, which must be done between now and the end of the year 2006, “NExT Transformation” is carrying out the following actions:

 

  - support and reporting of business transformation actions within the divisions to put into effect the NExT program;

 

20


  - evaluation of transformation projects (around 650 projects identified);

 

  - identification, strong support and follow-up of critical projects (about 50 high-impact projects requiring steering at the Group level).

 

Adaptation of Human Resources

 

France Telecom is adapting its human resources to the needs deriving from the changes in its businesses and the transformation of its organization:

 

  - shortening the decision-making circuits and decreasing hierarchical levels;

 

  - redeployment toward customer service skills;

 

  - strengthening of training actions, with the support of in-house schools for skills;

 

  - implementation of incentive measures geared to the achievement of the NExT program objectives;

 

  - recruitment of new talent (6,000 hires expected in France over the 2006-2008 period).

 

At the same time, France Telecom foresees 22,000 departures in France and an overall decrease of 17,000 in staff group-wide.

 

The “ACT”: Anticipation and Capabilities for the Transformation program

 

The goal of the ACT program is to mobilize and develop the Group’s capabilities through the implementation of the following four actions:

 

Act: Opportunities: The Group will make available to all employees information that is as complete as possible on the business activities existing within the Group; their likely progress; the location of jobs; the opportunities offered by the Group’s international scope; the possible opportunities outside the Group.

 

Act: Development: A Commitment to Personal Development (EDP) will allow each employee to formalize his career path as constructed with his manager; the employee’s commitment to the development of his skills and mobility; the company’s commitment to follow-up solutions. Development Spaces: dedicated human resources teams, will advise the employees who so wish on the subject of career advancement and on the project of internal mobility, international mobility or even departure from the company (spin-offs, mobility toward civil service, etc).

 

Act: Management: Managers will be evaluated more on their ability to communicate, train and develop their teams. They must ensure that each one of their staff fits in with this personal project procedure.

 

Act: Solutions: The Group is going to guarantee significant follow-up to those who commit to a project in line with its strategy, whether it is within or outside the Group, including in particular an increase in training actions.

 

4.2.2 A MARKET UNDERGOING FUNDAMENTAL TRANSFORMATION

 

France Telecom’s strategy falls within the context of the changing telecommunications services sector.

 

The telecommunications and, more broadly speaking, on-line communication and entertainment industry is experiencing a deep transformation, which is the result of strong technological innovation and which translates into a strong evolution of service offers, usages and competitive interplay.

 

France Telecom considers that the chief components of this transformation, described below, concern:

 

  - changing technologies: widespread use of the IP protocol, broadband and mobile services; the development of multi-access terminals and interoperable networks;

 

  - changing usages: the growth of the consumption of audiovisual content, abundance, personalization of usage contexts and services;

 

  - changing industry structures and strategies: evolution of ISP businesses and telecoms operators, increasing competitive pressure due to the entry of new players.

 

  n   Widespread use of the IP protocol on all networks

 

The IP protocol will be the means for a greater degree of inter-operability between the various networks and types of services. This will begin to challenge the “silo-based” structure of current networks (fixed voice, fixed Internet and mobile) each made up of specialized terminals accessing dedicated services using separate

 

21


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. As IP becomes generalized on all networks, use of the Internet and of more and more evolved forms of digital communication and entertainment will thus be widespread among all customers.

 

  n   Widespread use of broadband

 

Technologies such as ADSL, Wi-Fi, Gigabit Ethernet and UMTS currently offer very high speeds on all fixed or mobile networks at competitive prices.

 

  n   Mobility everywhere

 

Technology now satisfies the expectations of continuous personal communication capacity: the speed and functionality capacities of mobile networks are being considerably extended by the commissioning of UMTS while local mobile technologies (Wi-Fi) are being introduced on an increasing number of sites.

 

  n   Innovative multi-access terminals

 

With the appearance of innovative terminals equipped with multimedia facilities, constantly increasing storage capabilities and built-in operating systems, services can be made increasingly independent of the type of hardware. In parallel, technical solutions make it possible to connect various types of hardware to different types of networks.

 

Domestic networks will play a major role in this greater flexibility in the allocation of services to hardware and of hardware to networks.

 

  n   Open systems facilitating network inter-operability

 

Network interoperability will be facilitated not only by the generalization of the IP protocol to networks themselves, but also by implementation of open platforms (for example: authentication platforms, transaction platforms), having announced application program interfaces (API) and very flexible activation mechanisms (for example, Web services).

 

  n   The consumption of audio/video digital content from telecommunications networks

 

With the increasing digitalization of audiovisual content and the fast development of compression techniques, content is circulating more and more over fixed line or mobile telecommunications networks at competitive prices, whether it involves watching television, listening to the radio, or receiving on-demand video or music.

 

  n   The new forms of consumption

 

The fast spread of IP and broadband favors the emergence of new forms of consumption. Uses are thus becoming richer and richer and evolving toward abundance: abundance of communication minutes in contract packages up to unlimited minutes, increased fixed line and mobile network speed, greater diversity of services. More and more, these offerings will be provided in an integrated manner by “triple play” (fixed voice, Internet, TV) or “quadruple play” (plus mobile) operators.

 

  n   The personalization of usage contexts and services

 

With the fast dissemination of IP, fixed and mobile broadband networks and open systems, users are in a position to thoroughly personalize their services, their usage environment, their utilization context and their content, which they can find on all fixed line or mobile networks.

 

  n   Evolution of the business of Internet service providers and telecommunications operators

 

In terms of evolution in the telecommunications industry, these technological advances and these changes in the forms of consumption are leading to a convergence of the businesses of Internet service providers (ISP) and telecommunications operators.

 

  n   Increasing competitive pressure

 

With the increasing deregulation of telecommunications markets, numerous players of a different nature are investing in the market. Thus, in the fixed network segment, numerous low-cost ISPs and operators are developing quickly, making the most of the fast deployment of access splitting and resale. In the mobile market, MVNO are now heavyweight players in most geographical markets. Finally, players in the Internet world have plans to develop strongly in the communication and content services market on an unregulated basis.

 

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4.2.3 THE STRATEGY OF FRANCE TELECOM: A NEW EXPERIENCE IN TELECOMMUNICATIONS

 

In this market undergoing a fundamental transformation, France Telecom is basing its strategy on the integrated telecommunications services operator model.

 

  n   An integrated operator strategy

 

The objective of this integrated operator strategy is to create value through the implementation of the following integrated operator actions:

 

  - Offering convergent services, access to a single services portal, personalized terminals with shared ergonomics, allowing for added value in the offers made to customers and greater customer loyalty;

 

  - A unified overall appearance (“look & feel”) for services, which improves the adoption and utilization of new communication tools, facilitates personalization of services and choices by customers, and develops uses;

 

  - In customer relations, the implementation of unified customer support, providing for a seamless customer experience and “one stop shopping”;

 

  - Better knowledge of customer practices and a segmented approach to customers overall, allowing for increasing revenues and reducing “churn”;

 

  - Improved end-to-end service quality even if several networks are put into play to provide a service;

 

  - Economies of size and synergies thanks to improved reciprocity in all areas (optimization of network capabilities and service platforms, customer relations and support functions) and economies of scale through higher purchasing volumes allowing for obtaining better prices.

 

  n   A new generation of telecommunications services

 

Going from a network-access logic to a service-access logic, France Telecom is offering its customers a “New Experience in Telecommunications,” thanks to a new generation of telecoms services.

 

France Telecom’s aim is to respond in an integrated manner to customer needs in all its communication universes: at home (Home), at work (Enterprise) or while traveling (Personal). This service strategy is based on:

 

  - offering complete telecommunications services, including a seamless integrated Fixed, mobile and Internet networks experience, abundance offers, an integrated communication suite of France Telecom terminals;

 

  - content and “Live services” offers, including music, video, TV and offered games on all the Group’s platforms, and an entire range of services for everyday life, with exclusive offers for Group customers in certain cases;

 

  - offers and complete solutions offering business customers throughout the world all multimedia IP communication services;

 

  - a high level of quality of service and customer relations, thanks to a single integrated Group customer relations policy.

 

To invent and implement this new generation of services, France Telecom is relying, in the framework of the NExT program, on the following levers:

 

  - Research and Development and strategic partnerships;

 

  - Centralized strategic marketing;

 

  - The launching of convergent offers;

 

  - A new brand policy;

 

  - The integration of networks, information systems and service platforms.

 

4.2.3.1 Research and development and strategic partnerships

 

  n   Increased effort in Research and Development to offer the best of technology

 

As both a telecommunications services provider and a network operator, France Telecom’s ambition is to provide its customers with the best of technology, as soon as it is available, all while taking into account future technological generations. For this purpose, France Telecom has decided to increase its Research and

 

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Development effort. In terms of operating expenses before amortization and depreciation plus tangible and intangible investments, these efforts represented 1.5% of the consolidated Group revenues in 2005 (as compared to 1.3% in 2004 and 1.1% in 2003). France Telecom’s objective is to reach up to 2% of revenues by 2008. The R&D division will contribute to network integration, the enrichment of services and to the offering of new services, through its developments, as well as through its contribution to the Technocenter and to the implementation of strategic partnerships.

 

  n   Strategic partnerships to develop new services and accentuate the difference

 

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 mobile technologies, all technical protocols and all configurations of use: public networks and private networks. In addition, a fundamental aspect of France Telecom’s expertise is to assist customers in using its networks and services by providing the consulting and integration services they require.

 

France Telecom has decided to rely on strategic partnerships to forge a competitive edge for itself or to integrate new technologies, whenever the critical size to develop these advantages cannot be achieved alone. The priorities of the strategic partnerships will be in four areas:

 

  - networks and information systems support technologies;

 

  - hardware (for example in the mobile sector, with signature devices developed by suppliers according to ergonomic specifications defined by Orange);

 

  - content (for example with regard to new offers on ADSL); and

 

  - distribution channels, in order to increase sales, develop customer loyalty and make it easier to learn how to use these new services.

 

4.2.3.2 Centralized strategic marketing

 

To ensure greater fluidity in product development and faster transfer of R&D developments to the market, the Chairman of France Telecom decided to create the Strategic Marketing division.

 

This division will have the responsibility of carrying out all actions necessary for the implementation and launching of integrated operator offers, in particular convergent offers through the creation of a central group-wide function.

 

Its area of responsibility covers three axes:

 

  - Provide an advanced vision of the market in summary form, taking into account both potential technological advances as well as market changes, determining overall segmentation and group-wide initiatives (Group-wide Projects, Strategic Partnerships);

 

  - Determining the NExT convergent offers and ensuring their development and placement on the market through the Technocenter, as described below;

 

  - Ensuring the coordination of roadmaps for the development of Group products and their placement on the market, through a Strategic Marketing Committee gathering together the different divisions.

 

The development of new products and services will be entrusted to the Technocenter, organized around joint teams, who will manage the offering’s development cycles. Each 3-partner team (“3 PTeam”) will be comprised of three leaders:

 

  - a Product Leader who will manage the marketing aspects and interface with the business segments and who will be the head of this “3P Team”;

 

  - a Development Leader, who will be responsible for the entire development phase;

 

  - an Implementation Leader, responsible for the product, who will be in charge of the implementation of network and information system resources.

 

The heads of the different marketing, network and information systems, and the sales and services divisions, will be gathered together within one team, which will allow for closer coordination and greater quality in determining offers, saving time in product development, and making marketing and after-sales service easier.

 

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4.2.3.3 Launching convergent offers

 

Convergent offers are the essence of the New Experience in Telecommunications. Besides commercial convergence (single contract, single customer service and single invoice), they provide customers with a seamless experience of communication services (voice, e-mail, SMS, IM) and call handling services (voice messaging, address book, presence), regardless of the access (fixed, mobile or Internet) and the network used (RTC, ADSL, mobile). The perceived value thus created, enriched by surplus rate components (for example, unlimited calls between the members of the same family), will allow the Group to create value by utilizing the following levers:

 

  - Growth of average revenue per user (ARPU), thanks to enriched offerings;

 

  - Market growth: for example, the “Mobile & Connected” product, coupling fixed b broadband and mobile access, allows for developing the ADSL market with customers who do not want a fixed line for voice (product without telephone subscription);

 

  - Customer loyalty :

 

  - The fully convergent “Homezone” product (fixed, mobile and Internet) will allow the customer to use a single terminal;

 

  - The “Family Talk” product, launched successfully among a limited number of users, allows a “group of close users” to make unlimited calls within the group using France Telecom fixed lines and Orange mobile phones.

 

  - Growth of the customer base, through differentiation deriving from convergent products and related new products.

 

Convergent products are aimed first of all to multi-equipped customers (Fixed Line – Mobile – Internet), the number of which continues to grow in the countries where the Group is established in Europe, due to high rates of mobile penetration and the strong growth of ADSL penetration. France Telecom estimates than in France, multi-equipped customers (Fixed Line – Mobile – Internet) constitute the population with the highest ARPU (around 120 euros per month): these customers represent about 24% of households, but around 44% of the value of the general consumer telecommunications market.

 

4.2.3.4 A new branding policy

 

The objective of the project to change the Group’s branding system, NExT Branding, is to simplify this branding and make it consistent with the NExT vision.

 

The NExT Branding project aims to give a boost to the integrated operator model and to provide tangible proof of the convergence of products and services thanks to a single commercial brand, to simplify and homogenize the customer experience, to fortify commercial brands in order to strengthen offers vis-à-vis the competition, and to optimize marketing and communication costs. France Telecom believes that this project also represents a managerial vector for building an integrated Group and achieving its transformation.

 

The studies carried out among customers to prepare the project have enabled France Telecom to make several ascertainments. Firstly, in France, in Poland and in the other countries where the Group holds an historical operator position, the strong relationship between the historical brand and the customers must be maintained over the long term. Next, of all the brands in the portfolio, Orange is the one that has the greatest potential for expansion in all countries. Finally, for the Business market, where the need for integrated products is strong, a single brand can be implemented throughout the world.

 

In June 2005, France Telecom set and announced the following principles of the new branding policy.

 

In France, Poland, Senegal, Ivory Coast and Jordan, a pragmatic approach will be implemented, by operating the historical brand (France Telecom, TP, Sonatel, Côte d’Ivoire Télécom, and Jordan Telecom) together with the Orange brand.

 

Orange will be used as the sole commercial brand for mobile, broadband, ADSL television and multi-service offerings and will become the commercial brand for the Business market in all countries.

 

The implementation of the new branding policy is a project within the framework of the NExT program, for which responsibility has been entrusted to a member of the Group Management Committee, in charge of the “Brand evolution” assignment.

 

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4.2.3.5 The integration of networks, the information system and service platforms

 

The integration of networks, the information system and service platforms is indispensable for the development of all continual access products on the different fixed or mobile accesses that a customer has, and to ensure end-to-end quality service, meeting customer expectations and at a better cost. This network and information system integration strategy will be implemented with the following actions:

 

  n   France Telecom will deploy a new multi-service Broadband structure (NGN) capable of transporting voice or data services for fixed or mobile uses. This new network will gradually replace traditional networks;

 

  n   France Telecom will pursue its ambitious strategy of increasing network speed. The objective is to achieve 100% Broadband coverage in France. Fiber optics, as well as Giga Ethernet networks will be progressively deployed;

 

  n   When it comes to information systems, in connection with the integrated operator strategy, service platforms will be designed to allow for offering convergent services and unified customer service. Their development will be based on the reciprocity of applications (invoicing, content management) which are common to the Group’s three business segments and to all countries;

 

  n   The information system infrastructures will be streamlined: the number of data processing centers will be reduced significantly, and the use of computer servers and office tools will be reorganized.

 

4.2.4 MAIN ACTIONS FOR IMPLEMENTING THE GROUPS STRATEGY

 

The Group’s profitable growth strategy, based on the integrated operator model, aims to satisfy customer needs and expectations, in three areas:

 

  - personal communication services, essentially mobile;

 

  - residential communications services, rendered essentially at customers’ homes (“Home services”);

 

  - enterprise communication services.

 

This strategy will be available internationally, in connection with the NExT program, which, after the acquisition of Amena in November 2005, does not require a major acquisition in Europe.

 

4.2.4.1 Strengthening the growth of Personal Communication Services

 

On more and more competitive markets, the Personal Communication Services (or “Personal”) division intends to strengthen its growth by continuing to develop interpersonal communication revenues and by relying on the development of broadband on mobile services as the new growth sector.

 

Continuing to develop interpersonal communication revenues by offering customers more abundant usage

 

Interpersonal communication is the “Personal” core business. To date, 90% of “Personal” revenues come from interpersonal communication services, which include voice and other services, such as SMS, MMS, videotelephony and e-mail.

 

After the network development phase, the conquest of new customers and the improvement of performance, in a market where penetration has become significant, the “Personal” strategy remains focused on the growth of its core business, interpersonal communication, and on customer loyalty. The Personal division is relying for that on a marketing and commercial approach using a segmentation based on an analysis of customer needs. This segmentation allows for taking into account the specifics of each major customer segment and responding to it with offerings that allow for developing usages and recurrent revenues, for example, in associating terminal and service specifically for each customer segment.

 

This strategy for ARPU growth is being implemented by ongoing innovation in terms of rates, including major abundance (and even unlimited usage) contracts for calls, whether voice or SMS, toward certain numbers chosen by the customer or at certain times of day. These “Yield Management” methods allow for offering the customer an strong increase in his usages for a slight increase in his monthly bill and, make the best customers loyal.

 

In addition, the “Orange Signature” program (Co-development of terminals where “Personal” defines ergonomics) has currently been extended to all types of terminals, including 3G, EDGE, and Wi-Fi. These

 

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terminals allow for ease of use of Orange services and the customer may, by changing the terminal, find the same usage ergonomics, as well as service continuity, by using fixed-access broadband.

 

Mobile broadband services – a new growth sector

 

The Personal division has launched its broadband services in France and the United Kingdom (“Orange Intense” in France). This broadband offering uses the different mobile broadband access technologies available, such as UMTS, EDGE and Wi-Fi, to offer the customer an entire range of new usages on a range of handsets that will gradually replace 2G handsets.

 

This increase in access speed allows content accessible through GPRS to be accessed with greater ease and faster communications, but above all it allows for developing new services: thus the MMS offer communications enriched with personal content, visiotelephony replaces simple telephone communication, and new usages – breakthroughs from second-generation mobile telephony – appear, such as mobile TV (already 52 channels are available on mobile in France) or mobile music.

 

In the multimedia sector, Orange has demonstrated its ability to make use of various partnerships to supply services through business models allowing for the remuneration of partners, such as “Orange Gallery,” SMS +, and Partnerships with M6, for example. This policy furthers the development of innovative services and even the emergence of new business segments, such as mobile TV (Creation of specific channels, broadcasts solely for mobiles: “Mobisodes”).

 

Other new services, such as mobile payments and geographically located services, enrich the offering of broadband services.

 

In the corporate market, the Personal division continues to strengthen the value of its offerings, in particular through the use of integrated products such as Intranet and e-mail access via mobile. Thus the Group’s “Business Everywhere” offer, a personal services solution, built around fixed, mobile or WI-FI access, giving Business customers continual access to their communications universe, is developing very rapidly, since it is ideally suited to meet corporate demand for continuous connectivity.

 

The implementation of operational excellence through integration and convergence

 

“Personal” is actively contributing to all the transverse programs allowing for building an integrated operator strategy within the Group, in particular in the development of convergent products: Multiple-access fixed, mobile and Internet solutions products; new voice convergence offers (“Family talk” in France); business products (“Business Everywhere”); concerted marketing actions (“Madonna,” “King Kong”); single and integrated customer relations for fixed line and mobile customers.

 

4.2.4.2 Making France Telecom a benchmark in the Residential Communications Services sector

 

In the home communication services sector, France Telecom is developing its offerings in three integrated services universes:

 

  - communications services;

 

  - access to digital information and entertainment content;

 

  - practical life services;

 

based on the development of broadband and the fast spread of Livebox.

 

Communications services

 

In the person-to-person communications services sector, the strategy followed by the Home Communication Services division is to develop:

 

  - Abundance offers:

 

One year after having innovated with fixed-line “unlimited plans,” France Telecom has become the first operator to offer unlimited domestic, European and North American fixed-to-fixed and fixed-to-mobile with its “100% unlimited” rate plan, and it has continued to simplify its rate plans, by launching “Atout Téléphone” in August 2005, a new range of telephony for all with unlimited or customized formulas. This product has met with great success with over one million customers by late October 2005.

 

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  -Integrated products, based on the interoperability of networks and services:

 

  n   Visiophony on all networks, for all customers with three compatible solutions (MaLigne Visio, Orange Visio and Wanadoo Visio), which communicate with each other, for example, to exchange photos, videos or share their environment with their interlocutor.

 

  n   Livecom, the first PC communications software, integrating visiophony, unlimited ADSL telephony and instant messaging. The Livecom software suite allows for calling friends and family at any time, whether they are reachable on their PC, 2G or 3G mobile or visiophone. It offers surfers dual or multiple multimedia communications options in real time via 3 means of communication: audio, visual and text (instant messaging, SMS or e-mail).

 

  n   FamilyTalk, the first convergence product for the family (and launched in a limited series): an unlimited 24/7 offering between a family’s fixed and mobile handsets.

 

Access to digital information and entertainment content

 

In the fixed-line sector, the increase in speed and the progress made in image coding now allow for offering broadcast television and an entire range of new services associated with ADSL access: MaLigne TV allows access from a fixed line to the wealth of digital TV through TPS or Canal + Group clusters, to TNT channels and to a catalogue of over 1,000 hours of audiovisual programs on demand (VOD).

 

With the digitalization of content, the Group is enriching its product line by offering a range of new services:

 

  - France Telecom/MaLigne TV launched the first digital television recording service by telephone hookup with “Mon Magnéto”, an innovative digital recording service on the hard drive of a decoder (PVR: Personal Video Recorder) exclusively by ADSL.

 

  - In the music sector, LiveMusic allows for mobile transfer of music between a hi-fi unit and a PC via Livebox.

 

  - The transfer of photos allows for photos taken with a mobile phone to be arranged with a single click in the family photo album on the PC via the Photoblog service.

 

Practical life services

 

Practical life services involve all areas of individual or community life: citizenship, health, transportation, housing, online purchases, safety, education, personal services, and local communities.

 

Innovation in communications technologies and broadband ADSL connection, due to its continuous nature, allows for developing new home security or remote personal assistance services.

 

Thus the first mobile local medical assistance service is being experimented with in Issy-Les- Moulineaux, an innovation made possible thanks to the know-how of the Group and collaboration with Axa Assistance. France Telecom will soon launch a home maintenance service – an offering combining MaLigne Visio with a cluster of services – allowing for keeping ties with personal contacts and having access to social and medical services.

 

For local communities, France Telecom is launching the “Plan 3 fois 10” (3 times 10 plan): 10 services today, 10 services tomorrow and 10 services for the future. The first ten services, such as TéléNetCité, Intr@local, Intra Cité and Pack Surf Wi-Fi, are intended to aid them in their internal management or their economic development and to further the development of services for citizens.

 

In the home security sector, LiveZoom, a Livebox-related offering, allows for home surveillance through a mobile phone or a PC.

 

As in content, France Telecom will not do everything but will be everywhere, relying on very diversified partnerships with the best players in the sectors involved.

 

The development of broadband and fast spread of Livebox – the basis for the development of these new services – are a major priority for the Group

 

The growth of the ADSL base continues at a fast pace, and Internet access via broadband is progressively becoming the norm in France: at the end of 2005, the number of ADSL broadband access and split lines reached 9.4 million, an increase of 49% compared to 2004. In the General Public ADSL broadband market in France overall, the number of France Telecom customers reached 4.5 million, for a market share of 47.5%.

 

In 2005, new advances were achieved in access technologies, and the entire broadband network’s switch to ADSL2+ thus gives access at speeds reaching up to 18Mbits/s.

 

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This strategy to increase speed is also being deployed internationally in all the countries where the Group is a fixed-network operator: in Poland, but also in the countries where France Telecom is a new entrant in fixed telephony, such as Spain, the United Kingdom and the Netherlands, by building its offering on the basis of unbundling and capitalizing on the developments in new services made in France.

 

This strong growth of broadband allows France Telecom to develop the entire range of “Home services” around the “Livebox” domestic gateway.

 

Livebox is the Group’s first integrated pan-European product, around which household digital services are being developed: it allows for connecting all home communication services to broadband for surfing the Internet, watching TV, telephoning on IP, communicating by visiophone or gaming on the network and accessing Liveservices. Livebox is thus becoming the cornerstone of “Home Networking,” the point of convergence for equipment and technologies, and the key for access to home broadband services.

 

4.2.4.3 Developing Enterprise Communication Services

 

France Telecom believes it sets itself apart from its competitors with its integrated operator strategy, the geographical coverage of its actions both in France and in Europe with all possible extensions thanks to the Equant network, and its maintaining a significant investment in R&D in the service of its customers.

 

The Enterprise Communication Services division is focusing on the following objectives for 2008:

 

  - being a leader in the transformation to IP;

 

  - being present with customers wherever they are;

 

  - following up on the changes in customer businesses by developing service actions.

 

Being a leader in the transformation to IP

 

Large companies are gradually migrating their voice and data networks to IP infrastructures. Packages giving access to voice and data services and to communicating applications solutions are being offered to them to accompany the integration of VoIP into their networks. France Telecom is also offering them network management services, either on their own site or on a dedicated or shared centralized platform (IP Centrex type solutions).

 

For small- to mid-sized companies, packaged offerings are being designed to satisfy their needs, such as the Business Livebox, as well as extended virtual private networks.

 

Being present for customers wherever they are

 

The Group’s offering to implement this strategy is based around two major types of products: international network products thanks to the international network and to Equant’s presence in over 200 countries, as well as convergent Fixed-Mobile “Business Everywhere” offerings that help serve customers’ needs for mobility.

 

To accompany the development of its customers in France, Spain, Belgium, Poland, the United Kingdom and the Netherlands, France Telecom offers telecommuting or roaming employees solutions allowing them to connect securely to an IP network and thus to access their company’s business applications remotely using various technologies (Wi-Fi, xDSL, 3G, GPRS, RNIS or telephone line) and different types of terminals (PC, PDA). These “Business Everywhere Multimedia” products have the benefit of a continuous bilingual hot line.

 

The convergence of the networks supported by France Telecom thus enables it to offer integrated Fixed and Mobile services, such as Business Talk.

 

Accompanying the change in customer businesses by developing service activities

 

To meet business customers’ needs and take into account the changes in their businesses, France Telecom is developing its service segments. The Group is offering to take charge for its customers of all or part of their communications infrastructure management with Voice, Data and Mobile outsourcing services, for end-point and contact center equipment. It is also offering consulting, project management and specific services, and is developing application services for systems critical to customers’ businesses (Intermediation, CRM, IT).

 

Depending on a company’s business and its organization, France Telecom is offering package solutions adapted to each case.

 

In keeping with this strategy, in May 2005 France Telecom acquired all the assets and liabilities of Equant. The integration of Equant’s activities is part of the transformation undertaken by the Group to offer integrated

 

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services focused on the needs of companies. It allows France Telecom to reaffirm its commitment to its business customers and to consolidate its leadership on this market:

 

  - by accelerating the implementation of a unified strategy for the business market that is consistent with the integrated operator model;

 

  - by making the most of Equant’s advantages: an international customer base, worldwide distribution and networks, unmatched quality of service and acknowledged leadership in IP VPN and VoIP technology; and

 

  - by responding to changes in business customers’ needs thanks to the launch of new IP offerings (including “Business Everywhere” in Europe), the development of unified products for all markets, and the deployment of integrated solutions and services, convergent offerings and infrastructures, and a single customer interface.

 

4.2.4.4 International strategy

 

France, the United Kingdom and Spain, following the acquisition of Amena, along with Poland, are clearly considered to be essential and strategic for France Telecom. France Telecom considers that the positions it holds in these countries are strong from a competitive standpoint, economically sustainable, and that they constitute a well-advanced platform for the implementation of the NExT program. Furthermore, France Telecom considers Europe to be an extension of its domestic market.

 

In order to focus on its most strategically important and profitable assets, in 2003 France Telecom began to re-examine all its subsidiaries and shareholdings in order to decide whether to keep them, applying two types of criteria: strategic criteria (market growth and profitability, quality and sustainability of the competitive position, potential synergies with other assets, control of the company or indisputable possibility of acquiring control), and financial criteria (gross operating margin, impact on the rating assigned by rating agencies, potential for realization of the value by sale or partnership).

 

This analysis led to the divestment of a certain number of assets in 2003 (Casema, Eutelsat, Wind, CTE-Salvador, Telecom Argentina), in 2004 (Orange Denmark, decrease to 10% of the interest in BITCO-Thailand) and in 2005 (MobilCom).

 

Conversely, in May 2005 France Telecom acquired all the assets and liabilities of Equant in order to accelerate the implementation of its integrated operator strategy on the business services market. France Telecom bolstered its interest in the capital of Orange Romania (increasing the holding to 96.8% in April 2005) and in November 2005 bought up the minority interests in Orange Slovensko, a company now held outright by the Group.

 

In addition, France Telecom sold to Telekomunikacja Polska (TP) the interest of 34% that it held in the capital of PTK Centertel, the mobile subsidiary of TP. Following this transaction, France Telecom retained its interest of 47,5% in TP, which now holds 100% of its mobile telephony subsidiary PTK Centertel. This transaction, which will have no impact on France Telecom’s consolidated net financial debt, will allow TP to deploy its integrated operator strategy while retaining the flexibility necessary to its future distribution policy. It creates value both for the shareholders of France Telecom as well as for those of TP.

 

The optimization of the Group’s portfolio of assets will be continued within the framework of the NExT program.

 

Following the acquisition of Amena in Spain, the Group believes that there is no need for a major acquisition in Europe to implement the NExT program.

 

The Group will continue to selectively and prudently examine opportunities in countries with strong growth potential, bearing in mind the strategic and financial criteria determined in connection with the NExT program. Overseas growth opportunities must therefore:

 

  - allow for improving the Group’s growth profile;

 

  - have a positive impact on free cash flow per share;

 

  - not call the Group’s debt reduction objectives into question;

 

  - have no negative impact on the dividend distribution policy.

 

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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 in the event of any further development of the European market.

 

Acquisition of Amena

 

In November 2005, France Telecom acquired close to 80% of the shares of Auna Operadora de Telecomunicaciones S.A. (“Auna”) holding 97.9% of Retevision Movil S.A., a mobile operator whose trade name is Amena. France Telecom will subsequently proceed to merge Auna, Retevision Movil S.A. and France Telecom España (which groups together the Group’s fixed-line and Internet businesses in Spain under the Wanadoo brand). Following these transactions, France Telecom will hold 75 to 80% of the new entity.

 

The acquisition of Amena makes a significant contribution to the Group’s development and growth program and allows France Telecom to strengthen its integrated operator strategy in Europe. France Telecom is now in a position to launch fixed and mobile broadband-based convergent solutions in an additional key market, which is one of the most attractive in Europe with potential growth in the value of mobile that exceeds the European average. For its integrated approach in Spain France Telecom is going to use a single strong brand: “Orange”.

 

4.3 PRESENTATION OF THE BUSINESS

 

4.3.1 OVERVIEW

 

The France Telecom Group, with its principal subsidiaries Orange, Amena (the Spanish mobile operator acquired in November 2005), the TP Group (the Polish telecommunications operator TP S.A. and its subsidiaries), Equant and the PageJaunes Group, offers its consumers, business customers and other telecommunications operators a broad selection of services ranging from fixed-line and mobile telephony, data transmission, Internet and multimedia services and other value-added services.

 

France Telecom provides services today to close to 145.2 million customers throughout the world (see section 4.3.1.1 “Table of all the Group customers).

 

France Telecom is adapting its organization in order to implement its strategic objectives. Thus, the Group’s organization was modified in January 2006, in order to speed up the implementation of the NExT program (see section 4.3.1.2 “Organization of the France Telecom group”).

 

In order to reflect the Group’s development and the structure of its businesses, starting January 1, 2005, France Telecom set up four business segments. The Group’s businesses are presented in the 2005 annual report on Form 20-F for each of the business segments described in section 4.3.1.4 “Business segments.”

 

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4.3.1.1 Table of all the Group’s customers

 

By December 31, 2005, France Telecom serviced nearly 145.2 million customers. The table of all the Group’s customers (in thousands) at December 31, 2005 is set out below for its controlled companies:

 

At December 31 in thousands
Mobile     
France    22,430
Europe (outside France)    51,155
World (outside Europe)    10,730
Total    84,316
Fixed-line     
France    33,727
Europe (outside France)    14,567
World (outside Europe)    906
Total    49,200
Internet     
France    5,914
Europe (outside France)    5,694
World (outside Europe)    63
Total    11,671
Total     
France    62,071
Europe (outside France)    71,416
World (outside Europe)    11,699
Overall total    145,187

 

Definitions of customer types are set out below for each category of service:

 

Mobile services customers

 

Mobile services customers are deemed to be customers if they own a SIM card or hold a prepaid card and have made at least one call and who have not exceeded the date after which they are contractually precluded from receiving calls.

 

Fixed-line telephony services customers

 

This number is the aggregate of standard analog lines and ISDN access lines in service (including fully unbundled lines), each ISDN channel being treated as one line (ISDN: Integrated services digital network).

 

Internet access customers

 

Internet access customers are deemed to be customers if they have taken out a paid monthly subscription (under a fixed price plan) or if they actively use a free access account, i.e. access customers having registered activity during the last month as identified by actual consumption.

 

4.3.1.2 Organization of the France Telecom Group

 

On January 30, 2006, France Telecom announced the decision by Didier Lombard, Chief Executive Officer, to change the organization of his management team to focus it on the Group’s transformation and on its operational performance, in connection with the acceleration of the implementation of the NExT program. The steering of the Group is now provided by a limited Group Management Committee.

 

The Group Management Committee chaired by Chief Executive Officer Didier Lombard is composed of:

 

  - Sanjiv Ahuja, General Manager of Orange, also in charge of businesses in the United Kingdom and International;

 

  - Olivier Barberot, in charge of Human Resources;

 

  - Barbara Dalibard, in charge of the Enterprise division;

 

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  - Jean-Yves Larrouturou, Company Secretary;

 

  - Gervais Pellissier, in charge of Finance and business in Spain;

 

  - Georges Penalver, in charge of Strategic Marketing;

 

  - Jean-Philippe Vanot, in charge of Networks, Operators & Information Systems;

 

  - Louis-Pierre Wenes, in charge of the NExT Transformation and of business in France.

 

In the context of the NExT program, France Telecom will change its organization. For each country or geographic region where the Group is present, a member of the Group Management Committee will be charged with the supervision of operational and financial performance and the implementation of strategy and restructuring programs for the Group and with monitoring the creation of an organization consistent with the consolidated operating strategy and with the position of the Group on the markets in question.

 

The Group’s overall organization comprises operating divisions, professional divisions and support functions.

 

The operating divisions are focused around customer needs and corresponding markets.

 

The Personal Communication Services division is responsible for the development of communications services aimed at individuals via mobile media. It includes the whole of the Orange subsidiary.

 

The Home Communication Services division is responsible for the development of all home-based communications services including, in particular, fixed-line broadband services in Europe.

 

The Enterprise Communication Services division is responsible for the development and sale of communications services to business customers throughout the world. It notably includes Equant.

 

The Content division is in charge of partnerships with content providers and is responsible for coordinating the development of related technological platforms.

 

The France Sales and Services division is responsible for the distribution within France of all the Group’s products intended for the consumer and small- and medium-sized business markets. It also represents the Group in communications with local authorities.

 

The International division is responsible for overseeing and developing the TP SA group and its foreign subsidiaries, outside Europe, which operate fixed-line and mobile businesses within a single country, in general as a historical operator (primarily: Sonatel in Senegal, Orange Côte d’Ivoire (in Ivory Coast) and CI Telcom; Jordan Telecom; and Mauritius Telecom).

 

The professional divisions are responsible for improving the France Telecom group’s operational performance.

 

The Networks, Operators and Information Systems division: in accordance with recent and future technological advances, this division incorporates network and information systems activities. More specifically, it is responsible for the development and management of France Telecom’s networks, all types of technologies included, for the sale of services to third-party operators and for the development and maintenance of all the France Telecom group’s information systems.

 

The Research and Development division, which is comprised principally of France Telecom R&D, is responsible for the activity of the France Telecom group’s research programs and maximizing the benefit of its intellectual property. It plays a driving role in all innovation developments.

 

The Technologies division is responsible for disseminating innovation within the France Telecom Group, guiding it, in due time, toward customer needs and furthering the initiatives, processes and procedures to spur innovation within the group.

 

The support functions, serving the operating divisions and activity divisions, ensure the consistency of the Group’s policies (Finance, Human Resources, Company Secretariat, External Communication, Regulations and Procurement).

 

Finally, to bolster the Group’s internationalization, an International Strategy Development unit is responsible for analyzing opportunities for international development, and a Group Cohesiveness and Internationalization unit is responsible for identifying new talent throughout the Group and facilitating the sharing of best practices between all the entities. A third unit is responsible for guiding the Brand Evolution for the France Telecom group within the framework of the NExT program.

 

33


4.3.1.3 FT GROUP SIMPLIFIED ORGANIZATIONAL CHART as at December 31, 2005

 

The following diagram shows the main operating subsidiaries and shareholdings of France Telecom S.A. as at December 31, 2005. The percentage holdings shown for each company are the percentages controlled directly or the percentage of control of the relevant operating company or, where jointly controlled, the percentage used for the proportional integration in connection with the consolidation.

 

LOGO

 

(1) Mobinil is a company 71.25% owned by the France Telecom Group and 28.75% by Orascom Telecom. Since all decisions must be approved jointly by both partners on the Mobinil Board of Directors, Mobinil is proportionately consolidated. Mobinil owns 51% of the capital of the operational company ECMS.
(2) France Telecom has the power to appoint a majority of the members of the TP S.A. Supervisory Board.
(3) Following the amendment to the shareholders’ agreement with the Senegalese government, Sonatel and its subsidiaries (Sonatel Mobiles and Ikatel) have been fully consolidated since July 1, 2005. Before this date, France Telecom’s interest in Sonatel and its subsidiaries was consolidated under the proportionate method.
(4) This percentage corresponds to the portion of the capital held by France Telecom in Jordan Telecommunications Company through Jitco, which owns 40.0% of Jordan Telecommunications Company, and which in turn is 88.0% owned by France Telecom.

 

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4.3.1.4 Business segments

 

In order to reflect the Group’s development and the structure of its business, starting January 1, 2005, France Telecom set up the following four business segments:

 

  - the “Personal Communication Services” segment groups together the mobile telecommunications businesses in France, the United Kingdom, Spain, Poland and the Rest of the World. It also includes all the Orange and Amena subsidiaries, as well as the mobile telephony businesses of TP Group (along with its subsidiary PTK Centertel) and other companies in the Group internationally;

 

  - the “Home Communication Services” segment groups together the fixed-line telecommunications services businesses (fixed-line telephony, Internet, services to operators) and the distribution activities and support functions provided to other business segments of the France Telecom group. It corresponds to the activities previously included in the “Fixed line, Distribution, Networks, Large Customers and Operators” segment (not including business services in France) and in the Wanadoo subsidiary, as well as the fixed-line telephony and Internet businesses of TP Group and other companies in the Group internationally;

 

  - the “Enterprise Communication Services” segment groups together communications services for companies in France and services for companies worldwide. It groups together the business services in France previously included in the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment, as well as worldwide services (the Equant subsidiary’s activities);

 

  - the “Directories” segment includes the PagesJaunes Group business, previously included in the Wanadoo subsidiary.

 

The Group’s business activities are presented in the 2005 Form 20-F, in this order, for each of these business segments.

 

4.3.2 PERSONAL COMMUNICATION SERVICES

 

4.3.2.1 General introduction

 

4.3.2.1.1 History

 

In 1989, France Telecom formed a new division to manage its mobile telecommunications network and activities.

 

In 1991, France Telecom obtained a license using the GSM (Global System for Mobile Communications) standard GSM900 in France, expanding to GSM1800 in 1998. It began to operate its GSM900 digital network in 1992. At the same time, France Telecom undertook the international development of its mobile activities thanks to the acquisition of GSM licenses and to the launch of operations, primarily in Europe.

 

Orange

 

In 1994, Microtel Communications Ltd., the predecessor of Orange plc, obtained a license to operate a digital GSM1800 network and began operating its GSM1800 network in 1994 in the United Kingdom.

 

In 2001, France Telecom acquired Orange plc for a total purchase price of 35.5 billion euros at the historical price and grouped its preexisting mobile telecommunications activities together with those of Orange plc within a new wholly-owned group, whose parent company is Orange S.A., a corporation (société anonyme) under French law.

 

In February 2001, Orange S.A. shares were listed for trading on the Premier marché of Euronext Paris and on the London Stock Exchange, following the offering on the market of approximately 13% of the capital of Orange S.A.

 

In order to better satisfy the growing needs of France Telecom customers for integrated services on a fixed-mobile platform and in order to implement a model of close cooperation between the Group’s different activities, France Telecom launched a simplified public exchange offer in September 2003 for the Orange shares that it did not hold.

 

As a result of the public exchange offer, and subsequent tender offer (offre publique de retrait) followed by a compulsory purchase procedure (retrait obligatoire), since April 2004 France Telecom has held 100% of the capital and voting rights in Orange S.A.

 

35


Poland (PTK Centertel)

 

In October 2000, a consortium led by France Telecom acquired a 35% holding in TP S.A, the parent company of the Telekomunikacja Polska S.A. Group (“TP Group”). Then, in October 2001, the consortium increased this holding to 47.5%. The consortium’s Polish partner, Kulczyk Holding, sold to France Telecom all the TP S.A. shares held by its subsidiaries Tele Invest and Tele Invest II, part in October 2004 and the balance in January 2005. Therefore, since late January 2005, France Telecom has held 47.5% of the capital of TP S.A.

 

TP S.A. was a majority shareholder (with a 66% interest) of PTK Centertel, one of three mobile operators in Poland, with the remaining 34% of PTK Centertel’s share capital being held by France Telecom.

 

In October 2005, in order to strengthen TP Group’s integrated operator strategy, France Telecom sold to TP S.A. its 34% interest in the capital of PTK Centertel. As of that date, TP S.A. holds 100% of the capital of its mobile subsidiary.

 

Spain (Amena)

 

In November 2005, France Telecom acquired close to 80% of the shares of Auna, which holds 97.9% of Retevision Movil S.A., a mobile operator under the trade name of “Amena”. France Telecom will next proceed to merge Auna, Retevision Movil S.A. and France Telecom España (which groups together the Group’s fixed-line and Internet businesses in Spain under the Wanadoo brand). As a result of these transactions, the France Telecom group will hold 75 to 80% of the new entity. This transaction, which fully observes the cash flow utilization criteria set forth in the NExT program, puts France Telecom in a position to launch convergent offerings based on fixed and mobile broadband in a key additional market.

 

4.3.2.1.2 Overview of activities

 

The “Personal Communication Services” business segment groups together mobile telecommunications services activities in France, the United Kingdom, Spain, Poland and the Rest of the World, and also includes licensing agreements and roaming. Each of these activities is described below. In addition, it includes all of Orange and its subsidiaries, Amena, and the mobile telephony activities of TP Group (along with its subsidiary PTK Centertel) and of other companies in the Group internationally.

 

These activities are focused primarily on voice and data transmission on digital networks using the GSM standard. In order to enrich its services, France Telecom has deployed the General Packet Radio Services (“GPRS”) system on its networks in most of the subsidiaries, along with the EDGE technology in some of its networks in Europe.

 

Orange has been involved in several UMTS license attribution processes in Europe in order to offer third-generation services. Orange’s controlled subsidiaries hold UMTS licenses in France, the United Kingdom, Spain (with Amena), Belgium, the Netherlands, Romania, Slovakia and Switzerland. In addition, a UMTS license has been attributed to PTK Centertel in Poland.

 

France Telecom considers the development of mobile broadband and third-generation services as a strategic priority and as a business with strong growth potential and wants to be a leader for these services in Europe.

 

France Telecom also intends to remain on the cutting edge of developments in the mobile telecommunications market by pursuing a systematic innovation policy, in particular by offering enriched, simplified and convergent services and by continuing to rely on an exclusive line of mobile telephones known as “Orange Signature”.

 

The “Personal Communication Services” segment made revenues of 23.5 billion euros in 2005 (20.5 billion euros in 2004). At December 31, 2005, France Telecom had 84.3 million mobile customers worldwide for all its controlled businesses (62.7 million customers at December 31, 2004).

 

36


The following tables provide the list of countries in which France Telecom is currently established, the operators, the percentage of interest held in each operator, the total number of customers and the licenses obtained in each country.

 

France

United Kingdom

Poland

Spain

          Total number of customers controlled by
France Telecom (in millions)
       
Country   Operator  

Share of
interest

controlled

(in %)

 

December 31,

2005

 

December 31,

2004

 

December 31,

2003

  2G Licenses  

3G Licenses

Attribution date /
Renewal date

France   Orange
France(1)
  100.0   22.6   21.3   20.3   GSM900/1800   August 2001/
August 2021
United Kingdom   Orange
UK
  100.0   14.9   14.2   13.6   GSM1800   September 2000 /
December 2021
Spain   Amena   79.4   10.3   9.3   8.2   GSM900/1800   March 2000 /
April 2020
Poland   PTK
Centertel
  100   9.9   7.4   5.7   GSM900/1800   December 2000 /
January 2023

 

  (1) Including MVNO. Excluding MVNO, the number of Orange France customers was 22.4 million.

 

Rest of the
world
            Total number of customers controlled by
France Telecom (in millions)
       
Country   Operator   Share of
interest
controlled
(in %)
    December 31,
2005
    December 31,
2004
  December 31,
2003
  2G Licenses  

3G Licenses

Attribution
date /
Renewal
date

Belgium   Mobistar   50.18     2.9     2.8   2.6   GSM900/1800   March 2001 /
March 2021
The Netherlands   Orange
Nederland
  100     2.0 (1)   1.7   1.3   GSM900/1800   July 2000 /
Dec. 2016
Romania   Orange
Romania
  96.82     6.8     4.9   3.3   GSM900   March 2005 /
March 2020
Slovakia   Orange
Slovensko
  100     2.5     2.4   2.1   GSM900/1800   June 2002 /
July 2022
Switzerland   Orange
Communications
S.A.
  100     1.2     1.1   1.1   GSM1800   December
2000 / Dec.
2016
Moldavia   Voxtel   54.9     0.7     0.5   0.3   GSM900  
Egypt   MobiNil/ECMS   71.25 (2)   4.8     2.9   2.1   GSM900  
Botswana   Orange
Botswana
  51     0.3     0.2   0.2   GSM900  
Cameroon   Orange
Cameroun
  100     1.0     0.75   0.5   GSM900  

 

37


Rest of the

world

            Total number of customers controlled by
France Telecom (in millions)
       
Country   Operator   Share of
interest
controlled
(in %)
    December 31,
2005
  December 31,
2004
  December 31,
2003
  2G Licenses  

3G Licenses

Attribution
date /
Renewal
date

Ivory Coast   Orange
Côte
d’Ivoire
  85     1.3   0.85   0.6   GSM900/1800  
Madagascar   Orange
Madagascar
  65.9 (3)   0.3   0.2   0.1   GSM900  
Dominican Republic   Orange
Dominicana
  100     1.0   0.7   0.6   GSM900  
Senegal   Sonatel
Mobiles
  42.3     1.0   0.3   0.2   GSM900/1800  
Mali   Ikatel   42.3     0.6   0.1   0.1   GSM900  
Jordan   Mobilecom   40.0 (4)   0.3   0.2   0.1   GSM900  
Mauritius   CellPlus   40.0 (5)   0.2   0.15   0.1   GSM900/1800    

 

  (1) Including MVNO. Excluding MVNO, the number of Orange Nederland customers was 1.9 million.

 

  (2) Orange and Orascom Telecom jointly control MobiNil, which owns 51% of the capital of the operating company ECMS. Accordingly, under IFRS accounting standards, the financial and operating data of MobiNil/ECMS are proportionally consolidated at 71.25%. The total customer base of MobiNil (at 100%) was 6.7 million at December 31, 2005.

 

  (3) Orange holds 60.8% of Telsea, a holding company that owns 65.9% (percentage appearing in the table) of Orange Madagascar.

 

  (4) France Telecom controls 40% of operator Jordan Telecom, which itself controls 100% of its mobile subsidiary Mobilecom. Accordingly, under IFRS accounting standards, Mobilecom’s financial and operating data are proportionally consolidated at 40%. The total customer base of Mobilecom (at 100%) was 660,000 at December 31, 2005.

 

  (5) France Telecom controls 40% of operator Mauritius Telecom, which itself controls 100% of its subsidiary CellPlus. Accordingly, under IFRS accounting standards, CellPlus’s financial and operating data are proportionally consolidated at 40%. The total customer base of CellPlus (at 100%) was 394,000 at December 31, 2005.

 

4.3.2.2 France

 

The table below shows the main features of the French mobile telecommunications market and the activities of Orange France, including, unless otherwise stated, the French overseas departments.

 

     At December 31

   2005

     2004

     2003

Market penetration rate in France (in %)(1)    79.7      73.9      69.1

  
    
    
Total number of users in France (in millions)(1)    48.1      44.6      41.7

  
    
    
Service plan in France (millions)(1)    30.5      27.4      24.5

  
    
    
Prepaid in France (millions)(1)    17.5      17.2      17.2

  
    
    
Orange France registered customers (in millions)(2)    22.6      21.3      20.3

  
    
    
Orange France service plan, metropolitan France (in millions)(3)    13.8      12.9      11.7

  
    
    
Orange France prepaid, metropolitan France (in millions)(3)    8.6      8.4      8.6

  
    
    
Orange France market share (%)(2)    47.1      47.7      48.8

  
    
    
Orange France network coverage (in % of the population)(4)    99.0      99.0      99.0

 

  (1) Source: ARCEP.

 

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  (2) Source: Orange France, including MVNO. The number of Orange France customers excluding MVNO was 22.4 million.

 

  (3) Orange France, excluding MVNO.

 

  (4) According to Orange France estimates, excluding French overseas departments.

 

At December 31, 2005, France was the fourth largest market for mobile telecommunications in Western Europe after Germany, Italy and the United Kingdom (source: EMC Database). The growth of the French market in 2005 was 8% (6.8% in 2004 and 8% in 2003).

 

The penetration rate of 79.7% (73.9% at December 31, 2004 and 69.1% at December 31, 2003), lower than the European average, can be explained by three major specific features of the French market:

 

  - demographic and geographic features: France is characterized by low average density of 106 inhabitants per km2 and by strong regional disparities (12 regions out of 22 have a density of less than 55 inhabitants per km2; 51.8% of the country has a density of less than 30 inhabitants/km2, and 22.8% of the country is mountainous). According to ARCEP, the penetration rate for two of the three main French regions in terms of population is greater than the European average;

 

  - the penetration of fixed-line telephony is higher than the European average;

 

  - the rate for multiple equipment is low in France: 6% compared to 18% on average in Europe.

 

At December 31, 2005, Orange France had approximately 22.6 million registered customers (including MVNO) (21.3 million at December 31, 2004 and 20.3 million at December 31, 2003) with a market share of 47% (47.7% at December 31, 2004 and 48.8% at December 31, 2003) (source: ARCEP). Excluding MVNO, the number of customers of Orange France was 22.4 million at December 31, 2005.

 

The priority for Orange France has gone from acquiring customers to creating value and loyalty.

 

The Orange brand, present in France since June 2001, benefited from a spontaneous recognition rate of 87% in the fourth quarter of 2005.

 

At December 31, 2005, the Orange France network covered an estimated 99% of the French population (excluding French overseas departments), the same as in 2004 and 2003.

 

GSM licenses

 

Orange France holds a GSM license initially issued for a term of 15 years starting on March 25, 1991 and renewed for a further term of 15 years from March 25, 2006. The main conditions for the renewal of this license which also apply to SFR, are as follows: an obligation to provide direct coverage to 98% of the population and an obligation to provide 99% full coverage by providing coverage to undeveloped areas (zones blanches) in addition to standards specifying the quality and availability of the enhanced network, particularly with regard to data transmission. The frequency usage fee will be composed of a fixed amount of 25 million euros per annum and a variable amount equal to 1% of the revenues made using such frequencies. Moreover, certain new obligations will apply to all mobile operators: informing the public and Mayors of the installation of radiocommunication facilities, services for the disabled, anti-theft measures for handsets and the obligation to systematically inform the subscriber, free of charge, of the handset unlocking procedure at the end of a period not exceeding the customer’s commitment period (where applicable, and in any case not exceeding six months).

 

With regard to covering undeveloped areas, France Telecom signed the July 15, 2003 convention which sets out the first phase of this operation: coverage of approximately 1,800 communes (French local districts) with financing shared among the mobile operators and the local authorities. A supplemental agreement was executed on July 13, 2004 relating to the second phase of this operation and concerns approximately 1,200 communes with financing provided solely by the mobile operators.

 

In the French overseas departments, Orange Caraïbe operates a GSM network in Guadeloupe, Martinique and Guyana under the Orange brand. Orange Caraïbe had around 600,000 customers at December 31, 2005, compared to around 593,000 customers at December 31, 2004 and around 577,000 at December 31, 2003. In December 2000, Orange Réunion launched its GSM services in the island of La Réunion, where it is competing with the existing operator. At December 31, 2005, Orange Réunion had around 229,000 customers, compared to about 177,000 customers at December 31, 2004 and about 159,000 at December 31, 2003 (source: ARCEP).

 

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UMTS licenses

 

Four UMTS licenses were awarded in France by a selection process. Only two operators, Orange France and SFR, applied. They were awarded UMTS licenses from the French government in the first round of tenders. After reviewing the terms of each license, the price was set at a one-off license fee of 619 million euros paid by Orange France in September 2001 and an annual license fee equal to 1% of the operating revenues from the UMTS network. Only Bouygues Telecom submitted a bid under the second call for tenders for two other UMTS licenses. Therefore, a total of three UMTS licenses were awarded in France, Bouygues Telecom having obtained its license under similar conditions to Orange France and SFR. The UMTS license awarded to Orange France in August 2001 was for a term of 20 years from the date of its attribution. This stipulates, among other conditions, that Orange France must deploy the UMTS network from mid-2003 (58% coverage rate in voice and data at 144 Kbit/s, 7% coverage of the population at 384 Kbit/s) through mid-2009 (98% and 17% coverage of the population respectively). The ART review of the schedules for the deployment of UMTS by Orange France and SFR, notably due to delays in the availability of network and terminal equipment, started in August 2003. ART (which became ARCEP) published its findings on its website in March 2004 together with the revised obligations applicable to Orange France and SFR:

 

  - taking into account the industrial circumstances surrounding the development of UMTS, no sanction procedure will be applied to Orange France and SFR;

 

  - commercial launch is required no later than December 31, 2004, with target deployment to cover 58% of the population by the end of 2005.

 

The revised obligations will be included in the individual licenses which are to be issued by ARCEP to Orange France and SFR once the new regulatory framework has been fully transposed.

 

4.3.2.2.1 Orange France products

 

Orange France offers four major types of products aimed at different categories of users: contract plans, commitment-free plans, the new Orange World multimedia product, as well as, for businesses, the Orange Business Solutions products.

 

Contract plans

 

Orange France offers two types of contract plans:

 

Blocked service plans allow young people from 11 to 25 years old to stay completely within their budgets:

 

The Orange Zap service plan, especially designed for adolescents, offers reduced rates during certain time slots (after school and during school vacations).

 

The M6 mobile by Orange service plan, intended more particularly for 18 to 25-year-olds, offers unlimited evening calls from 8:45 p.m. until midnight to Orange and M6 mobiles, which represents over 21 million telephone numbers. Since October 2005, unlimited television has been offered 24/7 on a blocked service plan with access to the M6 Music Hits channel.

 

These service plans are blocked upon reaching the threshold, but may be recharged by bankcard, by “mobicarte”, or by the “Recharge me” function.

 

At-will service plans include three product lines offered according to usage and including unlimited KDO:

 

Orange Classique, which includes 3 service plans (1 hour, 2 hour, and 4 hour) that are adjustable or can be carried over, plus unlimited calls to 3 Orange numbers;

 

Orange Intense, a choice between 7 service plans (from 1 hour to 10 hours) with SMS or Mo included, unlimited televideo on weekends and unlimited calls to 3 Orange numbers;

 

Orange Pro, a series of 7 service plans (from 3 hours to 20 hours) fully inclusive for business and personal use, with unlimited daytime calls.

 

Customers can switch service plans and product lines at any time.

 

Orange Intense

 

On October 27, 2005, Orange France launched a new line of service plans and now offers mobile broadband access in all its products. The Orange Intense line is now the benchmark product for offering multimedia to all customers, regardless of the form of mobile chosen (2G, Edge or 3G).

 

40


The new Orange Intense plans consist of a voice and video communication credit and a multimedia package including a usage credit for sending SMS (up to 40 SMS), MMS (up to 13 MMS) or datatransfers (up to 10 Mo). Television and video are free on weekends. The new product line consists of 7 monthly voice and video plans: 1 hour at 26 euros, 2 hours at 35 euros, 3 hours at 43 euros, 4 hours at 51 euros, 6 hours at 67 euros, 8 hours at 83 euros, and 10 hours at 99 euros. All these service plans offer free voice and video calls to 3 Orange numbers 24/7.

 

Commitment-free plans

 

Orange offers two types of commitment-free products, where per-second rates apply as of the first second:

 

Mobicarte is based on the “no bill – no subscription ” principle. This product gives access to all handsets in the Orange line. The recharge line is the largest on the market, with 11 products ranging from 5 euros to 100 euros, and up to 50 euros in bonus offers. In 2005, the Mobicarte product was enriched with options allowing for cheaper calling (unlimited weekends, unlimited evenings, unlimited daytime). Since November 2005, Mobicarte customers have had access to 3G and video.

 

Orange Initial is the simplest form of mobile telephony access, without recharging. This formula offers a subscription for making and receiving calls for 7 euros/month and a flat rate of 0.45 euros/min for all calls to fixed-line and mobile numbers.

 

Orange multimedia products: Orange World

 

Orange World offers simplified access to multimedia services, such as television, music, video and visio.

 

In 2005, two major milestones marked Orange World:

 

  n   the launch of 3G, in December 2004: the arrival of mobile broadband with mobile television, video, music and visio;

 

  n   the launch of Edge, in June 2005, which marked the beginning of a new stage in mobile broadband providing multimedia access to close to 90% of the French population.

 

The Orange World product relies on two exclusive partnerships:

 

  n   sports through the national soccer (Ligue 1) partnership;

 

  n   film through Star Wars, King Kong, etc;

 

  n   music with Madonna and Jamiroquaï, etc;

 

  n   the Tour de France, the French Open tennis tournament, etc.

 

Orange World offers a line of 5 monthly products (from 3 euros to 30 euros) and a wide selection of handsets.

 

On November 29, 2005, the first multimedia convergent product (Internet/mobile) was launched under the name “Mes Services Perso” (“My Personal Services”). It allows customers with an Orange service plan and a Wanadoo broadband subscription to enjoy the following services:

 

  - a single price plan for sending 65 SMS from mobile (or via Orange.fr) or the Wanadoo portal;

 

  - access to Wanadoo messaging on the Orange World portal without prior programming;

 

  - dialogue between Livecom and Orange Messenger instant messaging;

 

  - the synchronization of their mobile repertoire on the Wanadoo portal.

 

The “Mes Services Perso” option is a limited series, marketed at the price of 7 euros per month.

 

At December 31, 2005, Orange had around 1.5 million customers holding an Orange World option or a Pass (for Orange Intense customers) and over 4 million active customers on the Orange World portal.

 

Orange Business Solutions

 

Orange France’s objective is to accompany all companies on a daily basis (very small companies, small- to medium-sized companies, large companies or multinationals) helping them develop their efficiency and competitiveness through mobile solutions. Thus, Orange France offers them:

 

  n   a wide range of voice solutions:

 

  - services to help optimize management of the mobile phone base and to contain costs;

 

41


  - added-valued services, such as the mobile virtual private network (Orange VPN) and a unified fixed/mobile VPN product (Business Talk).

 

  n   mobile data solutions allowing for receiving e-mails on mobile and PDA (Orange Blackberry, Orange Bureau, Orange Mail), or solutions for working while traveling via a laptop with the Business Everywhere product. It allows for access to messaging, company information, Intranet, business applications and the Internet, and includes GPRS, EDGE, 3G and Wi-Fi technologies.

 

  n   machine-to-machine services, and

 

  n   after-sales service dedicated to businesses.

 

4.3.2.2.2 Sales, distribution and customer service

 

In Metropolitan France, Orange France sells its products and services through a comprehensive range of distribution circuits:

 

  n   on December 31, 2005, the France Telecom distribution network included 712 points-of-sale (663 on December, 2004 and 620 on December 31, 2003) ;

 

  n   supermarkets and large stores;

 

  n   approximately 1,200 independent distributors.

 

Orange France has also developed its own points-of-sale network: 175 “Mobistore” shops were open on December 31, 2005 (150 on December 31, 2004 and 100 on December 31, 2003).

 

Orange France “Entreprises” offerings are marketed by networks specializing in sales of services to businesses. There are five Agences Grands Comptes and eleven Agences Entreprises of France Telecom, and approximately 80 independent specialized distributors.

 

Mobicarte recharges are available mainly from retailers, such as tobacco shops and France Telecom points-of-sale.

 

7,500 customer advisors work for Orange in France 7 days per week. These specialists are located in the customer centers of the France Telecom group (Orange France and France Telecom), and at the outside service providers.

 

Customer service is also available in the France Telecom points-of-sale and Mobistore shops.

 

Finally, subscribers can access some customer service functions via the mobile Internet portal or the Orange voice servers. They may view information about their bills, change their service plans or choose new ones.

 

4.3.2.3 United Kingdom

 

The table below shows the main features of the mobile telephone market in the UK and the operations of Orange UK.

 

     On December 31

   2005

     2004

     2003

Market penetration rate in the United Kingdom (%)(1)    110.6      101.1      89.15

  
    
    
Total number of users in the United Kingdom (in millions)(1)    66.0      60.4      53.2

  
    
    
Service plan in the United Kingdom (in millions)(2)    21.2      19.9      16.9

  
    
    
Prepaid in the United Kingdom (in millions)(2)    44.8      40.3      34.8

  
    
    
Orange UK active customers (in millions)(2)    14.9      14.2      13.65

  
    
    
Orange UK service plan (in millions)(2)    5.0      4.7      4.5

  
    
    
Orange UK prepaid (in millions)(2)    9.9      9.5      9.2

  
    
    
Orange UK market share (%)(1)    22.1      23.55      25.6

  
    
    
Orange UK network coverage (in % of the population)(2)    99.4      99.4      99.4
  (1) Source: Mobile Communications.

 

  (2) Source: Orange UK.

 

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On December 31, 2005, the United Kingdom was, in terms of number of users, the second largest mobile telephone market in western Europe after Germany. The mobile telephone market in the United Kingdom grew by about 9.3% in 2005, after 13.8% in 2004 and 4.4% in 2003 (source: Mobile Communications).

 

The number of mobile telephone users in the United Kingdom grew by approximately 24% in two years, from 53.2 million users on December 31, 2003 to 60.4 million on December 31, 2004 then to 66.0 million on December 31, 2005, which represents approximately 110.6% of the population of the United Kingdom (101.1% on December 31, 2004 and 89.15% on December 31, 2003).

 

On December 31, 2005, Orange UK counted with approximately 14.9 million active customers (14.2 million on December 31, 2004 and 13.65 million on December 31, 2003) (source: Orange UK) with a market share estimated at approximately 22.1% of active customers in the United Kingdom (23.55% on December 31, 2004 and 25.6% on December 31, 2003) (source: Mobile Communications).

 

GSM and UMTS licenses

 

A GSM license was granted to Orange UK in February 1994 and remains in force on the basis of an annual renewal.

 

Orange UK holds one of the largest mobile telephone networks in the United Kingdom. On December 31, 2005, according to Orange UK, the network covered approximately 99.4% of the population (99.4% on December 31, 2004 and 99.4% on December 31, 2003).

 

On September 1, 2000, Orange 3G Limited, a subsidiary held 100% by Orange UK, was awarded one of the five UMTS licenses for a period of twenty years, at a cost of approximately 6.6 billion euros. This license covers the two 10 MHz spectrums and one 5 MHz spectrum. For operational reasons, the license was revoked and reassigned to Orange UK. Among other requirements, the terms of the license require Orange UK to be able to provide UMTS telecommunications services to at least 80% of the United Kingdom before December 2007. The UMTS license may be revoked in the event of a significant deviation from one of these terms. If a UMTS license is revoked, amended or abandoned, the purchase cost will only be reimbursed in exceptional circumstances.

 

The Orange UK third generation network was officially opened in July 2004 with the launching of the “Mobile Office Card” PC card for businesses. In December 2004, Orange opened the third generation network to all users.

 

4.3.2.3.1 Orange UK products

 

Orange UK offers two kinds of offers for individuals and special offers for businesses referred to as “Orange Business Solutions”.

 

For individuals

 

Monthly service plan

 

The “Your Plan” service plan is designed for individuals who can use its inclusive communication time to make calls to other fixed-line or mobile networks in the United Kingdom. Moreover, numerous other offerings were introduced to provide a larger choice to customers – for example a package for off-peak times including 1,000 minutes per month, Orange Premier offering a Premium service to the biggest users. Moreover, bundled offerings of SMS, MMS and roaming services and international services are also available.

 

Orange believes it offers an excellent quality/price ratio to the United Kingdom and has consequently developed the “Orange Value Promise” by which Orange is able to offer a larger choice of rates than any other competing network. If a customer or potential customer of Orange UK believes that a service plan proposed by another British operator is better than one of the Orange UK offerings, Orange UK shall provide to that person an equivalent service at the same price. The “Orange Value Promise” offers customers who subscribe to a monthly service plan at an O2, Vodafone or T-Mobile retailer, an equivalent offering from a selection of non-promotional rates offered.

 

Customers who have subscribed to a monthly service plan may theoretically cancel their contract with one month’s advance notice, subject to an initial period which is generally twelve months.

 

“Pay as you go” service plans

 

Orange “Pay as you go” service plans allow customers to buy a handset and call time when they need it depending on the amount of time they wish to have. This service plan does not currently include fixed fees. A

 

43


“Recharge” has no expiration date and there is no minimum commitment period. Customers have several ways to quickly recharge their accounts: recharges, bank cards, payments in cash or with “Swipe” cards at a point-of-sale, or the use of some automated teller machines.

 

In 2005, Orange UK significantly overhauled its “Pay as you go” plan. These changes include the creation of a new simplified base rate called “Same Rates 24/7” with a “Bonus Top-Up” bonus system that offers customers free call time, calculated on the additional amount purchased in the preceding month. Moreover, Orange launched a new rate that offers customers free bundled transmissions, also calculated on the additional amount purchased in the preceding month. Orange also recently launched an instant voice messaging service “PAYG 3G” called “Talk Now”.

 

These service plans are completed by “Orange Extras”, which offer customers the opportunity to purchase text, voice, or access Orange World at a reduced price. “Orange Extras” must be used within a specific time (one day, one week, one week-end, one month, etc.) starting from purchase but there is no time commitment for any of the “Pay as you go” service plans.

 

Orange Business Solutions

 

In 2002, Orange UK launched “Orange Business Solutions”, a completely integrated business entity to respond to the mobile telephone needs of medium-size businesses, large companies and public-sector organizations. “Orange Business Solutions” which is responsible for complete end-to-end management of its customers, offers a large portfolio of specific products and services for businesses, including a flexible range of voice options, Orange business messaging, mobile messaging and a complete series of other innovative mobile services. Orange also responds to the needs of small businesses by offering voice and data transmission services to facilitate mobile work.

 

In 2004, Orange launched the third generation network with the “3G Mobile Office Card” PC card for business customers. The Mobile Office Card allows users of laptop computers to connect to the Internet by mobile link, to access e-mail and the systems of their companies as much as seven times faster than by a switched fixed-line. Business Solutions customers now also have access to “European M2M Connect”. This product was launched in the United Kingdom, France and Belgium in 2004, and allows customers to use a web-based platform for communication between computers. “Talk Now” was launched for Business Solutions customers by providing a “Push to talk”-style function (communication with a group of users using a single button) on the Handspring Treo 600 terminal. In 2004, small business customers benefited from the launch of e-mail solutions improved by advisory services and “PC Messenger” services for sending text messages from a desktop computer

 

Orange UK also provides a complete and flexible range of voice and data service plans for businesses. These are service plans including communication, and combinations of data communication service plans including international roaming packages, GPRS and UMTS.

 

Orange World

 

Orange UK has developed a large portfolio of contents accessible from the Orange World portal that can be customized according to customer needs. Entertainment and information services including “Sky News” and sports videos (updated every five hours); exclusive selections of video films such as “Star Wars”; scrolling news and video clips of big movie hits; music downloads and ring tones from “Warner Music”, “EMI”, “Sony/BMG”, “Universal Music”, and “Ministry of Sound”; console-style games such as “Splinter Cell” by Tom Clancy, and Doom and classic titles such as “Tetris” and “Pac-Man”; exclusive backstage access to the Chelsea, Manchester City and Liverpool clubs as well as 80 other soccer clubs; and practical applications such as “Traffic TV”. This last service provides customers with an overview of the traffic conditions on motorways and intercity routes in the United Kingdom as well as direct video access to traffic conditions from selected motorway cameras throughout the United Kingdom.

 

On December 31, 2005, Orange World users represented about 2.8 million active customers (compared to 2.4 million on December 31, 2004).

 

4.3.2.3.2 Sales, distribution and customer service

 

Orange UK sells its products and services in the United Kingdom through a complete range of distribution circuits:

 

  - Orange UK shops that only sell Orange and France Telecom products. In 2005, the number of shops increased to 291, compared to 264 in 2004 and 253 in 2003.

 

44


  - Non-specialized retailers that continue to record a significant number of new Orange customers.

 

  - Specialized distributors and retailers offering different kinds of Orange UK services and Orange “Pay as you go” cards as well as other products and services. In 2005, there were about 83 of these points-of-sale offering Orange UK services and products.

 

A specialized sales force managed by Orange UK Business Solutions to acquire and retain corporate customers.

 

Customers may also obtain Orange products and services and buy accessories at the Orange UK site: www.orange.co.uk.

 

4.3.2.4 Spain

 

In November 2005 France Telecom acquired nearly 80% of the shares of Auna, that holds 97.9% of Retevision Movil S.A., a mobile operator whose corporate name is “Amena”. The remaining 2.1% of the capital of Retevision Movil S.A. is owned by Caja de Cataluña. France Telecom will next merge Auna, Retevision Movil S.A. and France Telecom España (which includes, under the brand Wanadoo, the fixed-line and Internet operations of the Group in Spain). When these operations are completed, the France Telecom group will hold 75 to 80% of the new entity. This operation, that fully complies with the criteria for the use of cash defined as part of the NExT program, positions France Telecom to launch convergent offerings based on fixed-line and mobile broadband services in an additional key market.

 

The table below shows the main features of the mobile telephone market in Spain and the Amena operations.

 

     On December 31

   2005

     2004

     2003

Market penetration rate in Spain (%)(1)    105.3      89.1      92.8

  
    
    
Total number of users in Spain (in millions)(1)    42.0      38.3      37

  
    
    
Service plan (in millions)(2)    NA      18.6      15.6

  
    
    
Prepaid (in millions)(2)    NA      20.6      21.9

  
    
    
Amena active customers (in millions)(2)    10.3      9.3      8.2

  
    
    
Service plan (in millions)(2)    5.0      4.3      3.5

  
    
    
Prepaid (in millions)(2)    5.3      5.0      4.7

  
    
    
Amena market share (%)(3)    23.7      24.2      22.1

  
    
    
Amena network coverage (in % of the population)(2)    98.8      98.5      97
  (1) Source: Mobile Communications for 2004 and 2003, figures for 2005 provided by Amena and figures published by competitors.

 

  (2) Information provided by Amena.

 

  (3) Source: Mobile Communications for 2004 and 2003. Estimates provided by Amena for 2005.

 

Amena is one of three mobile telephone operators in Spain, with Telefónica Móviles (Movistar) and Vodafone. On December 31, 2005, Amena estimated that it was third in this market with 10.3 million subscribers (9.3 million on December 31, 2004 and 8.2 million on December 31, 2003) (source: Mobile Communications for 2004 and 2003, and Amena for 2005) and a market share of 23.7% (24.2% on December 31, 2004 and 22.1% on December 31, 2003) (source: Mobile Communications).

 

Amena obtained the third GSM license in June 1998 and launched its network in January 1999 under the brand “Amena”, thus ending the Telefónica and Vodafone duopoly in mobile telephone that previously controlled the market. In less than 7 years, Amena conquered market share thanks to its innovative sales and promotional policies, strong brand recognition and targeted offerings in the residential market and especially in the youth segment. Amena has been able to increase the value of its loyal subscribers while continuing to take market share from the competition. Amena builds customer loyalty by implementing CRM tools that allow it to measure and evaluate the behavior of its customers by developing new products and services, and by improving the performance of its operations by reinforcing the GSM network.

 

45


The Amena network today covers nearly 99% of the Spanish population.

 

Four UMTS licenses were granted in March 2000, by competitive bid offer, to Amena, Telefónica Móviles España, Vodafone, and Xfera. Initially, the 3G license holders had to launch their services in August 2001. However, given the lack of 3G handsets and the virtual inexistence of infrastructure equipment, the Government deferred the launch date to June 2002. It was envisioned at the time of the launch that the 3G networks would cover the sixteen largest cities in Spain (equal to 25% of the population). However, in December 2002, a new deadline was granted for launching services, and the UMTS was effectively launched on the Spanish market in 2004, during the first quarter of 2004 for Amena.

 

More than 40 companies received licenses to launch mobile services using networks of other operators (MVNO). No contract with these operators has been entered into as of this date.

 

Amena Products

 

Amena provides mobile telephone services that target the residential market and the business market.

 

The residential market

 

Prepaid accounts

 

For customers choosing prepaid plans, Amena offers a large range of rates (“Tarjetas”), targeted according to the various market needs (24-hour same rate, peak/off-peak times rates, special youth rates, etc).

 

The customer may also choose to take advantage of preferential rates for frequently-called numbers, or even decide to have an Amena number that will only be billed 0.03 per minute. The company launched the possibility of paying for a certain number of minutes (“Módulos”) for a set amount, with the offer including extended promotional periods.

 

There are numerous ways to recharge the prepaid card, by combining classic “scratch” cards, automated teller machines and call centers.

 

Package service plans

 

Package service plans allow customers to obtain lower prices when a minimum monthly use is guaranteed. Special rates are offered, for example for off-peak times, as well as a special rate for very young users.

 

Following the example of prepaid service plans, the customer may choose advantageous rates for the three most frequently called numbers, select an Amena customer that will only be billed 0.03 per minute, or other options.

 

For the two segments, a comprehensive loyalty program has been implemented for renewal of handsets “Renove sin puntos”, offering significant discounts on market prices.

 

The offering for this market is based on the optimization of both utility and leisure services, and on a reduction in the total number of services. The objective is that customers may better understand the services that are available. The offering is thus designed to ensure user-friendliness and transparency, and to allow clients to easily try the various services offered. Amena data services include SMS, MMS, WAP, “information alerts” via SMS and MMS and other services including functions for chat, tunes and pictures, video games and music.

 

Business market

 

For the business market, Amena adapts its offering to different needs, uses, types of calls, number of lines and other features of businesses.

 

Custom solutions have been specifically developed for various sectors (e.g. real estate, shipping) and are offered in partnership with other companies (software developers and others).

 

As far as data services are concerned, receiving e-mails is the most commonly requested service. This is the reason why a complete range of handsets and technical solutions are offered to satisfy the particular customer needs. Other data services are information services, video calls, Internet or Intranet access.

 

As for the residential market, a comprehensive customer loyalty program allows renewal of handsets “Renove sin puntos” with significant discounts on market prices.

 

46


4.3.2.5 Poland

 

The table below shows the main features of the mobile telephone market in Poland and the activities of PTK Centertel, the mobile subsidiary of TP Group, wholly-owned by TP S.A.:

 

     On December 31

   2005

     2004

     2003

Market penetration rate in Poland (%)(1)    77      60      45

  
    
    
Total number of users in Poland (in millions)(1)    29.2      23.1      17.5

  
    
    
Service plan in Poland (in millions)(2)    11.3      9.6      7.9

  
    
    
Prepaid in Poland (in millions)(2)    17.9      13.5      9.5

  
    
    
PTK Centertel active customers (in millions)(2)    9.9      7.4      5.7

  
    
    
PTK Centertel service plan (in millions)(2)    4.0      3.2      2.5

  
    
    
PTK Centertel prepaid (in millions)(2)    5.9      4.2      3.2

  
    
    
PTK Centertel market share (%)(3)    34      32      33

  
    
    
PTK Centertel network coverage (% of population)(2)    99.5      99.35      99.14
  (1) Source: Mobile Communications for 2004 and 2003, figures for 2005 provided by PTK Centertel.

 

  (2) Information provided by PTK Centertel.

 

  (3) Source: Mobile Communications for 2004 and 2003. Estimates provided by PTK Centertel for 2005.

 

PTK Centertel Sp. z.o.o., (hereinafter “PTK”), is the wholly-owned mobile subsidiary of TP S.A.

 

PTK obtained four licenses for the provision of telecommunication services: a 15-year license (expiring in August 2012) to operate a GSM1800 digital network, a 25-year license (expiring in December 2016) to operate an NMT 450i analogue network and a 15-year license (expiring in July 2014) to provide a GSM900 service.

 

In December 2000, PTK obtained a UMTS license for 650 million euros, of which 260 million have been paid-off and the balance of which will be spread out in 18 payments starting in 2005. In compliance with the general conditions of the UMTS license, PTK must provide the UMTS services to at least 20% of the population by the end of 2007. PTK launched commercial UMTS services in November 2005. The UMTS services serve five main urban areas, including Warsaw, and this coverage will be systematically enlarged. The UMTS services are available both for residential customers and business customers.

 

The GSM dual band network (GSM900 and GSM1800) provides voice and data transmission, including sending SMS, MMS, call transfers, telephone conferences, caller identification and display, and caller identification restriction. Roaming services are also available.

 

The UMTS network allows better quality services and connections to be offered, and provides access to multimedia services that require high-speed data transmission.

 

In January 2005, PTK obtained a certificate to register in the “registry of obligations of telecommunications businesses” created by the President of the Office of Telecommunications and Post Regulations. In accordance with the certificate, PTK Centertel is authorized to perform the following telecommunication activities:

 

  n   Provision of telecommunication services in NMT 450 network;

 

  n   Provision of telecommunication services in GSM 900 network;

 

  n   Provision of telecommunication services in GSM 1800 network;

 

  n   Provision of telecommunication services in UMTS 3 G network;

 

  n   Data transmission service; and

 

  n   Leased networks

 

In April 2005, PTK and Orange Brand Services Ltd signed a brand license agreement, according to which PTK acquired the rights to operate under the Orange brand. PTK launched the Orange global brand in September 2005. In compliance with this contract, PTK paid operating fees of 1.6% of its operating income for the complete use of the Orange brand, as well as the benefits of the roaming and interconnection agreements, the technology, signature handsets, and Orange support services.

 

47


On December 31, 2005, PTK had acquired 358 roaming agreements with operators located in 175 countries, thus allowing its users to have access to GSM900, GSM1800 and PCS1900 when traveling outside Poland.

 

PTK became the second largest Polish mobile network operator in 2003 and reinforced its position in 2004 and 2005 with 9.9 million customers on December 31, 2005 (compared to 7.4 million on December 31, 2004 and 5.7 million on December 31, 2003 (source: Mobile Communications).

 

The dynamism of the growth of revenues enabled PTK to reach second place in 2005 in terms of value of market share, with a share of 33%.

 

4.3.2.6 Rest of the world

 

4.3.2.6.1 Belgium

 

The following table shows the main characteristics of the mobile telecommunications market in Belgium and the activities of Mobistar.

 

     On December 31

   2005

     2004

     2003

Penetration rate in Belgium (%)(1)    85.9      82.5      76.0

  
    
    
Total number of users in Belgium (in millions)(1)    8.8      8.5      7.8

  
    
    
Mobistar active customers (in millions)(2)    2.9      2.8      2.6

  
    
    
Mobistar market share (%)(1)    33.25      33.5      33.4

  
    
    
Mobistar revenues (in millions of euros)    1,453      1,344      1,167

  
    
    
Mobistar network coverage (% of population)(2)    99.0      99.0      99.0
  (1) Source: Mobile Communications.

 

  (2) Information provided by Mobistar.

 

Orange provides mobile 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. On December 31, 2005, Orange held 50.18% of Mobistar’s capital. The remaining capital is held by the Belgian company Telindus (4.62%), in the process of acquisition by the historic Belgian operator Belgacom, with the balance of 45.20% 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 on December 31, 2005 (source: Mobile Communications).

 

To improve the quality and the capacity of its network, Mobistar set up a GSM1800 network in 2001. Mobistar implemented its GPRS network with an estimated coverage of 99% of the population, in January 2001. In May 2001, Mobistar was the first operator to launch an offering of commercial GPRS services for the Belgian business market. Mobistar has offered GPRS handsets since May 2001 and GPRS services to residential customers since August 2002. Mobistar launched MMS services in January 2003.

 

Mobistar distributes its services through major retail outlets and over 100 specialized retail shops.

 

During 1998, Mobistar was awarded fixed-line telephone licenses and infrastructure licenses and, as a result, offers an indirect access telephone service to individuals and to small- and medium- sized businesses. Mobistar also provides fixed-line telephone services, data transmission services and mobile telecommunications services to businesses.

 

In March 2001, Mobistar obtained a 20-year UMTS license from the Belgian government based on a bid of 150 million euros. The conditions of the license require that Mobistar should, among other requirements, operate its network between 2005 and 2011. Mobistar met its first commitments by introducing the technology in Belgium as of September 2003. This first stage was validated by the regulator. Under the license conditions, the license could be revoked and penalties applied if the licensee fails to meet its obligations. The next stage in the launch of UMTS for Mobistar is the implementation, before January 1, 2006, of a network covering 30% of the population. In order to reach this objective, sites have been acquired to fulfill the coverage obligation despite recurring difficulties in obtaining the necessary administrative authorizations.

 

48


4.3.2.6.2 The Netherlands

 

The following table shows the main characteristics of the mobile telecommunications market in the Netherlands and the activities of Orange Nederland N.V.

 

     On December 31

   2005

     2004

     2003

Penetration rate in the Netherlands (%)(1)    102.1      93.7      82.9

  
    
    
Total number of users in the Netherlands (in millions)(1)    16.3      15      13.3

  
    
    
Orange Nederland N.V. active customers (in millions)(2)    2.0      1.7      1.3

  
    
    
Orange Nederland N.V. market share (%)(1)    12.1      11.3      10.0

  
    
    
Orange Nederland N.V. revenues (in millions of euros)(2)    635      592      465

  
    
    
Orange Nederland N.V. network coverage (% of population)(2)    99.9      99.9      99.9
  (1) Source: Mobile Communication, including MVNO.

 

  (2) Source: Orange Nederland N.V.

 

Orange provides mobile services in the Netherlands through its wholly-owned subsidiary, Orange Nederland N.V. Formed in 1997, Orange Nederland N.V. was awarded a GSM 1800 license in February 1998 and launched its operations 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.

 

On December 31, 2005, according to its own estimates, Orange Nederland N.V. covered 99.9% of the population of the Netherlands and had a 12.1% market share with approximately 2.0 million active customers (source: Mobile Communications).

 

On December 31, 2005, Orange Nederland N.V. was one of four key operators in the competitive wireless telephone market in the Netherlands. The implementation of Orange services such as Orange World and Orange signature handsets, the strength of the Orange brand and the focus on customer service, have all made it possible to achieve 16% growth in controlled subscribers from December 31, 2004 to December 31, 2005, the highest rate in the market.

 

Orange Nederland N.V. owns 53 shops and also runs an Internet point-of-sale.

 

In July 2000, Orange Nederland N.V. was awarded one of the five UMTS licenses offered for tender, at a cost of 436 million euros. The term of the license is 15 years. The license covers two 10 MHz spectrums and one 5 MHz spectrum. The conditions of the license require that Orange Nederland N.V. must, among other requirements, be able to cover all cities in the Netherlands by the beginning of 2007. The license could be revoked should Orange Nederland N.V. fail to meet this requirement.

 

4.3.2.6.3 Romania

 

The following table shows the main characteristics of the mobile telecommunications market in Romania and the activities of Orange Romania.

 

     On December 31
     2005      2004      2003

  
    
    
Penetration rate in Romania (%)(1)    59      45      31.55

  
    
    
Total number of users in Romania (in millions)(1)    13.2      10.3      7.0

  
    
    
Orange Romania registered customers (in millions)(2)    6.8      4.9      3.3

  
    
    
Orange Romania market share (%)(1)    52      48.3      47.1

  
    
    
Orange Romania revenues (in millions of euros)    870      624      467

  
    
    
Orange Romania network coverage (% of population)(2)    96.6      96.5      95.0
  (1) Source: Mobile Communications for 2003 and 2004. Figures for 2005 provided by Orange Romania.

 

  (2) Source: Orange Romania.

 

Orange operates mobile services in Romania through its subsidiary Orange Romania. Orange Romania was formed and was awarded a GSM900 license for a period of 15 years in 1996. On December 31, 2005, Orange

 

49


Romania was estimated as covering approximately 96.6% of the Romanian population and, with 6.8 million active customers, held the largest market share ahead of MobiFon/Connex. Orange holds 96.82% of Orange Romania’s share capital, the remainder being held by minority share holders.

 

Orange Romania was the fourth mobile operator to enter the Romanian market and believes that it currently ranks first on this market.

 

Following an invitation to tender launched in August 2004, licenses lasting 15 years were awarded to Orange Romania and Mobifon (Connex) in November 2004. A minimum coverage is required for Bucharest and ten large cities in 2011. The license cost 35 million US dollars. Annual operating fees in the amount of 1.2 million euros per FDD frequency block and 0.6 million euros per TDD frequency block are also due.

 

4.3.2.6.4 Slovakia

 

The following table shows the main characteristics of the mobile telecommunications market in Slovakia and the operations of Orange Slovensko.

 

     On December 31

   2005

     2004

     2003

Penetration rate in Slovakia (%)(1)    82.0      78.2      68.3

  
    
    
Total number of users in Slovakia (in millions)(1)    4.4      4.3      3.7

  
    
    
Orange Slovensko active customers (in millions)(2)    2.5      2.4      2.1

  
    
    
Orange Slovensko market share (%)(1)    56.2      55.3      56.1

  
    
    
Orange Slovensko revenues (in millions of euros)    556      480      392

  
    
    
Orange Slovensko network coverage (% of population)(2)    99.3      99      98.5
  (1) Source: Mobile Communications.

 

  (2) Source: Orange Slovensko.

 

Orange operates mobile services in Slovakia through its subsidiary Orange Slovensko. Orange holds 100% Orange Slovensko’s capital, following the repurchase of minority shares in November 2005. Orange Slovensko was formed in 1996 and was awarded its GSM900 license in the same year. In August 2001, Orange Slovensko’s license was extended to GSM1800. On December 31, 2005, Orange Slovensko estimated that its network covered 99.3% of the Slovakian population and that it had the largest market share in the country with approximately 2.5 million active customers.

 

In addition, Orange Slovensko was awarded a UMTS license in June 2002 for approximately 1.5 billion Slovakian kroners (approximately 35 million euros) and an annual operating fee of 0.08% of license-generated revenues. The UMTS license is granted for a period of 20 years from the date of award. Under the conditions of the license, Orange Slovensko may be required by another national operator to achieve network coverage of 20% by December 31, 2006, in order to enter into a roaming agreement with that operator.

 

4.3.2.6.5 Switzerland

 

The following table shows the main characteristics of the mobile telecommunications market in Switzerland and the operations of Orange Communications S.A.

 

     On December 31

   2005

     2004

     2003

Penetration rate in Switzerland (%)(1)    95.5      87.7      84.8

  
    
    
Total number of users in Switzerland (in millions)(1)    6.9      6.2      6.1

  
    
    
Orange Communications S.A. active customers (in millions)(2)    1.2      1.1      1.1

  
    
    
Orange Communications S.A. market share (%)(1)    18.2      18.2      17.8

  
    
    
Orange Communications S.A. revenues (in millions of euros)    875      834      775

  
    
    
Orange Communications S.A. network coverage (% of population)(2)    99.3      98.7      98.6
  (1) Source: Mobile Communications.

 

  (2) Source: Orange Communications S.A.

 

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Orange operates in Switzerland through its subsidiary Orange Communications S.A. that was formed in January 1998 and obtained its GSM1800 license in May 1998. Orange holds 100% of Orange Communications S.A.’s capital and 100% of its voting rights. On December 31, 2005, Orange Communications S.A. held a market share of approximately 18.2% with 1.2 million of active customers and estimated that its network covered 99.3% of the Swiss population.

 

Orange Communications S.A. was the third operator to enter the Swiss market and was third in terms of market share on December 31, 2005 (source: Mobile Communications).

 

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 euros). This license covers two 15 MHz spectrums. Three other licenses were awarded to SwissCom Mobile A.G., TDC Schweiz A.G. and 3G Mobile A.G. The license conditions require that Orange Communications S.A. should, among other requirements, be able to cover 50% of the population before the end of 2004, a condition that has been satisfied. There is presently no risk of having to pay any penalty, or of the license being revoked.

 

4.3.2.6.6 Moldova

 

The following table shows the main characteristics of the mobile telecommunications market in Moldova and the operations of Voxtel.

 

     On December 31

   2005

     2004

     2003

Penetration rate in Moldova (%)(1)

   26.6      19.0      -

  
    
    

Total users in Moldova (in millions)(1)

   1.16      0.84      0.53

  
    
    

Voxtel customers (in millions)(1)

   0.67      0.46      0.29

  
    
    

Voxtel market share (%)(1)

   57.6      54.4      54.6

  
    
    
Voxtel network coverage (%)(2)    87.4      84.4      79.9
  (1) Source: Mobile Communications.

 

  (2) Information provided by Voxtel.

 

Orange is active in Moldavia through its subsidiary Voxtel, which was formed in 1998 and which obtained its license in the same year. In 2003, the license was extended to GSM 1800 MHz. France Telecom and Orange Romania own 51% and 3.9% of the equity respectively.

 

4.3.2.6.7 Other controlled mobile operations, outside Europe

 

Egypt: Orange holds 71.25% of MobilNil (MobiNil Telecommunication S.A.E.), which in turn holds 51% of Egyptian Company for Mobile Services (ECMS), an operating company that operates under the MobiNil brand name. Orange holds 71.25% of MobiNil and the Egyptian group Orascom Telecom holds 28.75%. Orascom Telecom also directly holds 16.6% of ECMS. The remaining 32.4% of ECMS’s capital is listed on the Cairo and Alexandria Stock Exchange.

 

ECMS was established in 1998 and was awarded its GSM900 license the same year. On December 31, 2005, according to ECMS estimates, its network covered approximately 94% of the population of Egypt, compared to 91% on December 31, 2004, the same as on December 31, 2003. ECMS estimates that it held a market share of 55.1% on December 31, 2005 (approximately 53.75% on December 31, 2004 and 52.4% on December 31, 2003) with approximately 6.7 million active customers on December 31, 2005 (4.0 million active customers on December 31, 2004 and 3 million active customers on December 31, 2003), that is 4.8 million active customers for the Orange proportional share (2.9 million active customers on December 31, 2004 and 2.1 million on December 31, 2003). ECMS believes that it is the leader in this market (source: Informa Telecoms & Media’s World Cellular Information Service).

 

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 244,000 active customers on December 31, 2005 (approximately 194,000 active customers on December 31, 2004 and approximately 163,000 active customers on December 31, 2003) and held second place in terms of market share among the two operators present in this market (second in 2004 and 2003) (source: Informa Telecoms & Media’s World Cellular Information Service).

 

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Cameroon: Orange Cameroon is 99.5% owned by the France Telecom Group. Orange Cameroon launched its GSM900 service in January 2000 under the name Mobilis. Orange Cameroon has operated under the Orange brand since June 2002. Orange Cameroon had approximately 943,000 active customers on December 31, 2005 (approximately 748,000 active customers on December 31, 2004 and approximately 539,000 on December 31, 2003). Orange Cameroon held second place in terms of market share among the two operators present in this market (second in 2004 and first in 2003) (source: Informa Telecoms & Media’s World Cellular Information Service).

 

Ivory Coast: Orange has an 85% shareholding in Orange Côte d’Ivoire, which launched its GSM900 network in 1996 under the Ivoiris brand. Since January 2002, Orange Côte d’Ivoire has operated under a GSM900/1800 license. Since May 2002, Orange Côte d’Ivoire has operated in the Ivory Coast under the Orange brand. Orange Côte d’Ivoire had approximately 1.3 million active customers on December 31, 2005 (approximately 844,000 active customers on December 31, 2004 and approximately 586,000 active customers on December 31, 2003) and held first place in terms of market share among the three operators present in this market (first in 2004 and 2003) (source: Informa Telecoms & Media’s World Cellular Information Service). The current events in the Ivory Coast constitute a risk for Orange’s operations there (see section 3.3 “Risk factors”).

 

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 March 1998 under the Antaris brand. Orange Madagascar has operated under the Orange brand since June 2003. Orange Madagascar had approximately 279,000 active customers on December 31, 2005 (169,000 active customers on December 31, 2004 and approximately 144,000 active customers on December 31, 2003). Orange Madagascar held first place in terms of market share among the two operators present in this market (first in 2004 and 2003) (source: Informa Telecoms & Media’s World Cellular Information Service).

 

Dominican Republic: Orange has a 100% shareholding in Orange Dominicana, which launched its GSM900 network in November 2000 under the Orange brand. Minority interests representing 14% of the capital were repurchased in September 2005. On December 31, 2005, Orange Dominicana estimated it had approximately 950,000 active customers (approximately 704,000 active customers on December 31, 2004 and approximately 562,000 active customers on December 31, 2003) and occupied second place in terms of market share on December 31, 2005 among the five operators present in the market (second place on December 31, 2004 and on December 31, 2003) (source: Informa Telecoms & Media’s World Cellular Information Service).

 

Other controlled mobile operations:

 

Senegal: Sonatel Mobiles SA, wholly-owned by Sonatel SA which is 42.3% held by France Telecom, operates under the brand Alizé. Sonatel Mobiles SA was formed in 1999, using a GSM license awarded to Sonatel SA in 1996. On December 31, 2005, according to Sonatel Mobiles SA estimates, the network of this latter covered approximately 54% of the populated area of Senegal. On December 31, 2005, Sonatel Mobiles SA estimates that it held a market share of approximately 58.8% (about 69.6% at 31 December 2004 and 76% on December 31, 2003) with approximately 982,000 customers on December 31, 2005 (approximately 780,000 customers on December 31, 2004 and approximately 576,000 customers on December 31, 2003) (source: Informa Telecoms & Media’s World Cellular Information Service).

 

The competition is represented by the company Sentel, a subsidiary of the Millicom International group.

 

Mali: Ikatel SA, a subsidiary owned 69.6% by Sonatel SA, operates under the brand Ikatel. Ikatel SA started its commercial operations in 2003 following the award of a license in 2002 by the Mali government for fixed-line, mobile and Internet operations. On December 31, 2005, Ikatel SA estimated that it held a mobile services market share of approximately 71.3% (approximately 83.2% on December 31, 2004 and approximately 70% on December 31, 2003) with approximately 561,000 customers on December 31, 2005 (approximately 336,000 customers on December 31, 2004 and approximately 184,000 customers on December 31, 2003) (source: Informa Telecoms & Media’s World Cellular Information Service).

 

Jordan: In 2000, MobileCom (Petra Jordanian Mobile Telecommunications Co.), a wholly-owned subsidiary of the operator Jordan Telecom, itself controlled 40% by France Telecom, was the second GSM operator to enter the mobile telephone market in Jordan, after 5 years of exclusive service by the operator Fastlink (an MTC company). MobileCom introduced GRPS and MMS services in the middle of 2002, and limited EDGE coverage in 2004.

 

MobileCom counts more than 615 sites in the country, and provides coverage to 99.7% of the population and 58.7% of the territory.

 

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On December 31, 2005, MobileCom held a market share of approximately 22.6% (approximately 27.8% on December 31, 2004 and 27.2% on December 31, 2003) with approximately 660,000 customers on December 31, 2005 (approximately 455,000 customers on December 31, 2004 and approximately 352,000 customers on December 31, 2003) (source: Informa Telecoms & Media’s World Cellular Information Service).

 

In April 2004, Xpress, a company held by Jordanian and Saudi shareholders was the third to enter the market, using iDEN technology, and in June 2005, Umniah was the fourth and last GSM operator to enter the Jordanian market. It was a joint-venture between a Jordanian businessman and Kuwaiti investors (Global).

 

Mauritius: Cellplus Mobile Communications Ltd, formed in March 1996, is a wholly-owned subsidiary of Mauritius Telecom, an operator 40% controlled by France Telecom. Cellplus Mobile Communications Ltd was the second operator to enter the mobile telephone market in Mauritius, after seven years of exclusive presence of Emtel (a common company incorporating Millicom and a local company). Emtel introduced its GSM services in November 1999 and its 3G mobile telephone service in November 2004. MTML, a subsidiary of the Indian operator MTNL, is due to enter the mobile market in early 2006.

 

Cellplus Mobile Communications Ltd. obtained a license and began its commercial operations in October 1996. The company conducts its operations on GSM 900 MHz and GSM 1800 MHz frequency bands and has provided GPRS service since December 2004. Cellplus counts more than 165 sites in the country, and provides coverage to 99% of the population, and over 98% of the territory. Cellplus is the only operator that provides coverage to Rodrigue Island, an island belonging to Mauritius. Today, Cellplus employs 180 workers and is the leader in the local mobile market, with a market share of 65.2% on December 31, 2005 (69% on December 31, 2004 and 65% on December 31, 2003), and with approximately 394,000 customers on December 31, 2005 (approximately 380,000 at December 31, 2004 and approximately 326,000 on December 31, 2003) (source: Informa Telecoms & Media’s World Cellular Information Service).

 

4.3.2.6.8 Mobile operations : Other participations

 

Austria: ONE

 

The following table shows the main characteristics of the mobile telecommunications market in Austria and the operations of ONE.

 

     On December 31
     2005      2004      2003

  
    
    

Penetration rate in Austria (%)(1)

   104.7      95.5      89.5

  
    
    

Total users in Austria (in millions)(1)

   8.6      7.8      7.3

  
    
    

ONE active customers (in millions)(1)

   1.8      1.5      1.5

  
    
    

ONE market share (%)(1)

   20.7      19.0      20.2
  (1) Source: Mobile Communications.

 

Orange holds an interest of approximately 17.5% in ONE GmbH capital. The other members of the consortium are the German conglomerate E.ON and the Norwegian and Danish mobile telecommunications operators, respectively Telenor and TDC.

 

The ONE consortium was awarded the third Austrian mobile license in 1997. ONE launched its digital GSM1800 service in 1998 under the brand ONE. On December 31, 2005, the ONE network covered, according to its own estimates, approximately 98% of the population. On December 31, 2005, ONE counted with 1.8 million active customers. On December 31, 2005, ONE held a 20.7% share of the total market and occupied the third place in terms of market share. Mobilkom Austria held a market share of 39.5%, T-Mobile held a 24.2% share of the total market, Telering held a 12.1% share of the total market and 3Austria held a 3.6% share of the total market.

 

ONE was awarded a 20-year UMTS license on November 20, 2000 in consideration of an operating fee of 120 million euros.

 

Portugal: Sonaecom / Optimus

 

In November 2005, the France Telecom group contributed to Sonaecom the investments (20.18% of capital and 10.09% of voting rights) that it held in the capital of Optimus, the third Portuguese mobile operator, as well

 

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as in the capital of Novis (43.33%, fixed operations) and of Clixgest (43.33%, Internet operations). France Telecom thus no longer has direct investment in these subsidiaries of Sonaecom, but now holds 23.7% of Sonaecom’s capital.

 

On December 31, 2005, the Sonaecom network, through its subsidiary Optimus covered, according to its own estimates, approximately 99% of the Portuguese population. At that date, Optimus had approximately 2.4 million registered customers (2.1 million registered customers on December 31, 2004 and 2.0 million registered customers on December 31, 2003) (source: Mobile Communications).

 

The market penetration rate in Portugal was 116.2% on December 31, 2005 (106.4% on December 31, 2004 and 97.4% on December 31, 2003), with approximately 11.6 million mobile customers in Portugal (10.6 million customers on December 31, 2004 and 9.7 million customers on December 31, 2003) (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 20.4% on December 31, 2005 (20.1% on December 31, 2004 and 20.5% on December 31, 2003) (source: Mobile Communications).

 

When the Portuguese government awarded four UMTS licenses in December 2000, Optimus acquired a license for 100 million euros. The term of the license is 15 years. The conditions of the license required that, among other requirements, Optimus must cover 24.7% of the population from then until June 4, 2005. This objective has been largely exceeded with a population coverage reaching nearly 48% at the transmission rate of 128 kbps.

 

4.3.2.7 Licensing agreements

 

The brand “Orange” was first launched in the United Kingdom in 1994 and has since been licensed to 18 mobile telecommunications operators. In Europe, the Orange brand is currently licensed to Orange companies operating in the United Kingdom, France, the Netherlands, Romania, Slovakia and Switzerland, as well as to PTK Centertel, a subsidiary of the TP Group in Poland. Outside of Europe, the Orange brand has been licensed to Orange companies in Botswana, Cameroon, Ivory Coast, Madagascar, the Dominican Republic and to companies outside Orange in Australia, India, Israel and Thailand.

 

Under these Orange brand licensing agreements, Orange assists its licensees in promoting the brand in national markets by providing them with support services and giving them access to other resources of the brand.

 

4.3.2.8 Roaming

 

Roaming allows mobile customers to make and receive calls while in the coverage area of a network to which they are not subscribers and to be billed for this service by their home network. Mobile customers who are roaming can expect to enjoy substantially the same services, features and security while traveling as they do with their home networks. Orange’s roaming service was entirely created using the GSM technical standard and the 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 charged to customers reflect the wholesale charges between operators and the pricing policy applied by each operator for its customers. Orange is gradually rolling out flat-rate roaming tariffs through its European operations. These flat rates provide greater clarity to the end-users and allow customers to better understand and predict their roaming expenses. Orange is proactively approaching the market with innovative roaming offers adapted to the needs of each major account category.

 

Orange brings a high level of service continuity to its networks for its clients in Europe. While traveling, customers now have seamless access to their voice mail on the Orange networks and can receive caller line identification for incoming calls. Orange delivers this continuous customer service on its networks through its close cooperation with France Telecom’s Network Operators and Information System Division which provides interconnection with the Orange networks. Orange is progressively expanding its footprint and range of services consistently, primarily through the Freemove Alliance.

 

In view of the ongoing challenges of the wholesale roaming market, Orange is currently charging one of the lowest GPRS roaming wholesale prices in Europe, in a determined move to encourage data roaming within the industry.

 

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Orange is focusing on boosting usage and offering seamless customer experiences in its non-European operations across the globe with the aim of achieving a quality of service similar to that which will be available in Europe in 2006.

 

4.3.3 HOME COMMUNICATION SERVICES

 

Home communication services segment include the fixed telecommunications service (fixed-line telephone, Internet services, operator services) in France, Poland and the rest of the world, as well as the distribution operations and support functions provided to other segment of the France Telecom Group.

 

Home communication services operations realized net revenues of 22.5 billion euros in 2005 (22.4 billion euros in 2004), before intra-Group eliminations.

 

The operations in this sector are carried out in three geographical areas:

 

  - France: with the operations conducted mainly by the following operational divisions:

 

  n   Home communication services: for all communications services at home, particularly including broadband services;

 

  n   Sales and Services France: for distributing all the Group’s products in France in the consumer and small- and medium- sized business market; as well as by:

 

  n   the Content division, business divisions (Networks, Operators and Information Systems; Research and Development; Technologies), and the support functions.

 

  - Poland, with the fixed-line and Internet operations of the TP Group (TP S.A. and its subsidiaries), except for mobile operations.

 

  -The rest of the world, with mainly the subsidiaries France Telecom Espaňa, Wanadoo UK, Wanadoo Nederland in Europe, as well as, outside Europe, the non-mobile operations of Sonatel in Senegal, Côte d’Ivoire Télécom in the Ivory Coast, Jordan Telecom in Jordan and Mauritius Telecom in Mauritius.

 

In the Home communication services segment, France Telecom’s strategy in Europe primarily consists of offering an enhanced range of services based on ADSL broadband and the rapid spread of Livebox. This strategy has resulted in the integration of Wanadoo within France Telecom S.A. and the acquisition of a leader position in the ADSL market in Europe.

 

In February 2004, with a view to integrating Wanadoo’s access and portal services within France Telecom and to improving the Group’s position on the broadband market, France Telecom launched a public tender and exchange offer for the Wanadoo S.A. shares it did not already hold, and subsequently, in June 2004, a public tender offer followed by a compulsory purchase procedure. In July 2004, at the end of these operations, France Telecom held all the capital of Wanadoo S.A. The companies Wanadoo S.A. and Wanadoo France, whose main operations were to supply Internet access, were merged within France Telecom in September 2004.

 

In the ADSL access market in Europe, France Telecom counted 7.4 million customers on December 31, 2005. On September 30, France Telecom held first place in Europe and second place world-wide with 6.6 million customers (source: DATAXIS).

 

The table below shows the breakdown of France Telecom’s ADSL customers per type of offer (in thousands of subscribers) for all European countries where France Telecom operates.

 

Country      2005      2004      2003
France      4,457      2,927      1,738

    
    
    
United Kingdom      906      569      158

    
    
    
Netherlands      331      267      118

    
    
    
Spain      563      379      190

    
    
    
United Kingdom / Spain / Netherlands      1,800      1,215      466

    
    
    
Poland      1,144      631      133

    
    
    
Total      7,401      4,773      2,337

 

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The activities of the Home communication services segment are described below:

 

4.3.3.1 France

 

The operations of the “Home communication services” segment in France include the following:

 

  n   fixed-line telephone services offered to consumers (residential and small businesses not included in the small and medium-size business market);

 

  n   Internet access operations offered to the consumers, henceforth carried out within France Telecom S.A. in France;

 

  n   other consumer services (payphone and card services, gateway and e-commerce services);

 

  n   services to operators; and

 

  n   sales and distribution operations.

 

On December 31, 2005, France Telecom counted in France on the consumer market 26.9 million fixed-line service lines (27.5 million on December 31, 2004 and 27.6 million at December 2003). On December 31, 2005, 9.4 million lines used ADSL (6.3 million on December 31, 2004 and 3.3 million on December 31, 2003), sold by France Telecom or by other operators and providers of Internet access.

 

France Telecom is accelerating its Broadband Plan for regional coverage. The following table shows the percentage of the population covered by ADSL services in France:

 

     2005        2004        2003        2002  
Coverage of national territory in % of the population    97 %      90 %      79 %      70 %
  Source: France Telecom

 

4.5 million customers have subscribed to an ADSL offer from France Telecom, which held a 47.5% share of the ASDL market (2.9 million on December 31, 2004, i.e. a 46.8% market share, 1.7 million on December 31, 2003, i.e. a market share of 52.1%). “Livebox”, a France Telecom multi-service gateway reached 1.6 million on December 31, 2005 (0.2 million on December 31, 2004).

 

4.3.3.1.1 Home communication services for the General Public

 

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 also offers narrowband Internet services and an extended range of broadband services on ADSL. Beyond Internet services, France Telecom offers new ASDL online services like Voice over IP, television on ADSL and videophone.

 

Fixed-line service offers have significantly changed since mid-2004, with the growing number of ADSL customers and the increase in available ADSL speed. The speed proposed for access by ADSL has significantly increased in 2004 and 2005, with the launch of “eXtense DébitMax” offer in November 2004, which proposes the maximum available ADSL speed according to the technical characteristics of each line, able to reach up to 8 Mb/s, and up to 18Mb/s with the launch of “Débitmax2” in the Paris sites in December 2004, extended to 14 large cities in May 2005.

 

France Telecom’s rates for fixed-line telephone are subject to special regulations. Under the universal service call for tender issued by the French State last November, France Telecom submitted a global proposal on January 10, 2005. The ART indicated its approval of that proposal and reported its decision in February 2005.

 

That proposal provides, with regard to the period 2005-2008, for:

 

  n   a gradual increase in the subscription tariff of 23%, in order to align with the European average and to finance network, with the first stage increasing the monthly rate from 13 euros to 13.99 euros, including VAT, in March 2005;

 

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  n   an immediate reduction by 7% of the subsidized subscription; and

 

  n   a reduction of at least 26% in call rates over the relevant period.

 

In response to certain requests made by ARCEP (the new name for ART) and the French Government, France Telecom gave certain additional undertakings with a view to contributing towards fostering competition in the sector by way of new wholesale subscription and broadband resale offers, as well as measures aimed at improving the competitiveness of unbundled access:

 

  n   the unbundling commissioning costs went from 78.7 euros excluding VAT to 50 euros excluding VAT for full unbundled access, and to 55 euros excluding VAT for partial unbundling;

 

  n   in conformity with the undertaking made on January 10, 2005, a new standard offer for total unbundling was sent to ARCEP and published on July 27, 2005, recording a reduction by 1 euro exclusive of VAT of the rate for total unbundling;

 

  n   the undertaking has been made to achieve a quality of service for total unbundling that is in line with that for partial unbundling. A list of indicators was communicated to ARCEP on June 1, 2005, in order to measure the progress that has been made in this respect. France Telecom publishes its tableau de bord (management chart) of technical service quality, which is a first in Europe. The average time for completion of unbundling is much shorter than the contractual times;

 

  n   the wholesale offer for resale of the subscriptions was transmitted to ARCEP with a view to implementation by April 1, 2006 and the ADSL wholesale offer enabling end customers to access a broadband service without having to pay for a subscription is being developed.

 

4.3.3.1.1.1 Subscriptions and services

 

Access to the telephone network is provided via the telephone line, for which customers are charged fixed access costs upon the installation of the line and a monthly subscription for line maintenance and supply of basic services (inclusion in the telephone directory, access to high-quality customer service, use of France Telecom’s exclusive services such as, for example, voice-mail, restricted calling line identification on a call by call basis and itemized billing). New services are added on a regular basis.

 

  n   Connection to the telephone network

 

Telephone line connection fees were raised from 46.12 euros including VAT to 55.00 euros including VAT in March 2005, at the same time as the subscription rate.

 

Call out costs are also billed where the installation of a line requires the onsite presence of an engineer. The network access price includes, where the customer’s premises do not already have them, the supply of one (or two) telephone sockets. Call out charges are billed in the following three cases:

 

  - when no lines are connected to the customer’s premises;

 

  - when the customer requests extra lines or sockets; and

 

  - when the internal lines servicing the customer’s premises are defective.

 

  n   Subscription to the telephone service

 

France Telecom offers a range of subscriptions designed to satisfy the various needs of residential, professional and business customers.

 

The differences mainly concern service commitment levels (warranties related to service restoration time) and the availability of line-related services (number identification, for example, or the possibility of publication in business directories).

 

In April 2004, the range of business contracts was enhanced by the addition of a new contract, the Professional Services Contract, which automatically includes a large range of services together with a choice of two additional services to be selected (for example, from caller name identification, voice-recognition address book, call transferring or call waiting services).

 

In March 2005, the price of the subscription increased by 7.6%. The price rose from 13.00 euros including VAT to 13.99 euros including VAT for individuals, with company subscriptions dropping by 7.28%, from 7.00 euros to 6.49 euros including VAT. The subscription for professional contracts remained unchanged at 13.10 euros before tax.

 

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Starting on October 1, 2005, the general conditions for telephone subscriptions sales were modified, the minimum commitment time for opening a telephone line was reduced by half, from 12 to 6 months. More flexibility was introduced to allow customers wishing to subscribe to an offering for total unbundling to terminate their subscriptions without incurring any penalties.

 

  n   Telephone directory service

 

As a fixed-line telephone operator, France Telecom manages the database containing the directory information of its subscribers. This database, subject to subscribers’ rights for the protection of contact information, is provided to directory services suppliers and publishers of directories that request it.

 

France Telecom markets this database for different purposes, notably direct marketing, data improvement, and helping safeguard human lives through the emergency services SAMU (mobile emergency services), Fire Protection districts and Police.

 

In addition, France Telecom provides publishing assistance for alphabetical directory media, i.e. the Annuaire® (white pages published per department) and the number 3611 for alphabetical searching.

 

By the decree of March 3, 2005, France Telecom was designated, for 2 years, to provide, as part of the universal service, a universal directory (printed and electronic) and a universal directory service.

 

For information on the contractual relationship between France Telecom and the PagesJaunes Group regarding directories, see the item on the PagesJaunes Group in section 7 “Organization chart”.

 

  n   Value-added services

 

France Telecom is continuing its policy of developing services, some of which result in the payment of a monthly subscription that contributes to subscription revenues. Thus, for personal customers, France Telecom has for several years now offered value-added services such as answering services, call waiting, automatic call redial of the last number, call transfer, three-way calling, caller number display and caller name display, moving services such as number retention.

 

The offer continues to add innovative services: having offered fixed-line SMS, and the directory “Mes contacts” (my contacts, a voice recognition address-book), associated with Internet or minitel access, France Telecom launched “Fun Tones” in June 2005, a call tone customization service, available on Orange mobiles and fixed lines.

 

10.4 million customers subscribed for an added-value service on December 31, 2005 (9.2 million on December 31, 2004 and 7.9 million on December 31, 2003).

 

4.3.3.1.1.2 Calling services

 

Telephone calls are billed either per unit according to their duration or on a package basis. France Telecom is also continuing to develop new offers to meet changing uses and different consumer profiles.

 

  n   Calls billed according to duration based on the reference price scale (general rate)

 

When telephone calls are billed per unit, the price includes a fixed cost (connection cost), plus a price calculated per second.

 

The fixed cost is usually a call connection cost, calculated per second from the first second, or less often as a time credit (a certain number of seconds included in the fixed cost). The portion 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 the time of day.

 

Reference price scale (general rate)

 

In October 2003, France Telecom reorganized the price scale of international calls by reducing the number of zones from fourteen to eight and by establishing pricing per second from the first second (with the introduction of a call connection cost).

 

In early 2004, France Telecom began reducing the cost of calls to mobiles in metropolitan France.

 

In March 2005, France Telecom began reorganizing the pricing scale for local and national calls, which resulted in a price-per-minute reduction for calls:

 

  - the price/minute including VAT of local calls went from 0.018 to 0.014 euros in non-peak times (22.2% reduction) and from 0.033 to 0.028 euros in peak times (15.2% reduction);

 

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  - the price/minute including VAT of national calls went from 0.061 to 0.053 euros in non-peak times (13.1% reduction) and from 0.091 to 0.078 euros in peak times (14.3% reduction);

 

and by two rate simplification measures:

 

  - removal of the time credit, replaced by a call connection fee;

 

  - removal of proximity zones, which are aligned with the price of local calls, i.e. a reduction of 45.9% during peak hours and 40% during off-peak hours.

 

In January 2005, as in previous years, France Telecom continued to lower the cost of calls to mobile telephones: to Orange, SFR and Bouygues Telecom mobiles, and the time credit was replaced by a call connection fee. The rates were reduced for home customers, for business customers and corporations.

 

In April 2005, the rates for communications to mobiles in the overseas departments were also reduced.

 

  n   Pricing plans for Home customers

 

The France Telecom catalogue includes pricing plans that have been improved over time: “Heures locales” (local airtime), “Heures France” (France airtime), “Heures Antilles” (Antilles airtime), “Heures Guyane” (Guyana airtime), “Heures Tropique France” (France Tropical airtime), “Heures vers Mobiles” (To mobiles airtime), “Heures” (airtime), as well as price/minute offers (“Le Plan” and “Appel à prix unique” (one price call).

 

In June 2004, France Telecom launched unlimited offers allowing customers to make calls of unlimited duration to telephone numbers in metropolitan France (either to a limited number of telephone numbers or to all telephone numbers) for a fixed amount. These packages vary from round-the-clock, in the evenings or at the week-end. In January 2005, France Telecom extended the unlimited offering concept to calls from fixed lines to mobiles, with the limited series “Mes illimités vers mobiles” (my unlimited calls to mobiles).

 

The price of these packages including calls to mobiles were reduced in January 2005, as were the general prices for calls to mobiles.

 

In August 2005, France Telecom simplified its pricing by launching “Atout Téléphone” (telephone advantage), a new range including four unlimited packages, two of them including a package of minutes to fixed lines, mobiles, Europe and North America, and a package offering a price/minute reduction, for a monthly subscription:

 

  - 100% Illimité” (100% unlimited): at 79 euros including VAT per month, unlimited to all fixed lines and mobiles, everywhere in France, including to the overseas departments, Europe and North America (series limited to 150,000 customers);

 

  - 100% Illimité soir et week-end” (100% unlimited evening and week-end): at 59 euros including VAT per month, same call destinations as “100% Illimité”.

 

These two first offers were launched in June 2005 in a series limited to 150,000 customers.

 

  - Illimité + 120” (unlimited + 120): at 49 euros including VAT per month, unlimited to all fixed lines in France, plus 120 minutes to all mobiles in France, fixed line and mobiles in the French overseas departments, Europe and North America.

 

  - Illimité + 120 soir et week-end” (unlimited + 120 evening and week-end): at 29 euros including VAT per month, same call destinations as “Illimité + 120”.

 

  - Atout + 240” (advantage + 240): at 17 euros including VAT, 240 minutes included to all fixed lines and mobiles in France, including the French overseas departments, in Europe and in North America, plus more competitive prices for communications outside the package.

 

  - Atout +120” (advantage + 120): at 9 euros including VAT, 120 minutes included to all fixed lines and mobiles in France, including the French overseas departments, in Europe and in North America. And advantageous prices for communications outside the package.

 

  - Atout” (advantage): for 2 euros including VAT, very advantageous prices to fixed lines everywhere in France, to mobiles in metropolitan France and to Europe and North America.

 

  n   Pricing plans for Business customers

 

A range of “forfaits Pro” (pro packages) also exists for businesses: local packages, national packages, packages to mobiles, packages to Europe and North America.

 

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The range has been supplemented by “Plans Pro” and “Illimités Pro” offers.

 

  n   Change in the rate of contract-based plans

 

Overall, on December 31, 2005, in the consumer market, package plans had been adopted by 11.6 million customers, including the 830,000 subscriptions to VoIP packages sold by France Telecom. Such plans are either monthly subscriptions giving customers a specific price package or a fixed amount of calls. The change in the rate of contract-based package plans is as follows (including VoIP offers):

 

     December 2005        December 2004        December 2003  
Rate of contract- based package plans    46.8 %      42.5 %      35.7 %
Number of customers (in millions)    11.6        10.7        9.0  

 

4.3.3.1.1.3 Online services and Broadband Internet Access

 

France Telecom offers online services on the Télétel (Minitel) network, Internet access services and multimedia services and communication via ADSL.

 

Minitel and kiosks

 

Minitel is an online service accessible via the Télétel network which enables publishers of services to distribute content with added value and be remunerated each time the content is viewed according to the length of time spent viewing it. Access to Minitel services has diversified over recent years:

 

  - a range of dedicated terminals, for sale or rental (Minitel 1 terminals still held by customers were transferred to them free of charge, though France Telecom continues to service them);

 

  - browsers for personal computers, including France Telecom’s “i-minitel” browser which has been broadband-compatible since April 2005, for all subscribers;

 

  - broadband access on the www.minitel.com portal and on Wanadoo.

 

The terminal base is currently spread equally between dedicated terminals (3.6 million) and computers equipped with a browser (3.1 million).

 

Minitel is gradually losing ground to the Internet (a 33% decrease in traffic in 2005, down 25% in 2004, and 21% in 2003), but it is a useful and secure tool that retains a large customer base. Banking and stock exchange services are still the most frequently used by consumers, followed by a multitude of practical day-to-day services (weather, transport, itineraries, ticket sales, car and motorbike price index, games of chance, messaging systems and directories).

 

The Télétel kiosk model that has allowed the development of online services has been continued on the Internet because all parties involved in the web, including Internet access providers and Minitel and Internet content providers in June 2005 launched the “Internet plus” association to develop added-value services and facilitate the purchase of web content, using standardized platforms for payment via the Internet.

 

Internet Access

 

For its innovative marketing and knowledge of the market, France Telecom, under the brand Wanadoo, differentiates its offers based on client profiles and the prospects for technological evolution, allowing each customer to benefit from the best technology: fixed-telephone networks up to 64 Kbit/s, ADSL speeds from 512k up to 18Mb/s (Max2+), satellite surf packs and Wi-Fi surf packs, launched in November 2004 for areas not covered by DSL, 512k extended broadband launched in June 2005 that allows an extension of ADSL eligibility (Re-ADSL technology).

 

The number one objective of the Group is to promote the “increase in speed” of its customers to allow them to use multimedia content and services. The strong growth in the number of France Telecom broadband subscribers, that reached 4.5 million on December 31, 2005 (including TV and monoplay videophony customers), reflects the success of its ADSL service offers. France Telecom has been successful in growing its ASDL market share from 46.5% on December 31, 2004 to 47.5% on December 31, 2005, in a competitive but very active environment, marked by the growth of total unbundling.

 

The offers presented to Wanadoo customers include the following:

 

  - narrowband internet offersWanadoo accès libre” (Wanadoo free access) and a complete range of “inclusive” packages from five hours to unlimited 24 hours in France;

 

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  - broadband Internet offers, that are developing with the increase in speed: the range was simplified during 2005, with three speeds currently commercialized at the end of 2005: 512 kbit/s, Max to 8 Mbit/s, and Max2+ up to 18 Mbit/s, and was reorganized in the new range Multimedia Broadband, launched on August 18, 2005, a range that includes custom multimedia services (see below for the Multimedia Broadband range).

 

Services for Internet users

 

Specific services offered for Internet users:

 

  n   Online services on the Wanadoo portal, reformulated in the “Livecom” offer in June 2005. Livecom is a communication software that allows all modes of communication to all types of terminals (PC, mobile telephone, fixed-line telephone, videophone and Orange Intense telephone): videophony; ADSL telephony; instant messaging. The software and calls to other “Livecom” users are free of charge. Packages including a webcam and communication credits are additionally sold. To call correspondents equipped with a fixed-line telephone, a mobile telephone or a videophone or from an “Orange Intense” mobile, four communication credits (from 5 to 35 euros including VAT) may be purchased online.

 

  n   New Wanadoo options that facilitate communications such as shared space between users of the same Wanadoo account, the “Booster” option which speeds up web page display and the “Domicile Plus” option for business users who wish to use their Wanadoo access both at home and at work.

 

  n   Wanadoo Protection services: anti-virus, anti-spam (elimination of unsolicited messages), firewall, parental control, and coupling of protection options.

 

Multimedia Broadband

 

Wanadoo Multimedia Broadband is a new range of multimedia services launched in August 2005 for Wanadoo broadband customers, based on modularity. Customers first choose the Internet package that suits them best, then fill their basket with the multimedia services of their choice.

 

The Multimedia Broadband range includes the following services, the prices indicated being those in force in late 2005:

 

Broadband Internet Package:

 

512kb/s Internet for 24.90 euros including VAT/month (19.90 euros including VAT, promotional price) or “Internet Max” (up to 8Mb/s) for 29.90 euros including VAT/month (24.90 euros including VAT, promotional price) or “ Internet Max2+” (up to 18Mb/s) for 39.90 euros including VAT/month (29.90 euros including VAT, promotional price). Promotional prices at launch renewed from November 8, 2005 to January 18, 2006.

 

By acquiring a Livebox” (rentable for 3 euros including VAT/month), customers may also choose the multimedia services of their choice:

 

Digital television with “MaLigne TV (my line) for an additional 7 euros including VAT per month (offered for one year on subscription to a “bouquet TV TPS” or “Canal+”), also providing access to movie services and television on demand.

 

Unlimited Broadband telephone: for an additional 10 euros including VAT per month, this offer allows customers to have a VoIP additional telephone line and to make an unlimited number of calls to fixed local or national numbers.

 

Unlimited videophony: for an additional 15 euros including VAT per month, this offer allows customers to call and see their correspondents using a videophone connected to the “Livebox”. This is therefore both an unlimited telephone service and a videophone service.

 

Customers also receive support for their installation (with two free calls to technical support).

 

Customers subscribing to the “triple play” offer (Internet, Telephone, TV) received the promotional installation for 1 euro including VAT until January 18, 2006.

 

France Telecom also markets access to broadband independent of Wanadoo Internet access (“MaLigne” ADSL) and “MaLigne TV” service (16 euros including VAT/month) and “MaLigne Visio” (four offerings from 19.90 euros including VAT to 33 euros including VAT/per month) for non-Internet clients, on an ADSL line.

 

However, retail sales (ADSL “MaLigne” service) show a steady drop with the development of packaged services (ADSL access with subscription to an Internet service provider) which have more appeal to customers.

 

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The growth of multiservice offers has been rapid with 830 thousand VoIP customers and 200 thousand MaLigne TV clients at the end of December 2005 (150 thousand VoIP customers and 69 thousand MaLigne TV customers at the end of 2004).

 

Livebox”, a “multi-service gateway” at home

 

Launched in August 2004, “Livebox” is the heart of the broadband strategy of the Home division. Livebox is a household gateway connected to the fixed-line telephone socket, enabling various types of household terminals to be connected to broadband through various communication interfaces: Wi-Fi, Ethernet and Bluetooth. It is thus possible to:

 

  - connect several personal computers simultaneously and wirelessly to broadband Internet; use telephone over IP (VoIP);

 

  - receive television via ADSL, as “Livebox” can be linked to a television decoder unit; and play online with a games console.

 

It is equipped with a Bluetooth port which allows the use of a mobile phone. The Wi-Fi function is integrated and adjustable in order to keep up with changes in Wi-Fi standards, and includes a reinforced protection function. It is compatible with ADSL 2+ speeds and costs 3 euros including VAT per month to rent.

 

“Livebox” has been a huge commercial success. On December 31, 2005, the number of “Liveboxes” rented by France Telecom in France was as high as 1.6 million and its deployment has strongly increased in the second half of 2005.

 

“Liveservices”, new broadband services for the home

 

France Telecom has created a new universe of communication services with “Liveservices”. “Liveservices” are a range of innovative broadband services, that are used to connect home multimedia devices (fixed line or mobile telephone, videophone, camera, television, Hi-Fi stereo system) via broadband using the “Livebox”.

 

These “Liveservices” have been pre-marketed in the Hauts de Seine and Marseille areas since June 2005: “Livephone”, a mobile broadband telephone, allows customers to obtain information without turning on their computers, “Livezoom” allows customers to find out remotely what is happening at home using a wireless camera connected to the “Livebox”, “Live télésurveillance” is a partnership with a telemonitoring operator, “Livemusic” is used to listen to radio or MP3 files from a personal computer to the Hi-Fi stereo system, “Transfert Photo” is used to post photos taken with a mobile telephone on a Wanadoo photoblog via the “Livebox”, without using a computer.

 

Sales of “Liveservices” began on January 24, 2006.

 

New convergent services: fixed-mobile

 

In 2005, France Telecom launched convergent services between the Internet and mobiles, thus developing its integrated operator strategy:

 

  n   Family Talk”, launched in June 2005, an unlimited telephone service offer (7/24) within a closed group of users made up of a fixed line and three Orange mobiles belonging to the same home, reserved for the first 50,000 subscribers. For 39 euros including VAT per month, with an introductory offer of 29.90 euros for the first two months, all fixed line to mobile, Orange mobiles to each other and Orange mobile to fixed-line calls are included.

 

  n   Mes services perso” (my personal services), launched in December 2005, is an innovative offer that allows customers to access multimedia services from their Orange mobile handsets and on the Internet from the Wanadoo.fr portal: access to Wanadoo messaging, SMS transmission from Wanadoo.fr or Orange.fr portals, or from mobiles, instant messaging, synchronization of the mobile handset with a personal online Wanadoo address book (“Mes Contacts” – my contacts) or on Orange.fr (“Mon répertoire” – my address book).

 

4.3.3.1.1.4 Other consumer services

 

The other Consumer services include:

 

  - public phone and phone card services

 

  - information services

 

  - internet portals and e-commerce activities.

 

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Public phone and phone card services

 

With the growth of mobile telephones, public phone and phone card service activities are steadily decreasing.

 

This trend has led France Telecom to gradually reduce the number of public telephones as shown in the following table:

 

     2005      2004      2003
Public telephones (on December 31)    180,000      189,000      198,000

 

However, France Telecom maintained 116,000 telephones installed on public highways in the third quarter of 2005, of which 41,000 were installed as part of the Universal Service (which sets the equipment requirement at 1 telephone booth for local districts with populations of less than 1,000 and two booths for more).

 

The prices for calls made from public telephones are slightly higher than prices applicable to calls made from private telephones. The pricing grid for national calls (local, long-distance and fixed-line calls to mobile telephones within France) was amended in August 2004 in the following manner:

 

  - suspension of pricing relating to peak/off-peak time slots (in metropolitan France);

 

  - simplification of call time pricing; and

 

  - alignment of the send frequency of the first pulse (20s) and the send frequency of the subsequent pulses (45s) to mobiles with that of national calls.

 

The prices for international calls from public telephones were modified in August 2005 and the prices for calls from public telephones in French overseas departments to international fixed lines and mobiles were modified on October 22, 2005.

 

France Telecom allows its customers who wish to use payphones to pay by various methods. The most frequent method of payment is by “télécarte” (a prepaid phone card equipped with an electronic chip for exclusive payphone use, which comes in a range of two “Télécartes” with 50 and 120 Telecom Units). Other methods of payment are available: bank card and France Telecom cards, in which the cost of the call is charged to the customer’s fixed-line telephone bill, prepaid telephone cards with codes (including the France Telecom “Ticket Téléphone”).

 

Call services using cards, from any fixed-line telephone, are also offered: the France Telecom card allows a user to make calls from fixed-line telephones in France, from abroad (“France Direct” service) and from mobile telephones using the Orange and SFR networks to fixed-line telephones, mobile telephones and payphones; calls are billed to the fixed-line telephone account of the person owning the France Telecom card or to a bank card (“CB Phone” service).

 

“Tickets téléphones” allow users to make prepaid calls from France, from fixed-line telephones or public telephones, by dialing a prefix and a secret code. The market for this service is highly competitive, especially for international calls, which resulted in France Telecom lowering its prices in March 2005.

 

Telephone information services

 

2005 saw the implementation, under the auspices of ARCEP, of the process for revising the telephone numbering system for access to telephone information services:

 

  - the decision of ART (French Telecommunications Regulatory Authority) on January 27 dedicating a new numbering format using 118 XYZ numbers to access telephone information services, replacing the existing numbers.

 

  - the award, in June 2005, by drawing of lots, of new information numbers using 118 XYZ to different entities. Four numbers were awarded to France Telecom, 118 712, 118 711, 118 710 and 118 810.

 

  - on November 2, 2005, the commercial launch of 118 XYZ services, and the start of the transition period extending to April 3, 2006, when the “12” and numbers with a format other than 118 XXX can no longer be used commercially.

 

  n   New directory information services

 

As part of new regulatory and contract provisions, on November 2, France Telecom and Orange, backed by their experience in providing directory services, launched a complete range of new telephone information services, focusing on quality of service and customer relations as well as the transparency of the offer and rates.

 

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  n   the number “118 712” is an added-value operator service, available 24 hours per day, seven days per week, from fixed-line and mobile telephones at the price of 1.12 euros per call (except from payphones), not including the variable communication cost of mobile operators. It may be used to obtain:

 

  - up to three items of information, including fixed-line telephone numbers, postal addresses of businesses or individuals, mobile numbers and electronic addresses of customers who have chosen to subscribe for this service, reverse research (identification of names from telephone numbers) as well as the possibility of being connected with the desired correspondents.

 

  - mobile customers may receive confirmation via SMS containing information on the nearest subway station for the cities of Paris, Lyon, and Marseille. This service will be progressively enlarged.

 

Two other numbers, adapted to the specific needs of customers, complete the range of services:

 

  n   the number “118 710” is an innovative service using voice recognition and synthesis technology accessible from a France Telecom fixed line. Up to three items of information can be obtained per call. It is billed at a price of 0.56 euros including VAT from the first successful search.

 

  n   the number “118 810” is a service designed for businesses or offices that, for cost control, wish to block the call connection function. Up to three items of information can be obtained from a France Telecom fixed line. The cost is 1.12 euros per call.

 

  n   Universal service for directory enquiries

 

By decree of March 3, 2005, France Telecom was designated Universal Service provider for national directory enquiries for two years. In conformity with the transition procedures set by ARCEP, this national directory enquiries service via operators remains accessible by dialing “12” in the transition period, until April 3, 2006, at the latest.

 

The number “118 711”, started on November 2, 2005, is designed to fulfill the France Telecom universal service commitments. The basic service includes the provision of two separate items of directory information on the basis of a surname or corporate name and a region. The services are available from fixed-line or mobile terminals at a price of 0.90 euros including VAT, not including the communication cost that varies depending on the mobile operator.

 

Additional services are offered on a paid-option basis that enable customers from a France Telecom fixed line to:

 

  - be connected to the desired correspondent;

 

  - make more than one request for information (up to fourteen telephone numbers per call); and

 

  - request reverse searches (identification of a correspondent from a given telephone number).

 

  n   International directory enquiries

 

France Telecom also provides an international directory enquiries service via operator that is reached by dialing the number “3212”. This service provides two items of information in almost all countries throughout the world as well as being able to connect the caller to the required correspondent in numerous countries.

 

Portals and e-merchant

 

France Telecom represents France’s leading Internet access portal provider in terms of its number of visitors, with Wanadoo portals in France visited by 12.8 million Internet users in December 2005 (11.7 million in December 2004 and 11.0 million in December 2003) (source: Nielsen – Home & Work Panel).

 

Value creation on content and services is based on harnessing audience potential through two essential income sources:

 

  n   Online advertising, with an Internet advertising sales activity for the Wanadoo portal and a number of other sites on which advertising is managed by Wanadoo (Voila, Cityvox, Mappy, iFRANCE, EMW, Sports.fr). This enables advertisers to reach 66% of Internet users via the Wanadoo Advertising Network (source: Nielsen – Home & Work Panel).

 

  n   Fee-based services, with practical services: horoscopes, quizzes and IQ tests, “lonely hearts”, directories and classified advertisements. These services also include fun services: video-on-demand, games options (“Jeux Wanadoo” launched in June 2004 with more than sixty downloadable games, and “Option Juniors” with content packages for children), partnership with Microsoft on interconnected games consoles (Xbox Live), ring-tone, logo and music downloads.

 

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For pan-European campaigns, Wanadoo is also able to draw on a European partnership of portals, which include the “Web.de” portal in Germany and the “Libero” portal (Wind) in Italy. This network provides online advertising and direct marketing (emailing campaigns).

 

E-merchant business: “alapage.com”

 

Wanadoo’s e-merchant (or e-commerce) activities used to be carried out based on two sites: “Alapage.com” and “Marcopoly.com” have been incorporated by France Telecom into the Sales and Services France division. In order to strengthen the Group’s marketing capabilities on the French market, the activities have been merged and realigned under one dedicated brand – Alapage – which encompasses a comprehensive cultural, high-tech and leisure offering.

 

To do so, Marcopoly and Phenix Editions, which were fully-owned subsidiaries of Wanadoo e-merchant SA, were dissolved in January 2005, without liquidation, with all of their assets and liabilities transferred over to Wanadoo e-merchant, with this company becoming FT e-commerce in July 2005, trading under the Alapage brand.

 

Alapage’s business is benefiting from a favorable market context linked to the development of broadband in France along with growth in e-commerce. The alapage.com site was visited by 3.3 million single visitors in December 2005 (source: Nielsen/NetRatings).

 

4.3.3.1.2 Operator services

 

4.3.3.1.2.1 Relations with international carriers

 

Under payment agreements signed by carriers for international calls, France Telecom will be paid a fee by carriers that use its network to transfer their international calls to France and it will in turn pay a fee to use the networks of other carriers for calls made from France. The billing currency used is the SDR (Special Drawing Right), a basket of currencies dominated by the US dollar and euro (see section 3.3.3 “Risk factors”). Payments are made in the currency chosen by the creditor carrier.

 

These rates decreased significantly up until 2000. Since then, this trend has gradually slowed down, notably for France, other members of the European Union and the United States.

 

4.3.3.1.2.2 Interconnection services

 

French telecommunication regulations require France Telecom to provide for the interconnection of its switched public network with other operators for calls leaving the France Telecom network, or incoming calls from the networks of competing operators.

 

This sector is regulated by the French telecommunications regulator (ARCEP). Volumes exchanged between France Telecom and other operators are valued based on rates approved by this body.

 

For voice services in 2003, the reduction in call rates was set at 1% with respect to traffic exchanged at the local switch closest to the end customer, compared with a 6% reduction in 2002 and 7.5% in 2001, and 4% for traffic exchanged at regional switch level (16% in 2002 and 7.6% in 2001).

 

For the same services in 2004, the rate for traffic exchanged at the local switch closest to the end customer remained stable while the rate for regional switch level exchanges fell 2%.

 

In 2005, this rate remained unchanged for both local and regional switch traffic.

 

As regards the rate for volumes exchanged at the double transit level, this has not been covered by an ARCEP accreditation procedure since 2004.

 

4.3.3.1.3 Sales, distribution and customer service

 

The Sales and Services France division is responsible for customer relations on all of the Group’s products and services intended for general consumers and small and medium-size businesses.

 

The Enterprise Communication Services division handles very large national and international businesses, notably through Equant, for the rest of the world.

 

The Networks, Operators and Information Systems Division distributes France Telecom products and services to other carriers and telecommunications service providers.

 

Residential consumer goods are distributed via various channels, including:

 

  n  

a network of 700 France Telecom stores at the end of 2005 (663 at the end of 2004 and 620 at the end of 2003) spread throughout France. The program launched in 2004 to relocate and increase the density of the

 

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network of stores with a view to strengthening the Group’s commercial presence in town centers and shopping malls is bearing fruit, with an increase in the number of sales outlets and above all their proximity to clients. In this way, France Telecom is working to improve its presence alongside its customers.

 

  n   France Telecom’s in-house customer contact centers, specializing in sales and remote customer relations, manage customer accounts and provide after-sales or remote assistance services. These centers cover mobile, fixed and Internet products.

 

  n   self-service channels based on a voice portal (the “3000” dial-up service) and an Internet portal (“francetelecom.com”), This portal allows customers to access the dedicated “customer section” for all of the France Telecom Group’s products and services. It also enables customers to discover the various solutions offered by France Telecom, Orange and Wanadoo and order them directly online. Lastly, this dedicated section gives customer various options for tracking their bills electronically in line with their needs.

 

  n   a network of local retailers (tobacconists and newsagents), mainly distributing prepaid fixed line products (telephone cards, “tickets telephones”) and prepaid mobile telephone products (top-up airtime products).

 

The Sales and Services France Division provides extensive customer services including an after-sales enquiry service that is available free of charge 24 hours a day, seven days a week (the “1013”/”1015” dial-up services), on-site technical assistance and a customer support service in connection with their use of France Telecom products and services (installation, assistance). The Internet portal also enables customers to have access to a wide range of information to facilitate their use of products, allowing them to configure their equipment and correct certain problems online.

 

Corporate customers, other than key accounts, are also handled by the Sales and Services France division on voice, mobile and data transmission operations, with services delivered through a network of 11 company agencies covering the whole of France. These agencies have dedicated sales representatives for a given portfolio of clients as well as a network of telephone advisers who are on hand to inform customers about the products and services available, the status of their orders and the quality of service on their facilities. In addition, France Telecom’s Internet site makes it possible for businesses to manage their contracts and order additional products or services in real time.

 

4.3.3.2 Poland

 

Fixed-line and Internet access services

 

TP Group offers a range of fixed telephony services including local, long-distance and international calls as well as fixed to mobile calls and narrowband and broadband Internet access.

 

From October 2002 to March 2003, TP rolled out an active digitalization program aimed at providing the customers with the benefits of digital networks and ISDN access. At the same time, the number of analog lines increased, paving the way for the further development of Internet access services and ADSL. By the end of 2005, TP had more than 11 million access lines.

 

In order to stabilize the fixed voice revenues, TP Group has developed a new tariffs plan (NTP), with either a discount or free minutes call-time at the weekend and during off-peak hours, and aiming to encourage customers to switch over from standard pricing packages to monthly packages generating higher revenues. TP Group strongly promoted this new tariffs plan over 2005.

 

In addition, over the first half of 2005, TP Group introduced a free-call service for 60 minutes of local and national calls, further strengthening the appeal of its new tariffs plan. As such, these offers became the packages most frequently taken out by TP’s customers in 2005, and the majority of customers who were previously on standard subscriptions have now changed over to the new price plan. By the end of 2005, more than 3.5 million customers had subscribed for the tariffs plan. The percentage of revenues represented by monthly packages out of the total amount of fixed telephony revenues came to 46% at the of end 2005.

 

The overall level of revenues (ARPU) among subscribers with the new price plan is higher than for standard packages due to the fact that these subscribers generate a higher level of traffic and make much less use of the preselected numbers’ service.

 

The increase in revenue streams from broadband traffic represents a key strategic objective with a view to stabilizing revenues on the fixed business. In 2001, TP Group launched its ADSL broadband Internet access

 

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service under the neostrada tp brand. The broadband Internet customer base has grown very quickly: 14,000 customers at December 31, 2002; 134,000 at December 31, 2003; 631,000 at December 31, 2004 and 1,144,000 at December 31, 2005.

 

At the end of December 2005, around 93% of TP Group lines were eligible for ADSL connections, offering strong potential for future growth.

 

The current ADSL offering has been ramped up from a first access based on 128 kbps to higher speeds of up to 6,144 kbps. The most widespread ADSL option is neostrada tp at 128 kbps, which was introduced in 2004. In order to step up the migration over to more advanced products and increase the unit revenues generated, TP Group launched a program to promote ADSL at 512 kbps in June 2005 and introduced a new 256 kbps option in August 2005. In October 2005, TP launched a special offer for customers taking out a contract for 24 months with a monthly subscription of 1.22 złoty (around 0.30) for the first six months. TP aims to continue migrating its ADSL customers over to the highest neostrada tp options over the next two years in order to provide them with new multimedia services that require greater bandwidth.

 

In December 2005, TP launched Livebox tp based on the Livebox model, with a Wi-Fi connection. In the near future, the Livebox tp product will also be able to offer customers voice-over-IP telephony and ADSL-based television services.

 

In 2005, TP Group developed its web site (“tp.pl”) with a range of new features such as customer access to their personal accounts, enabling them to order products online or check the status of their payments.

 

The same year, TP Group bought out the minority interests in Wirtualna Polska, which runs Poland’s second most popular internet portal (“wp.pl”) in terms of visitors.

 

Furthermore, the Internet subsidiary controlled by TP Group – TP Internet – offers contact services centre (telesales, help desk, infolines) as well as an electronic signature.

 

Business services

 

In the Enterprise Communication Services segment, TP Group launched a number of new fixed telephony services in 2005, lowered installation fees, rolled out a new per-second billing plan in addition to new call packages for business clients.

 

The new services have been designed in order to move traffic revenues over to access revenues, while increasing the level of satisfaction among its customers and building their loyalty. In 2005, TP Group developed a new VOIP technology-based offering for corporate customers. It results in the constant increase of customer satisfaction indicator for all voice services.

 

TP Group offers complex data transmission solutions for businesses and provides reliable and secure connections for business customers in order to connect up their various sites located in Poland and elsewhere. TP Group also offers a range of additional services such as: permanent virtual connections, virtual private networks, Internet and Extranet access, and traffic management. The service level agreement for data transmission guarantees a constant level of quality for transmission, based on various contractual indicators (repair time, maximum number of faults on data transmission, etc.).

 

Internet access services for business customers are provided in a range of options based on frame relay transmission, ATM protocols and the xDSL technology.

 

At the end of 2004, TP Group, in conjunction with Equant, launched its IP VPN service – one of the most technologically advanced services available on the Polish market.

 

In 2005, TP Group was the first company in Poland to introduce a new type of service – Business Everywhere – enabling business users to connect up to their IT networks from anywhere in Poland, with a wide range of access options, from switched access to ADSL and the use of EDGE and UMTS technologies.

 

Lastly, TP Group represents one of Poland’s leading leased line providers. These lines may be used by clients for their own needs or for the provision of telecommunications services for their own customers. At present, such lines are primarily used by Polish mobile telephone network providers, the Polish Ministry of Defense, the Polish Interior Ministry and other Polish authorities, as well as by financial institutions and Internet access providers. The price for leasing lines is based on two factors: the number of end users and the monthly subscription rate (which depends on the capacity provided and the type of network used). TP Group’s strategy aims to increase the network’s transmission capacity, while decreasing the cost of use for customers.

 

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4.3.3.3 Rest of the world

 

Europe

 

Outside of France and Poland, France Telecom’s subsidiaries from the Home communication services segment are: France Telecom Espaňa, an alternative operator in Spain (formerly Uni2) and an Internet access provider under the Wanadoo brand; Wanadoo UK, an Internet access provider operating under the Wanadoo brand in the United Kingdom; Wanadoo Nederland, an Internet access provider in the Netherlands. In line with the NExT program, these activities will be marketed under the Orange brand.

 

In all of these countries, the Group is focusing primarily on unbundling its services, developing broadband packages on ADSL in addition to convergence solutions made possible by France Telecom’s position as an integrated operator in each country.

 

  n   Wanadoo UK launched its unbundling offering in 2005. In November, for customers in unbundled areas, it launched an Internet connection service offering up to 8 Mbit/s for £14.99 the first six months and then £17.99. Customers in areas that have not been unbundled are able to enjoy speeds of up to 2 Mbit/s.

 

   For other customers, Wanadoo UK offers a 2 Mbit/s broadband Internet package for £17.99 as well as its “Pay as you go” free access ranges and “Anytime” packages for narrowband Internet access.

 

   “Wireless and Talk”, with a second IP telephone line behind the Livebox for GBP 4 per month (with six months free), launched in the first half of 2005, has been a resounding success. At December 31, 2005, Wanadoo UK had around 80,000 active customers on this product.

 

   A combined offering with Orange UK has been available since the third quarter of 2005, with an exclusive offer for Orange customers to sign up for broadband Internet access with Wanadoo for £9.99.

 

  n   In Spain, France Telecom España is continuing to develop its unbundling program and has already migrated 29% of its ADSL customer base over to unbundled lines.

 

   It offers narrowband and ADSL-based broadband Internet services and represents Telefonica’s main rival in Spain for Internet access. Drawing on its position as a fixed operator and Internet access provider, France Telecom España is offering “Naveghable” services combining Internet access with switched pre-selected telephone access. In this case, its Internet access offerings are based on a broadband package with ADSL (up to 20 Mbit/s for 20 euros including VAT up until January 31, 2006 and then 42 euros per month in unbundled areas), an innovative pay-as-you-go ADSL access service (for 6 euros including VAT per month plus 0.03 euros per minute), or a narrowband package (for 9.9 euros including VAT per month). The majority of France Telecom España’s broadband customers have taken out a “Naveghable” package. At December 31, 2005, France Telecom España had one million active fixed telephony customers, including “Naveghable” clients.

 

  n   In the Netherlands, Wanadoo Nederland focused its efforts on deploying unbundled services in 2005, with the launch of a service in September combining an ADSL Internet access with speeds of up to 20 Mbit/s (ADSL2+) with unlimited IP telephony for 27.50 euros (including VAT) for the first year (and then 29.95), including Livebox rental costs.

 

In all the countries in which it operates, the Group distributes its access offering through a range of distribution channels, with their payments depending on the services provided:

 

  n   in department stores, retailers and stores specialized in IT or telecommunications;

 

  n   by distributing free installation CD-ROMs (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 the United Kingdom, this sales network comprises around 3,550 sales outlets, including 1,500 for Lloyds Pharmacy and 264 for Orange.

 

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The following table presents a detailed breakdown of the Internet customer base for each type of service (in thousand subscribers) for the European countries in which France Telecom is present (excluding France and Poland):

 

Country    Offers      December 2005      December 2004      December 2003
United Kingdom    Narrowband      1,145      1,790      2,423

  
    
    
    
     Broadband      906      569      158

  
    
    
    
     United Kingdom      2,051      2,359      2,580

  
    
    
    
Spain    Narrowband      728      1,059      1,310

  
    
    
    
     Broadband      563      379      190

  
    
    
    
     Spain      1,291      1,438      1,500

  
    
    
    
Netherlands    Narrowband      116      176      255

  
    
    
    
     Broadband      506      454      288

  
    
    
    
     The Netherlands      622      630      543

  
    
    
    
Total    Narrowband      1,989      3,025      3,987

  
    
    
    
     Broadband      1,975      1,402      636

  
    
    
    
     Total      3,964      4,427      4,624
  Source: France Telecom

 

Outside Europe

 

Latin America

 

  n   France Telecom indirectly holds a 25% equity stake in Intelig, an alternative fixed line telecoms operator for long distance national and international calls in Brazil. This operator began operations in the first half of 2000. This specific shareholding is likely to be sold.

 

Asia and Oceania

 

  n   France Telecom signed a partnership agreement in July 1997 with VNPT, a Vietnamese fixed line telecoms operator. Under the terms of this agreement, France Telecom provides financial, technical and management assistance in relation to a project to install new lines east of Ho Chi Minh City.

 

  n   In April 2002, France Telecom set up Tahiti Nui Telecom in partnership with the Office des Postes et Télécommunications de Polynésie française (OPT), in which it holds a 34.0% stake. This company offers telecoms services for international calls from French Polynesia to 54,000 fixed line customers of OPT as of December 31, 2005.

 

Middle East and Africa

 

  n   France Telecom owns a 51% controlling interest in Côte d’Ivoire Télécom, which is the national telecommunications operator in the Ivory Coast. CI Telecom provided fixed line telecoms services for 244,000 lines as of December 31, 2005 compared with 225,000 lines as of December 31, 2004 and 328,000 lines at December 31, 2003. CI Telecom’s business is affected by local current events, which led to the full write-down of this asset as of December 31, 2004.

 

  n   France Telecom holds a 42.3% interest in Sonatel, which was the very first telecommunications operator in Senegal. Sonatel provided fixed line telecoms services to 267,000 lines at December 31, 2005, compared with 245,000 at December 31, 2004 and 229,000 at December 31, 2003.

 

  n   France Telecom indirectly holds a 40% stake in Jordan Telecommunications Company, which provided fixed telephony services on nearly 628,000 lines at December 31, 2005, compared with 638,000 lines at December 31, 2004 and 632,000 lines at December 31, 2003. Jordan Telecommunications Company was floated on the Amman (Jordan) stock market in 2002.

 

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  n   France Telecom indirectly holds a 40% stake in Mauritius Telecom, the historic operator in Mauritius. Mauritius Telecom operated approximately 357,000 telephone lines at December 31, 2005 compared with 354,000 lines at December 31, 2004 and 348,000 lines at December 31, 2003.

 

4.3.4 ENTERPRISE COMMUNICATION SERVICES

 

The Enterprise communication services segment groups together services for businesses in France and worldwide (Equant).

 

4.3.4.1 France

 

Enterprise communication services in France cover business fixed line telephony services, business network services and other business services.

 

4.3.4.1.1 Business fixed line telephony

 

The fixed line telephony services include: i) access and access services, ii) telephone calls, iii) online services.

 

4.3.4.1.1.1 Access and access services

 

Access to the telephone network is provided via the telephone line, for which customers are charged fixed access costs when lines are installed, in addition to a monthly subscription for line maintenance and the basic services supplied (listing in the telephone directory, access to high-quality customer services, use of France Telecom’s exclusive services such as voice mail, restricted calling line identification on a call-by-call basis and itemized billing). New services are added on a regular basis.

 

  n   Connection to the telephone network

 

Charges for being connected up the telephone network include a basic connection charge, callout costs for technicians, if required for the installation of the line, and any specific installation costs linked to the customer’s configuration.

 

For example, callout costs are charged in the following three cases:

 

  - no lines are connected to the customer’s premises;

 

  - the customer requests extra lines or sockets; and

 

  - the internal lines servicing the customer’s premises are defective.

 

  n   Subscription to the telephone service

 

France Telecom offers a range of subscriptions designed to meet the various needs of professional and business customers.

 

The differences primarily concern service commitment levels (guarantees relating to the time required to restore services) and the availability of services linked to the line (for example, number identification or the possibility of publication in professional directories).

 

In April 2004, the range of business contracts was further developed, with the addition of a new contract – Professional Services Contract – that automatically includes a vast range of services together with a choice of two additional services to be selected, for example, from caller name identification, a voice-recognition address book (“Mes Contacts”), a call transfer, or a call-waiting service.

 

  n   Services

 

For corporate customers, France Telecom is able to offer shortened numbers, toll-free numbers, shared-cost numbers, call and telephone-conference management, invoice management, new-number messages, the option to retain the same number, and private virtual networks with shortened numbers in addition to network management services. The rates for these services are adjusted in relation to the various categories of customer’s needs.

 

  n   Numéris (ISDN)

 

France Telecom has been offering its ISDN (integrated services digital network) service to professional customers since 1987, under the Numéris brand. Numéris provides voice, data and image transmission at

 

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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 for Numéris calls are the same as for standard calls.

 

Numéris Accès de base” (basic access) enables customers to connect up PBXs, and use of PBX telephony facilities has continued to grow. Numéris Accès Primaire (primary access) is intended for the largest business sites. Since December 2001, France Telecom has offered “Numéris Grand Site”, a broadband fiber-optic voice connection that allows customers to access a wider range of services with a rate that reduces as use increases.

 

4.3.4.1.1.2 National and international calls

 

Telephone calls are billed either per call based on their duration or on a package basis.

 

France Telecom has continued to develop its package plans and created new diversified pricing packages, including premium flat rate offers for unlimited calls, designed to meet the various user profiles and increase customer loyalty.

 

  n   Calls billed on the basis of their duration under the reference price scale

 

When telephone calls are billed per call, the price includes a fixed cost and a price 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 call connection cost, calculated per second as of the first second. The part billed on a time basis is based on a variable price that depends on call destinations, with a normal rate and a discount rate depending on the time of day.

 

Reference price scale

 

The Enterprise Rates correspond to the basic rates for business and professional clients with Business Contracts, Business Services Contracts, Business Presence Contracts and Business Numéris Contracts. Since it was introduced at January 1, 1998, the Enterprise Rate has seen a number of pricing and geographical changes, with the latest incorporated in May 2005. The Enterprise Rate works with discounted offers tailored to each client.

 

The Balance Rate offers a specific pricing structure including a fixed call connection charge for each destination in addition to a price per second depending on the pricing region in question.

 

The French telecommunications regulator ARCEP has defined a plan to reduce fixed-mobile call charges that has been reflected in France Telecom’s rates. In January 2005 and January 2006, as well as in 2004, France Telecom reduced its rates for calls to Orange, SFR and Bouygues Télécom mobiles.

 

  n   New price packages

 

The range of monthly local call plans for professionals includes: the “Forfait Local Pro” (local professional package) and the “Forfait Local PME” (local call package for small and medium-size businesses), a range of national monthly packages with “Forfait France Pro” and “Forfait France PME”, package plans covering calls to mobile telephones (since October 2003, with an extension of the range in January and September 2004). In September 2004, the prices for these professional packages were lowered. The “Forfaits Pros Europe et Amérique du Nord” (European and North American pro package) was launched in May 2004.

 

At the end of the first half of 2005, France Telecom:

 

  (i) enhanced its “Illimité Pro/PME” package.

 

The analog line-based “Illimité Pro/PME” (unlimited call package for professionals and small and medium-size businesses) package now offers customers unlimited calls 24 hours a day and seven days a week to any landlines in Metropolitan France for 30 euros excluding VAT per month per line, with 40 minutes of calls to all mobiles included, irrespective of the operator in Metropolitan France.

 

The Illimité Pro/PME package on a basic Numéris access now offers customers the opportunity to subscribe for unlimited calls 24 hours a day and seven days a week to any landlines in Metropolitan France for 60 euros excluding VAT per month per access, with 80 minutes of calls to all mobiles included, irrespective of the operator in Metropolitan France.

 

Up until December 31, 2005, new subscribers were able to benefit from an offer for two months at a promotional price of 20 per month per line instead of 30 for the “L’Illimité Pro/PME” package on analog lines or 40 per month per access instead of 60 for “L’Illimité Pro/PME” on a basic Numéris access.

 

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(ii) Rates for professional/SME Europe and North America packages have been reduced by up to 22%. This represents a range of 10 call rates making it possible to call any landline in the Near Europe and North America regions. These calls account for over 50% of the volume of minutes for calls outside of France. These rates apply 24 hours a day, seven days a week, without any time credit or connection charges. Calls are therefore billed to the nearest second.

 

At the same time, customers using the professional/small and medium-size business Europe and North America packages can also take out the “L’Illimité Pro/PME” package.

 

(iii) Fixed-line rates have been reduced for professionals and very small businesses with the new Plans Pro packages. These offer a range of attractive price plans, designed specifically for professionals and very small businesses. The aim is to enable customers to benefit from highly attractive rates for all their calls from landlines to any landline or mobile in France and abroad. Customers are able to select their level of consumption from the six options available in this range, from 10 up to 100. Their calls are charged at the corresponding price for the call plan selected with a minimum monthly charge corresponding to this plan.

 

To meet the expectations of small and medium-size businesses, France Telecom combines the following services with its various plans:

 

  - discount prices on calls to pre-selected numbers;

 

  - distinct billing for “New Number Message” and “Keep-Your-Number” services.

 

France Telecom also offers a company telephony service based on a Virtual Private Network (“Atout RPV”) for key account companies. This plan is based on:

 

  - a price component, “Atout RPV Tarif”, which offers discounts on traffic within the company based on call volumes;

 

  - a service component, “Atout RPV Service”, which delivers the main private networking functionality for the company’s sites throughout France.

 

  n   Convergence

 

France Telecom launched its “unified VPN” service in November 2003, a first convergent fixed/mobile telephony solution based on a Virtual Private Network. This plan offers a set of homogeneous and convergent business telephony services (private numbering plan, call filtering, transfers, management and additional billing services, web administration) on fixed and mobile telephones, combined with price offers on calls from fixed or mobile telephones. It is especially designed for small and medium-size businesses or small independent subsidiaries of major groups.

 

In 2004, France Telecom continued to enhance its range of Internet Protocol (IP) telephony solutions with the launch of two new turnkey services for the small sites of large businesses and for small and medium-size businesses and industries (the e-telephony service for access and the e-telephony Internet pack) in addition to tailor-made services for large companies and multinationals.

 

In 2005, France Telecom continued to capitalize on its positioning as an integrated operator, offering convergent services such as the Business Talk range for small and medium-size businesses and industries, the first “2–in-1” offer for convergent services on the French market, with integrated fixed and mobile services. The Business Talk pack simplifies the management of fixed and mobile telecoms, while making it easier for customers to use their fixed and mobile telephones thanks to a simple and attractive pricing plan, call analysis tools and a unified fixed and mobile voicemail service for users.

 

France Telecom is able to offer the following services for small and medium-size businesses:

 

  - Business Pack IP Centrex, which offers all the functions of a PBX without having to have any such equipment onsite, includes various convergent services such as a unified messaging system, while making it possible to keep telephone numbers and prioritize voice flows;

 

  - Business Talk IP PBX, which combines the provision of equipment with consulting and integration services for IP communications systems with, if necessary, the integration of convergence services such as the unified messaging system;

 

  - Business Pack Internet, which is designed for companies that want to keep their PBX or IPBX onsite.

 

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The range of services available for multi-site large businesses and multinationals has also been enhanced with:

 

  - Business Talk IP PBX, which combines the provision of equipment with consulting, integration and operational services for IP communications systems, with the option for total delegation of sets to France Telecom. It is important to note that this solution is independent from the virtual private network provider used;

 

  - Business Talk IP, which includes PBX and IPBX connections up to the IP VPN network, unlimited internal voice traffic, external voice traffic managed by France Telecom, the option to keep telephone numbers, and access to emergency services on sites equipped only with IP handsets, an Enterprise quality of service, centralized voice management and personalized reporting charts.

 

4.3.4.1.1.3 Online services

 

The Audiotel service is based on offering numbers for calls to a kiosk service (e.g.: “892” number), part of the revenues from which are paid back to the service provider company. In 2005, France Telecom’s traffic levels were down 6% after an increase of 1.7% in 2004 and 0.4% in 2003.

 

In May 2004, France Telecom launched its “Numéros Magiques” service, with a new range of telephone numbers that are very easy to remember. This service enables corporate customers to stand out in their customer relations by highlighting how easy it is to contact them and showcasing their brand.

 

4.3.4.1.2 Enterprise network services

 

Enterprise network services include i) infrastructure services, ii) managed data services, iii) mobility solutions and iv) innovative services offering high value-added.

 

4.3.4.1.2.1 Infrastructure services

 

  n   Leased lines

 

France Telecom is able to offer its professional and business customers leased lines that are either digital (digital Transfix lines) or analog. At December 31, 2005, France Telecom had around 196,000 leased lines in France, compared with approximately 245,5000 at December 31, 2004 and 291,500 at December 31, 2003). Although the total number of lines leased by France Telecom has decreased since 1997, its total transmission capacity has increased considerably. Leased lines are gradually being replaced by DSL technologies. At December 31, 2005, DSL and leased lines accounted for 67% and 33% respectively of access points for data transmission services, compared with 51% and 49% respectively at December 31, 2004.

 

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 rates for France Telecom’s leased lines have steadily fallen each year since 1998, with this reduction seen on both digital and long distance services.

 

  n   DSL business, satellite and Wi-Fi services

 

DSL business services make it possible for the various sites of a company such as regional branches, maintenance sites and commercial offices, to be interconnected based on DSL technologies. At December 31, 2005, some 77% of business sites in France were connected up to the Internet using ADSL, compared with approximately 63% at the end of 2004 and 45% in 2003.

 

For areas that are not connected up to DSL, France Telecom has a wide range of access options for broadband Internet via satellite, Wi-Fi and WiMax and provides, in conjunction with the local authorities, broadband coverage to districts in rural areas. For instance, France Telecom is able to offer the Pack Surf WiFi, an alternative broadband Internet access solution for local authorities and businesses located in areas without any ADSL coverage.

 

These solutions are now available throughout the whole of France, supplementing DSL coverage.

 

  n   Fiber-optic services

 

France Telecom has been using fiber-optic cable at the heart of its national network for several years now. It is also the medium that is generally used to connect the sites of companies that strongly contribute to a value chain production process and that represent important nerve centers, such as their head office, administrative center, research and development center, regional offices and main production sites.

 

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Transport services on fiber-optic cable are available throughout France for interconnecting the local networks of small and medium-size companies, remotely backing up the databases of large companies or supporting collaborative engineering applications between subcontractors and their customers. They offer speeds of up to several gbps as standard.

 

Short-distance interconnection needs are covered in all towns with a population of 10,000. France Telecom also offers a range of historical services such as SMHD, MultiLAN and InterLAN. The Intracité product, which is intended for local authorities, has continued to evolve and be adapted to new technologies.

 

France Telecom is pursuing efforts to develop its new generation range of very high-speed services, with the deployment of the Giga Ethernet technology making it possible to achieve connection speeds of up to 10 gbps.

 

In 2004, France Telecom launched a new plan for equipping the country with broadband for the benefit of all company sizes. This plan aims to connect business parks (zones d’activités économiques) up to broadband and very high-speed broadband services thanks to fiber-optic connections in certain targeted areas.

 

In November 2005, France Telecom announced the launch in France of the Ethernet LINK interconnection service for multi-site large businesses with data centers. This enables them to interconnect their key sites (head office, business centers, R&D centers) with their data centre and transport information flows for all of the company’s applications:

 

  n   business-critical real-time flows (flux legacy, ERP, CAO, PAO) ;

 

  n   voice flows for traditional telephony and ToIP/VoIP ;

 

  n   data flows for professional use (messaging system, Internet, Intranet, groupware applications).

 

Drawing on France Telecom’s optical network spanning two million kilometers of fiber optics, Ethernet LINK is available throughout metropolitan France.

 

In line with moves to step up the deployment of very high-speed broadband services in 2,000 business parks, in October 2005, France Telecom announced the launch of its guaranteed symmetrical 2 Mbit/s broadband access service for corporate clients based on the same price throughout France, including the Business Internet access and IP VPN services available since December 1, 2005:

 

  n   Internet access, with a guaranteed speed of 2 Mbit/s end-to-end on the network and a guarantee to restore access in the event of an incident, enables symmetrical connections to the Internet for sending and receiving large email files, Internet access to shared areas, intranet sites or any applications online. These include security, backup, shared messaging, domain name and hosting services, specially adapted to the needs of corporate clients.

 

  n   Access via an IP VPN, with guaranteed speeds and service restoration times, enabling multi-site businesses to optimize IT exchanges for both companies and local authorities, including voice over IP and intra-company calls. The organization’s IT network can also be accessed by mobile users thanks to the Business Everywhere solution.

 

4.3.4.1.2.2 Managed data services

 

Data transmission operations primarily involve data communication services provided to customers in France and data-communication services provided outside of France and marketed in France by France Telecom to multinational companies based in France, under an exclusive distribution agreement with Equant.

 

The Enterprise IP network serves as a platform for a wide range of services, including IP VPN, Internet access services, email, hosting and security.

 

France Telecom is able to offer its customers various types of services:

 

(i) leased lines are gradually being replaced by DSL technologies that make it possible to offer customers Internet (IP network) or Intranet (VPN) access services. Various services are available, with customers using the Group’s Frame Relay, X.25 or Global Intranet services progressively migrating over to Intranet-enabled solutions such as IP VPN and Oléane VPN. France Telecom also offers Internet services through Oléane Open and Oléane Power.

 

(ii) Internet access services that include access to the companies’ dedicated backbone network, which is interconnected with the global Internet via the core of France Telecom’s long distance network.

 

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4.3.4.1.2.3 Mobility solutions

 

In 2004, France Telecom launched an integrated range of itinerant-user services for corporate customers called “Business Everywhere”. These services enable unified itinerant-user access by linking all the France Telecom Group’s networks together. They include user telephone support services, a single bill and secure access. The France Telecom Group further strengthened this range with the launch of Business Everywhere for PDAs in 2005. Business Everywhere is available via a dedicated user interface that can be accessed from any network (WiFi, ADSL, GPRS, Edge, 3G or STN) from any PC or PDA, making it possible to access the client company’s messaging systems and business applications.

 

At December 31, 2005, France Telecom had 408,000 Business Everywhere users in France, representing an increase of 27% in relation to December 31, 2004.

 

4.3.4.1.2.4 Innovative services with high added value

 

France Telecom is developing a range of innovative services with high added value in order to:

 

  - accompany its customers in the transformation of their communications systems over to IP;

 

  - meet their needs in terms of security and the management of their business-critical applications, which require 24-7 availability;

 

  - offer its customers a range of services with a view to designing, building and managing their service platforms.

 

(i) Integration services. France Telecom offers end-to-end integration services ranging from WAN to LAN, PBX, and even the client’s handsets. In line with moves to accompany its customers in their migration over to IP and their use of the new systems, France Telecom is implementing a range of solutions to enable businesses to progressively migrate conventional PBXs over to leading-edge IP communications services, including coherent and global service level agreements (SLAs). France Telecom is able to provide integration services through onsite teams and online support solutions.

 

(ii) Management of clients’ business-critical applications. In line with the convergence of telecommunications and information systems, France Telecom is able to offer services linked to information systems by positioning itself on critical applications.

 

France Telecom accompanies clients on highly critical communicating service platforms: messaging system, security, customer relations management platforms, machine to machine, groupware tools. France Telecom is able to host, manage and operate these platforms on behalf of clients, offering ASP-mode applications for small and medium-size businesses and local authorities.

 

Thanks to the interbank exchange platforms hosted by its subsidiary SETIB, France Telecom is able to offer secure flow management, dynamic virtual card and telepayment services.

 

France Telecom also offers a range of tools for healthcare professionals enabling them to implement secure third-party payer systems. Indeed, Almerys operates information exchanges between healthcare professionals, mutual insurers, welfare agencies and insurance companies.

 

In November 2005, France Telecom launched Oléane Back-up, a turnkey online backup solution that can be integrated into its secure IP network and Internet services for businesses. Oléane Back-up makes it possible for small and medium-size businesses to automatically back up their data in total confidentiality at two geographically-remote data centers.

 

(iii) Customer relationship management. France Telecom has a wide range of corporate customer services for managing incoming and outgoing contacts (toll free and special rate numbers). Indeed, France Telecom offers a range of tailor-made multi-channel contact solutions designed to enable businesses to progressively manage all of their customer contacts irrespective of the means of communication used (telephone, fax, email, chat, SMS, call-back, virtual call centers, voice-recognition services). France Telecom is supplementing its range with a turnkey offering for small and medium-size businesses.

 

(iv) Professional services. France Telecom offers its customers a range of services to enable them to evaluate, design, build and manage their service platforms with one dedicated contact. These support services range from the audit phase through to advice on design, implementation and operations and the complete outsourcing of these solutions. For example, France Telecom is able to carry out LAN audits or onsite evaluations for its customers.

 

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Total or partial outsourcing of company communication services. This activity involves:

 

  - transforming, migrating and operating all or part of companies’ fixed or mobile communications services – voice, data, image – in order to provide a highly effective global communications infrastructure while simplifying management and providing end-to-end service-level agreements;

 

  - integrating the entire range of innovations in terms of uses and technologies for the client throughout the contract in order to optimize its communications infrastructure and enable it to differentiate itself in relation to its own customers;

 

  - accompanying these solutions with a range of services, from advice to deployment and assistance.

 

Over the last two years, France Telecom has won several contracts for the total or partial outsourcing of company communication services.

 

4.3.4.1.3 Other business services

 

Other business services concern broadcasting services in addition to services for financial sector businesses, provided by Globecast and Etrali respectively.

 

Globecast

 

France Telecom offers radio broadcasting services through GlobeCast. GlobeCast has worldwide reach with its 21 offices and 15 technical centers broadcasting video and multimedia content on its satellite and fiber-optic network on behalf of television and radio broadcasters, businesses, government institutions and sales outlets networks. GlobeCast is able to offer “ingest” services that make it possible to digitalize and distribute content on all types of network or platform, such as satellite television, cable networks, mobile video, ADSL TV and even streaming on workstations.

 

Etrali

 

One of the global market leaders according to its estimates, Etrali provides connectivity solutions, systems and services designed to enable the international financial community to manage its voice and data communications between trading rooms and their integration into the client company’s information system. Etrali is the main partner of more than 1,600 trading rooms in 45 countries. Its customer base is primarily made up of banking institutions, financial companies and brokers and, to a lesser extent, international industrial businesses and companies linked to the transportation of goods and people, security and energy. Etrali’s strategy for providing integrated communications solutions for the financial industry is based on the following three offerings:

 

  n   Etradeal systems and terminals: Etrali allows its clients to choose and maintain control over their technology by offering them a secure, rapid and reliable trading platform compatible with the TDM and/or IP environments thanks to its Etradeal system;

 

  n   Etr@net connectivity service: Etrali offers its customers and partners a range of secure voice and data transmission solutions, making it possible to interconnect several sites via TDM or IP gateways while ensuring a unified administration and supervision system, and offering traders the possibility of being able to find their usual working configuration whichever site they may be working out of;

 

  n   service offering: Etracare makes it possible to manage all of the phases in the communications platform lifecycle, from its design through to its development and deployment, maintenance and administration.

 

4.3.4.2 Global business services

 

The France Telecom Group’s global business services are provided by Equant and its subsidiaries.

 

Thanks to its portfolio of solutions, Equant is recognized as one of the market leaders for international telecommunications services for multinational businesses (source: Gartner). Indeed, Equant’s worldwide communication network and strategic partnerships enable it to provide services to its customers around the world. At December 31, 2005, Equant believed that it offered an unparalleled level of regional coverage. On this same date, Equant was running its customer services out of three main centers based in Rio de Janeiro (Brazil), Delhi (India) and Cairo (Egypt), offering a range of support services 24 hours a day, seven days a week for all of its customers worldwide. At December 31, 2005, Equant offered local support in 166 countries or territories (source: Equant).

 

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Equant combines its expertise on network services with a broad range of value-added services, making it possible to provide global, integrated and personalized communications solutions. These solutions are based on network services that enable users/employees to access their information systems, applications and messaging systems. Network services include conventional data transmission services (ATM, Frame Relay) as well as end-to-end IP services. Equant’s network services notably include the MPLS IP VPN solution, which was being used by over 1,300 client companies at the end of December 2004 and 2005 (compared with around 1,000 at the end of 2003 and 700 at the end of 2002) and was available in 146 countries and territories at the end of 2005 (compared with 146 at the end of 2004 and 142 in 2003 and 2002). Equant’s networks transmit data, voice and video.

 

Equant ramped up and harmonized the connectivity of its customers in 2005, even for their smallest sites, with the launch of its range of Small Office Solutions. These solutions are based on three levels of DSL services designed to enable customers to improve performance while optimizing the level of support that they require at their various sites thanks to their global virtual private network.

 

Equant also offers a range of management tools to enable its customers to control and optimize network performance and availability. Since 2005, Equant has rolled out a general service aimed at optimizing network performance (Application Performance Analysis), enabling its customers to:

 

  n   improve network design,

 

  n   accelerate network installation and deployment,

 

  n   look into network development scenarios,

 

  n   build up better knowledge of their network infrastructure.

 

Since 2003, in response to changes in customer demands, Equant has provided more value-added services in the form of personalized solutions incorporating security, messaging systems, groupware, maintenance and customer-relations management, initialized by consulting phases. These personalized solutions are intended to simplify the integration and management of the client’s telecommunications and IT infrastructure in a secure and optimum way.

 

In addition to all of the intrinsically secured services offered by Equant, a range of additional security services are available, such as antivirus and SPAM protection for email systems as well as archive management. In 2005, 360,420 users were protected by the Equant Messaging Protection Suite.

 

Equant sells, installs and integrates network equipment such as routers, PBXs and LANs for its clients. In line with its global support services for customers, Equant also offers PC fleet management services.

 

In 2005, Equant continued to develop its range of convergent services, notably for IP telephony, enabling its customers to:

 

  n   improve their productivity and flexibility,

 

  n   develop new uses such as groupware tools,

 

  n   converge their resources.

 

Lastly, in addition to conventional solutions such as network, equipment-maintenance or sale services, Equant is able to offer its multinational key account clients a comprehensive outsourcing offering for their communications services. This concerns the outsourcing of telecommunications infrastructures – voice, data, and image – as well as messaging system and security services or even the management and optimization of third-party contracts. Outsourcing may also involve taking on clients’ in-house IT teams and taking over the company’s communications equipment and assets. This represents a response to a need among key account clients, which want to be able to count on a strategic partner in the increasingly critical field of business communications.

 

4.3.5 DIRECTORIES

 

Directory activities are carried out by the PagesJaunes Group and its subsidiaries, grouped together in two divisions: PagesJaunes in France and PagesJaunes International and its subsidiaries.

 

PagesJaunes in France

 

The services provided by PagesJaunes relate to the publication and distribution of directories, sale of advertising space in paper-based and online directories, services involving the creation and hosting of web

 

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sites, as well as the publication of “PagesPro” business directories, sales of on-demand access and of “QuiDonc” reverse phone directory services, and the publishing of the “Europages” European business directory. The company’s income is mainly generated via the sale of advertising space in its paper directories and online services.

 

During 2005, 619,513 advertisers used at least one of the PagesJaunes media for the purpose of promoting sales of their products and services, representing approximately 21% of the corresponding market.

 

The company’s paper directory business includes the “PagesJaunes” directory and “l’Annuaire” (telephone directory). PagesJaunes is the publisher of the “PagesJaunes” directory (classified by category) and has signed an advertising sales agreement with France Telecom with regard to “l’Annuaire” (telephone directory classified alphabetically). France Telecom has granted PagesJaunes exclusive rights to canvass and collate the advertising to be incorporated into “l’Annuaire” and the alphabetically classified PagesJaunes 3611 (Minitel) service as well as the technical design, implementation and layout of such advertising. Under this agreement, PagesJaunes is responsible for billing and collecting from advertisers the cost of the advertising that they have subscribed for, and acts as the agent in this respect (PagesJaunes is liable to France Telecom for the payment of all published advertisements regardless of any customer’s failure to pay). France Telecom has put in place a distributorship contract for use of the universal printed directory for PagesJaunes, accompanied by an assignment contract for the “L’Annuaire” brand for a total of 12 million. These contracts are effective as of January 1, 2006. In line with moves to set up the universal directory, the PagesJaunes Group has decided to reposition the “L’Annuaire” directory in 2006 thanks to a new editorial and advertising offering.

 

In addition to its paper-based directory services, PagesJaunes has also offered online services since the launch of PagesJaunes 3611 on Minitel in 1985. Since then, this offering has been enhanced with the launch of the “pagesjaunes.fr” Internet site in 1997 and the development of an Internet site hosting and creation service the same year as well as the mobile Internet launch of pagesjaunes.fr in 2001. The introduction of the PagesJaunes service on Minitel in 1985 contributed to familiarizing both users and advertisers with the concept of an online directory service. This familiarization in turn facilitated the development of pagesjaunes.fr. and 445,866 advertisers used PagesJaunes online services in 2005, with 339,553 on the pagesjaunes.fr site. The pagesjaunes.fr site is pursuing a growth strategy based on developing its features, enhancing its content and optimizing relations

 

When the French directory enquiries market was deregulated, PagesJaunes launched its own telephone-based information service on November 2, 2005 (PagesJaunes 118 008) throughout France. It will therefore be one of the operators in this sector.

 

The following table presents changes in the number of advertisers over the last three years:

 

     2005        2004        2003  
Total number of advertisers(1)    619,513        583,836        561,180  

  

    

    

Advertisers in paper directories (“PagesJaunes” or “l’Annuaire” telephone directories)    575,435        550,504        532,041  

  

    

    

Advertisers using online services    445,866        420,941        401,610  

  

    

    

Of which:                         
- advertisers using pagesjaunes.fr at the end of December    339,553        307,953        267,175  

  

    

    

- as a percentage of the total number of advertisers    54.8 %      52.7 %      47.6 %
  (1) The number of advertisers includes all advertisers for the relevant year, including those having purchased advertising space in a PagesJaunes media via an advertising agency. These figures are different from those previously provided by Wanadoo in that Wanadoo counted all businesses acting through an advertising agency as a single advertiser.

 

International and Subsidiaries

 

These services are provided by the company’s various subsidiaries, primarily involving the publication of consumer directories outside France, the development of “Kompass” directories in Europe and the development of activities to supplement the publication of directories (such as geographical services on “Mappy” and direct marketing with