EX-15.1 7 exhibit151.htm EXHIBIT 15.1 France Telecom - Exhibit 15.1

Exhibit 15.1




EXCERPT CONTAINING THE PAGES AND SECTIONS OF THE 2011 REGISTRATION DOCUMENT THAT ARE INCORPORATED BY REFERENCE INTO THE 2011 ANNUAL REPORT ON FORM 20-F(1)


(1)

The following document contains certain pages and sections of the 2011 Registration Document which are being incorporated by reference into the 2011 Annual Report on Form 20-F of France Telecom. Where information within a subsection has been deleted, such deletion is indicated with a notation that such information has been redacted.





4  risk factors


4.1   OPERATIONAL RISKS

17

Risks Related to the Sector, the Economic Environment and Strategy

17

Risks Relating to Human Resources

18

Other Operational Risks

19

4.2   LEGAL RISKS

21

4.3   FINANCIAL RISKS

23

Liquidity Risk

23

Interest Rate Risk

23

Risks to Credit Rating

24

Credit Risk and/or Counterparty Risk on Financial Transactions

24

Foreign Exchange Risk

24

Risk of Asset Impairment

25

Equity Risk

25





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   15





In addition to the information contained in this Registration Document, investors should carefully consider the risks described below before deciding whether to invest. Any or all of these risks could have a negative impact on France Telecom’s business, financial position or profits. In addition, other risks that are not yet identified or currently considered to be immaterial by France Telecom could have a similarly negative impact and investors could lose all or part of their investment.

The risks described in this chapter concern:

risks relating to France Telecom-Orange’s business activities (see Section 4.1);

risks of a legal nature (see Section 4.2);

financial risks (see Section 4.3).

In each Section, risk factors are presented in diminishing order of importance, as determined by the Company at the registration date of the current Registration Document. France Telecom-Orange may change its view of their relative importance at any time, particularly if new external or internal facts come to light.

Several other chapters also discuss risks in some detail:

for a discussion of regulatory risks and pressures see Sections 6.6 Regulations and Note 15 Litigation to the consolidated financial statements;

for risks arising from the vulnerability of technical infrastructure and environmental risks see Section 17.4 Environmental Information;

for financial risks see:

Note 11 to the consolidated financial statements Information on Market Risk and Fair Value of Financial Assets and Liabilities for a discussion of interest rate risk, currency risk, liquidity risk, covenants, credit risk, counterparty risk and equity market risk,

Note 10.10 to the consolidated financial statements on derivative instruments;

for risks arising from litigation involving the Group see Notes 15 Litigation and 16 Subsequent Events to the Consolidated Financial Statements, as well as Section 20.4 Litigation and Arbitration Proceedings;

policy for managing interest rate, currency and liquidity risks is set by the Treasury and Financing Committee. See Section 16.3.4 Group Governance Committees;

for insurance strategy see Section 6.8 Insurance;

more generally, policy for managing risk throughout the France Telecom-Orange Group is discussed in the Chairman’s Report on governance and internal control. See Section 16.4 Internal Control and Risk Management;

for risks related to France Telecom-Orange’s general strategy see Section 6.2 France Telecom-Orange’s Strategy.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   16





4.1   OPERATIONAL RISKS

Risks Related to the Sector, the Economic Environment and Strategy

1.   The worsening economic and financial situation in Europe could have a major impact on France Telecom-Orange’s businesses, especially on the Group’s revenues and results.

After the economic rebound of 2010, developments in the euro zone in 2011 in terms of the debt crisis and the deterioration of public sector finances of numerous member states triggered a loss of confidence in the European economy as a whole. The risk of a renewed economic slowdown is still high. This situation could, if it were to continue, have a direct effect on consumer spending and increase fiscal pressure on households and companies. This could have a significant impact on France Telecom-Orange’s revenues and results.

For further information on the impact of the situation in the euro zone in terms of companies’ debt and refinancing capacities, see also the financial risks set out in Section 4.3.

2.   France Telecom-Orange generates much of its revenues from mature countries and business activities where intense competition in the telecommunications sector may erode its market share or profitability.

At constant exchange rates and scope of consolidation, the increase in France Telecom-Orange’s revenues in recent years has been primarily due to the rapid growth in its mobile communications and Internet businesses, driven by the upswing in the corresponding markets. However, these markets are reaching maturity, notably in Europe, and in some cases are showing signs of saturation. France Telecom-Orange is also faced with tough competition, in particular on pricing and especially in the French mobile market, where competition has heightened following the award of the fourth 3G license to Free in December 2009 and the launch of its mobile plans in January 2012 (1).

In response to this competition, France Telecom-Orange strives to better answer customers’ needs in terms of the quality and simplicity of services. Thus France Telecom-Orange is developing an organization, procedures and systems aimed at offering the latest technological developments and improved products and services to its customers, while at the same time striving to make them accessible and easy to use. In France, this is reflected in particular by a drive to refocus its organization around the customer on a regional basis.

In the face of competition, France Telecom-Orange’s ability to maintain its margins will also partly depend on a change in its cost structure with a reduction in fixed costs. France Telecom-Orange has thus launched two major transformation programs: Chrysalid, aimed at sharing best practices within the Group in order to control costs, including overhead costs, marketing, customer service management, real estate, networks and distribution costs, as well as a program to pool purchasing with Deutsche Telekom through the jointly-owned company Buyin.

Should France Telecom-Orange’s ambitious and complex transformation programs be unsuccessful, or do not succeed in correctly managing the networks, technologies and procedures necessary to meet customers’ expectations, the Group could lose market share or be forced to reduce its margins which could have a negative effect on its financial position and results.

3.   As part of its strategy, France Telecom-Orange is exploring sources of growth in new countries and businesses. This quest may prove difficult or fruitless, may be costly, or may lead to over paying for acquisitions. In addition, investments already made may fail to bring the expected returns, may become unforeseen liabilities, or may translate into increased country risk. In all cases, the Group’s results and outlook could be impaired.

The Group’s growth depends heavily on its activities in fast-growing regions of the world. France Telecom-Orange has invested in telecommunications operators in Eastern Europe, the Middle East and Africa and could make further investments in these or in other fast-growing regions. Political instability or changes in the economic, legal or social landscape in these regions may call into question the outlook on profits held when these investments were made, or may become unforeseen liabilities, and the Group’s results could be impaired.

Moreover, these regions present challenges or specific risks in terms of internal control or non-compliance with laws and regulations in force, such as anti-corruption regulations (which could also be a source of risk in other regions where the Company is present, in particular due to the increase in its scope and its restricting nature).




(1)  For further information on the competition faced by the France Telecom-Orange Group in the business segments in which it operates, see Chapter 6 Overview of the Group’s Business.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   17





Group growth also depends on a strategy of developing new businesses to cope with the deep and rapid transformation now enveloping the electronic communications sector. This means developing convergent services and new businesses such as content, audience or e-health offerings, under the single Orange brand. The pursuit of these goals requires resources, in particular for service integration and content development, with no guarantee that usage of these services and content will grow and provide a return on the investment. Furthermore, the development of these new services could be hampered by regulatory changes or the economic environment.

If the expected growth in revenues from these new services was not achieved or if France Telecom-Orange was not able to render these new services profitable, the Group’s financial position and results could be impaired.

4.   The rapid growth in the popularity of audiovisual content streamed through the telecommunications network and insufficient innovation could lead to telecoms operators being supplanted by other content or service providers in customer-relations and to a saturation of the network, stripping operators like France Telecom-Orange of part of their revenues and margins while simultaneously requiring higher investment. This could affect the Group’s financial position and outlook.

The development of network usage for added-value services benefits the emergence of new, networkless players (content and service providers, including aggregators, search engines, handset makers, etc.). Competition to control customer relations with these players is intensifying and could erode the operators’ market position. This direct relationship with customers is a source of value for the operators and to lose all or part of it to new entrants could affect the revenue, margins, financial position and outlook of telecoms operators such as France Telecom-Orange.

Also, as with the competition in voice traffic from VoIP, suppliers are competing with telecoms operators to offer integrated communications packages, notably by developing new applications compatible with fixed or mobile handsets (smartphone applications, etc.). This situation could affect the revenue, margins, financial position and outlook of telecoms operators such as France Telecom-Orange.

Lastly, the current expansion in permanent connections to the Internet via smartphones and broadband usages such as TV as part of triple-play offerings or fixed-line and mobile Internet streaming has already, on occasions, resulted in the saturation of existing collection and transport networks, for France Telecom-Orange and other operators in France and abroad. In response, France Telecom-Orange has adopted a medium-term strategy of investing heavily to boost capacity on its collection and transport networks and differentiating itself through the quality of its service. In addition France Telecom-Orange has reorganized its innovation chain as part of the Nova+ program. There is nonetheless no guarantee that such capital expenditure or the reorganization of its innovation efforts will be sufficient in the face of pressure from new entrants or regulatory bodies in the countries concerned. If it proved not possible to insure returns on such capital expenditure, France Telecom-Orange’s financial position and outlook could be adversely affected.

Risks Relating to Human Resources

5.   France Telecom-Orange faced a major social crisis in 2009. Since 2010, the Group has been implementing an ambitious human resources project as part of its Conquests 2015 strategic plan to respond to this crisis but this project might not deliver the expected results, which could have a significant impact on the Group’s image, operations and results.

During 2009, the Group went through a significant crisis in relation to psycho-social risks and anxiety at work, the effects of which were still felt in 2010. This crisis, which generated widespread coverage in the French and international media after a number of employee suicides, had a big impact on the Group’s image. In response, the Group launched an ambitious social contract project aimed at clarifying the Company’s professional practice and management culture and to provide long-term solutions to the identified risk factors. This project led in particular to the signature, in March 2011, of the Strategic Workforce Planning agreement (accord sur la Gestion Prévisionnelle des Emplois et des Compétences) and the clarification of measures promoting the enhancement of professional careers and better employment flexibility.

Although the Group believes that the cost of implementing such a project should be more than offset by the benefits to the Company and its employees, this project may delay certain cost-cutting programs. Moreover, in the event that the project does not achieve the expected results, this crisis may persist, affecting the Group’s image, its operations and its results for a long time.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   18





6.   Should France Telecom-Orange not be sufficiently attractive compared with its competitors, in order to recruit or renew, when needed, the skilled personnel necessary across all countries to develop its business and ensure the Group retains expertise and maintains sufficient continuity with regard to the management of ongoing projects, its commercial activities and operating income could be adversely affected.

Wherever it operates, France Telecom-Orange is exposed to risks relating to its ability to attract and retain skilled personnel in its strategic professions, and to replace expertise in key fields by taking advantage, in France, of the increased pace of retirements, in particular as a result of the implementation of part-time schemes for older employees.

France Telecom-Orange’s success depends in part on its ability to attract highly-skilled personnel in all the countries in which it operates, and in particular in France in recent times, and to retain and motivate its best employees.

Should France Telecom-Orange fail to present itself as a sufficiently attractive employer, its commercial activities and operating income could be adversely affected.

Other Operational Risks

7.   Technical failures or saturation of the telecoms networks, technical infrastructure or IT system may reduce traffic, lower revenues and harm the reputation of operators or the sector as a whole.

Damage or interruptions to services provided to customers may occur following outages (hardware or software), human error or sabotage to critical hardware or software, or a failure or refusal to provide services by a key supplier or a lack of capacity on the network in question. As a result of the rationalization of the network based on the implementation of all-IP technologies, the increase in the size of the service platforms and the relocation of equipment into fewer buildings, such service interruptions may in the future affect a greater number of customers and more than one country simultaneously. While impossible to quantify, the impact of such events occurring in one or more countries could result in customer dissatisfaction, a decrease in France Telecom-Orange’s traffic and revenues and government intervention in the country or countries affected.

Finally, during the current period, the risk of failure of the internal France Telecom-Orange IT system has increased due to the accelerated implementation of new services and applications relating notably to billing and customer relationship management. More specifically, incidents (including the possible loss of control over personal data) could occur during the implementation of new applications or software.

8.   The technical infrastructure of telecommunications operators is vulnerable to damage or interruptions caused by floods, storms, fires, war, acts of terrorism, intentional damage, malicious acts and other similar events.

A natural disaster, such as the storms Klaus and Xynthia which struck in early 2009 and late February 2010, Hurricane Dean in Martinique in August 2007 and the storms in December 1999, which disrupted service in France in early 2000, and other unexpected occurrences affecting France Telecom-Orange’s facilities or any other incident or failure of its networks may result in serious damage with a high repair cost. In most cases, France Telecom-Orange has no insurance for damage to its aerial lines and must assume the full cost of the repairs itself. Furthermore, the damage caused by such major disasters may have more long-term consequences resulting in significant expense for France Telecom-Orange and which would harm its image. Moreover, international, community and national laws now recognize the existence of climate change. Weather phenomena associated with this climate change may increase the seriousness of disasters and of the damage caused.

9.   The scope of France Telecom-Orange’s activities and the openness of networks mean that the Group is at all times exposed to the danger of falling victim to a range of frauds, which could impact its revenues and margin and damage its image.

Like any telecommunications operator, France Telecom-Orange runs the risk of falling victim to fraud designed, by the fraudsters, either to use the operator’s services without paying (possibly with subsequent resale), or to defraud the operator’s customers via the communications services offered by the operator. By virtue notably of the current weakened economic climate, the cases of fraud to which the Group is exposed could increase. With the increased complexity of technologies and networks, new types of fraud that are more difficult to detect or combat may also develop. In any event, France Telecom-Orange’s revenues, margin, service quality and reputation could be adversely affected.

10.  Exposure to the electromagnetic fields of telecommunications equipment raises concerns regarding possible health risks. This situation could result in a decrease in the usage of mobile telecommunications services, additional difficulties rolling out cell phone antennae and wireless networks or an increased number of lawsuits, which could negatively impact France Telecom-Orange’s results.

In certain countries in which France Telecom-Orange carries out its mobile telephony business, concerns have been raised regarding the possible health risks to humans of exposure to electromagnetic fields emitted by telecommunications equipment (such as mobile handsets, cell phone antennae, Wifi, etc.).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   19





On the basis of the findings of research into the use of mobile handsets, the International Agency for Research on Cancer (IARC), a specialist arm of the World Health Organization (WHO), classified electromagnetic fields from radio frequency emissions as “possibly carcinogenic to humans” (category 2B) in May 2011. Nonetheless, the WHO reiterated in its June 2011 Fact sheet on mobiles that “to date, no adverse health effects have been established as being caused by mobile phone use”. In the absence of complete scientific certainty, some health or public authorities have issued various usage precautions designed to cut user exposure to electromagnetic fields from mobile phones.

Certain countries have adopted regulations which limit public exposure to base stations and wireless networks to levels below the limits recommended by the International Commission on Non-Ionizing Radiation Protection (ICNIRP). Other countries may consider taking similar measures. In certain cases, jurisdictions have ordered telephone operators to take down cell phone antennae and to compensate local residents. Similar decisions in the future cannot be ruled out.

These regulatory and case law developments could result in a reduction in geographic coverage, a deterioration in service quality and customer dissatisfaction as well as a slowdown in the roll-out of transmitter sites and an increase in network roll-out costs, which could seriously tarnish the Orange brand image and significantly impact the Group’s results and financial position.

The potential risks or perception of risks by the public or employees could also result in a decrease in the number of customers and lower usage per customer, as well as an increase in lawsuits or other consequences including acts contrary to the building of or even the existence of transmitter sites.

Finally, France Telecom-Orange cannot predict the conclusions of future scientific research or future studies carried out by international organizations and scientific committees called upon to examine these questions. The conclusions of these studies could have a significant adverse impact on France Telecom-Orange’s business activities and results.

For further information, see Section 6.3.1.3 The regulatory Environment and Section 17.4 Environmental information.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   20





4.2   LEGAL RISKS

11.   France Telecom-Orange continues to operate in highly regulated markets, where its flexibility to manage its business is limited.

In most countries in which it operates, France Telecom-Orange must comply with various regulatory obligations governing the provision of its products and services, primarily relating to obtaining and renewing licenses, as well as to oversight by authorities seeking to maintain effective competition in the electronic communications markets. Furthermore, in certain countries France Telecom-Orange faces a number of regulatory constraints as a result of its historically dominant position in the fixed-line telecommunications market, in particular in France and Poland.

France Telecom-Orange believes that, in general and in all countries in which it is present, it complies with all specifically applicable regulations as well as the terms of its operator licenses, but it cannot predict how oversight authorities or courts that may be asked or have already been asked to resolve a certain number of claims will decide on the issues.

Should France Telecom-Orange be ordered to pay damages or a fine due to the non-respect of a given regulation in force by the relevant authorities in a country in which it is present, the Group’s financial position and results could be adversely affected.

For further information on regulations, see Section 6.6 Regulation and the parts regarding the regulatory environment in Sections 6.3.1 to 6.3.6.

12.   France Telecom-Orange is continually involved in legal proceedings and disputes with regulatory authorities, competitors or other parties. The outcome of such proceedings is generally uncertain and could have a material impact on its results or financial position.

France Telecom-Orange’s position as the main operator and provider of network and telecommunications services, particularly in France and Poland, and one of the leading telecommunications operators worldwide, attracts the attention of competitors and competition authorities. Thus, France Telecom-Orange is involved in lawsuits or European Commission investigations regarding large amounts of state aid it is alleged to have received in France. In particular, the European Commission ruled that France Telecom-Orange should reimburse the French state some one billion euros that it received in state aid thanks to the special French business tax regime which it benefited from until 2003. This decision was ratified by both the General Court of the European Union and the European Court of Justice. In a second proceedings, the European Commission recently ruled against France Telecom-Orange on the system for financing retirement pensions for civil servants working at France Telecom-Orange, implemented by the Act of July 26, 1996 which turned France Telecom-Orange into a société anonyme. In addition, France Telecom-Orange – in particular in France and Poland – is frequently involved in legal proceedings with its competitors and with the regulatory authorities due to its preeminent position in certain markets, and the complaints filed against France Telecom-Orange may be very substantial. Finally, the Group may be the object of substantial commercial lawsuits, worth tens of millions of euros, or, in extreme cases, hundreds of millions of euros, such as the one that gave rise to an amicable settlement between its Polish subsidiary (Telekomunikacja Polska or “TP”) and Danish company DPTG in January 2012 where TP paid compensation amounting to 550 million euros.

The outcome of lawsuits is by definition unpredictable.

In the case of proceedings involving European competition authorities, the maximum fine provided for by law is 10% of the consolidated revenues of the company at fault (or the group to which it belongs, as the case may be).

The main proceedings in which France Telecom-Orange is involved are described in Notes 15 Litigation and 16 Subsequent Events to the consolidated financial statements, as well as Section 20.4 Litigation and Arbitration Proceedings. Developments in or the results of some or all of the ongoing proceedings could have a material adverse impact on France Telecom’s results or financial position.

13.   France Telecom-Orange’s business activities and results could be materially affected by legislative, regulatory or government policy changes.

France Telecom-Orange’s business activities and operating income may be materially adversely affected by legislative, regulatory or government policy changes, and in particular by decisions taken by regulatory or competition authorities in connection with:

amendment or renewal on unfavorable conditions, or even withdrawal, of licenses to use broadcasting frequencies which are essential to the mobile business;




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   21





conditions governing network access;

service rates;

the introduction of new taxes or increases to existing taxes for telecommunications companies;

consumer legislation;

regulations governing data security.

Such decisions could materially affect the Group’s revenues and results.

14.  The profitability of certain investments and France Telecom-Orange’s strategy in certain countries could be affected by disagreements with its partners in companies that it does not control or where, despite being the majority shareholder, some major aspects of the business are outside its control.

France Telecom-Orange operates some of its businesses through companies that it does not control (or where, despite being the majority shareholder, some major aspects of the business are outside its control). Articles of incorporation or agreements for some of these activities require that some major decisions, such as the approval of business plans or timing and size of dividends, need approval from France Telecom-Orange’s partners. Should France Telecom-Orange and its partners disagree regarding these decisions, the profitability of these investments, their contribution to France Telecom-Orange’s results and the strategy pursued by France Telecom-Orange in the countries in which these companies are located, could be adversely affected.

15.  France Telecom-Orange’s liability may be triggered by its Internet access and hosting services and it will also need to invest to meet recently expanded obligations as part of the struggle against illegal or illicit uses of the Internet. In addition, like all electronic communications service providers, France Telecom-Orange may be held liable for the loss, release or inappropriate modification of customer data stored on its servers or carried by its networks.

In most of the countries in which France Telecom-Orange operates, the provision of its Internet access, means of payment and hosting services (including the operation of websites with self-generated content) is regulated under a limited liability regime applicable to the content that it makes available to the public as a technical service provider, particularly content protected by copyright or similar laws. However, regulatory changes have been introduced imposing additional obligations on access providers (such as blocking access to websites) as part of the struggle against some illegal or illicit uses of the Internet, notably in France, Spain and the UK. Furthermore, the implementation in France of the Law of June 12, 2009 establishing Hadopi (Haute Autorité pour la Diffusion des Oeuvres et la Protection des Droits sur Internet – High Authority for the Dissemination of Works and the Protection of Rights on the Internet) has resulted in additional costs for France Telecom-Orange and has increased its exposure to liability. In December 2011, the cinema and video distribution unions brought proceedings before the Paris Civil Court against access providers and search engines located in France, including France Telecom-Orange, in order to block access to certain streaming and illegal film downloading sites.

France Telecom-Orange’s activities may also trigger the loss, release or inappropriate modification of the data of its customers or the wider general public, which is stored on its infrastructures or carried by its networks. This risk may also affect Group activities related to the mobile payment solution Orange Money (see Section 6.3.4.2 Middle East and Africa in Section 6 Overview of the Group’s business). The repercussions of such an incident could involve numerous persons and have a considerable impact on France Telecom-Orange’s reputation, as well as a strong impact in terms of its liability, including its criminal liability. Moreover, recourse to liability proceedings is facilitated in a number of countries, in particular in Europe, by the implementation of European Directives adopted in 2009. This legislation increases operators’ obligations, requiring that they notify authorities of security breaches that violate personal data or of weaknesses in their networks and services. In France, these obligations are a result of the Government Order adopted on August 24, 2011.

16.  The French Public Sector, directly or indirectly, owns nearly 27% of France Telecom’s share capital, which could, in practice, allow it to determine the outcome of votes at Annual Shareholders’ Meetings.

At December 31, 2011 the French Government directly owned 13.4% of the shares and 13.5% of the voting rights in France Telecom, and the Fonds Stratégique d’Investissement (FSI) held 13.5% of the shares and 13.6% of the voting rights. On November 25, 2009, the French Government and the FSI concluded a shareholders’ agreement constituting an “action in concert” (joint action). The public sector has the right to appoint three of the 15 board members. The French public sector could, in practice, given the absence of other major shareholder blocks, determine the outcome of votes on issues requiring a simple majority at Shareholders’ Meetings. Nevertheless, the French Government does not have a golden share or any other special advantage other than the right to have representatives on the Board of Directors in proportion to its shareholding (see Section 18 Major Shareholders).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   22





4.3   FINANCIAL RISKS

Liquidity Risk

17.  France Telecom-Orange’s results and outlook may be adversely affected if access to capital markets remains difficult or worsens.

France Telecom-Orange raises most of its finance from capital markets (particularly the bond market). For four years, financial markets have been extremely volatile and have shown signs of malfunctioning, materially reducing their liquidity. During the last quarter of 2008, and again since August 2011, the liquidity crisis has reached unprecedented levels, markedly affecting the access of both borrowers and issuers to the financial markets. To save the financial sector and mitigate the impact of the economic crisis, most developed countries drastically increased their spending. In certain countries the extent of this increase triggered a loss of confidence in public debt and led certain ratings agencies to downgrade sovereign debt in the US and numerous euro zone countries, including France. Although at this time it seems the corporate bond markets have been less directly affected, as matters stand, it is impossible to rule out contamination by the sovereign debt crisis or another major market event.

Moreover, market fears are growing over the consequences of the new Basel III and Solvency II directives -which look to boost banks’ and insurance companies’ capital respectively- as regards the ability of companies to continue funding their activities through the banking and bond markets in a normal manner.

As a result, and in these circumstances, companies having recourse to the bond market or to bank loans can have no assurance that they will obtain the financing or refinancing necessary to their businesses at prices and on terms considered reasonable, even for first-rate borrowers or issuers, such as France Telecom-Orange.

Any inability to access the markets and/or obtain financing on reasonable terms could have a material adverse effect on France Telecom-Orange. The Company could, in particular, be required to allocate a significant portion of its available cash to pay off debt, in particular for the purposes of repaying loans that cannot be refinanced. In any event, France Telecom-Orange’s results, cash flows and, more generally, financial position and flexibility could be adversely affected.

Finally, even though the consequences of the sovereign debt crisis and of numerous countries’ ratings being downgraded, including France, on the margins applied to corporate issuers have, until now, been limited in time, a deepening of the sovereign debt crisis or further downgrades in country ratings could have an adverse impact (sharp increase) on the margins applied to corporate issuers.

See Note 11.3 Liquidity Risk Management to the consolidated financial statements, which notably sets out the various sources of financing available to France Telecom-Orange, the maturity on its debt and changes to its rating, as well as Note 11.4 Management of Covenants which contains information on the limited commitments of the France Telecom-Orange Group as regards financial ratios and in the event of bankruptcy or a material adverse development.

Interest Rate Risk

18.  France Telecom-Orange’s business activities could be adversely affected by interest rate fluctuations.

In the normal course of its business, France Telecom-Orange draws most of its funding from capital markets (particularly the bond market) and a small share from bank loans. Part of France Telecom-Orange’s debt is at floating rates but the great majority is at a fixed rate. As a result, France Telecom-Orange is exposed to interest rate increases, first on the variable component of its debt, and second, when refinancing. The consequences of entering into a financing arrangement during a period when the available rates are high may be long-lasting, depending on the maturity of the loan or bonds.

To limit exposure to interest rate fluctuations, France Telecom-Orange from time to time makes use of financial instruments (derivatives) but cannot guarantee that these transactions will effectively or completely limit its exposure or that suitable financial instruments will be available at reasonable prices. In addition, hedging costs stemming from interest rate fluctuations could increase, generally, in line with market liquidity and banks’ circumstances.

In the event that France Telecom-Orange cannot use financial instruments or if its financial instrument strategy proves ineffective, cash flow and earnings may be adversely affected.

The management of interest rate risks and an analysis of the sensitivity of the Group’s position to changes in interest rates are set out in Note 11.1 to the consolidated financial statements.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   23





Risks to Credit Rating

19.  If France Telecom-Orange’s debt rating is downgraded, placed under surveillance or revised by rating agencies, its borrowing costs could increase and in certain circumstances limit the Company’s access to the capital it needs (and thus have a material adverse effect on its results and financial position).

France Telecom-Orange’s financial rating is partly based on factors over which it has no control, namely conditions affecting the electronic communications industry in general or conditions affecting certain countries or regions in which it operates, and can be changed at any time by the rating agencies.

The Company’s financial rating has already been downgraded in the past (in 2001 and 2002) as a result of concerns raised by the agencies regarding the Company’s ability to implement its debt reduction policy. Even though its debt has fallen considerably since 2001 and 2002, and even though the Company’s rating has improved, it could be reviewed at any time, in light of changing economic conditions, or following a deterioration in the Company’s results or performance, or simply due to the ratings agencies’ perception of these various factors.

Credit Risk and/or Counterparty Risk on Financial Transactions

20.  The insolvency or deterioration in the financial position of a bank or other institution with which France Telecom-Orange has contractual relations may have a material adverse effect on the Company.

In the course of its business activities, France Telecom-Orange engages in relations with financial institutions, particularly in order to manage currency and interest rate risks. Although cash collateral accounts are in place with most derivative banking counterparties, the failure of these counterparties to meet any of these commitments, or significant differences with the last values retained for securities used as collateral, could have adverse consequences on France Telecom-Orange. In this regard, the Group is exposed to counterparty risk with respect to these transactions.

Equally, France Telecom-Orange’s position as a result of its financing agreements (and in particular with regard to the undrawn 6 billion euros syndicated loan facility, even if the facility includes a very large number of lenders) could be compromised if one or more of the financial institutions with which the Company has contractual relations experiences liquidity problems or is no longer able to meet its obligations.

Investments can also expose France Telecom-Orange to counterparty risk since the Company is exposed to the collapse of the financial entities with which it has made investments. See Note 11.5 Credit Risk and Counterparty Risk Management to the consolidated financial statements.

The international banking system is such that financial institutions are interdependent. As a result, the collapse of a single institution (or even rumors regarding the financial position of one of them) may increase the risk for the other institutions, which would increase the counterparty risk for France Telecom-Orange.

For customer-related credit risk and counterparty risk see Note 11.5 and Note 3.3 Trade Receivables to the consolidated financial statements.

Foreign Exchange Risk

21.  France Telecom-Orange’s results and cash position are exposed to exchange rate fluctuations.

In general, foreign exchange markets have recently experienced heightened volatility as a result of the global economic and financial crisis, which could increase the currency risks and hedging costs for France Telecom-Orange, as a result of unfavorable exchange rate movements.

A significant portion of France Telecom-Orange’s revenues and expenses is recognized in currencies other than the euro. The main currencies in which France Telecom-Orange is exposed to a material foreign exchange risk are the pound sterling, the Polish zloty and the Egyptian pound. Fluctuations from one period to the next in the average exchange rate for a given currency could have a material effect on the revenues and expenses in this currency, which would in turn have a material effect on France Telecom-Orange’s results. In addition to the main currencies, France Telecom-Orange carries out its business in other monetary zones, including in certain emerging markets (such as those in the CFA franc zone), which are incidentally considered to be drivers of future growth for France Telecom-Orange. A fall in the currencies of these markets would adversely affect France Telecom-Orange’s revenues and gross operating margin as well as its growth potential. In regard to 2011 data, the theoretical impact of a 10% fall against the euro in the main currencies in which the Group’s subsidiaries operate would have cut consolidated revenues by 2.1% and Reported EBITDA by 1.8%.

Finally, as a result of focusing its development strategy on emerging markets, the share of Group business exposed to currency risk is likely to rise in the future.

When preparing the Group’s consolidated financial statements, the assets and liabilities of foreign subsidiaries are translated into euros at the closing rate. This translation, which does not affect the income statement, could have an adverse effect on the assets and liabilities in the consolidated balance sheet, with a corresponding translation adjustment in equity, for potentially




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   24





significant amounts. See Note 11.2 Foreign Exchange Risk Management, Note 7.2 Other Intangible Assets and Note 13 Shareholders’ Equity to the consolidated financial statements.

France Telecom-Orange manages the foreign exchange risk on commercial transactions (stemming from operations) and financial transactions (stemming from financial debt) in the manner set out in Note 11.2 to the consolidated financial statements.

Notably, France Telecom-Orange makes use of derivatives to hedge its exposure to exchange rate risk but cannot guarantee that these hedging transactions will effectively or completely limit its exposure or that suitable hedging instruments will be available at reasonable prices. In addition, hedging costs stemming from exchange rate fluctuations could increase generally depending on market liquidity and banks’ financial positions.

To the extent that France Telecom-Orange had not used any hedging instruments to hedge part of this risk, or if its strategy for using such instruments is ineffective, France Telecom-Orange’s cash flows and results could be adversely affected.

See Note 10.10 Derivative Instruments to the consolidated financial statements.

Risk of Asset Impairment

22.  France Telecom-Orange has recognized substantial amounts of goodwill as a result of acquisitions made since 1999. Impairment losses on this goodwill, likely to have a material adverse effect on France Telecom-Orange’s balance sheet and results, could thus be recognized in accordance with IFRS.

France Telecom-Orange has recognized substantial amounts of goodwill in connection with its acquisitions since 1999, in particular the acquisitions of Orange, Equant, Amena and the equity interest in TP S.A. As of December 31, 2011, the gross value goodwill of continuing operations amounted to 30.6 billion euros.

Recoverable amounts of the businesses which support the book values of long term assets (including goodwill) are sensitive to the valuation method and to the assumptions used in the models. They are also sensitive to any change in the business environment that is different to the assumptions used. Thus, when events or circumstances indicate that an impairment loss may occur, France Telecom-Orange recognizes an impairment loss on this goodwill, particularly in the case of events or circumstances that involve material adverse changes of a permanent nature affecting the economic climate or the assumptions and targets used at the time of the acquisition.

In accordance with IFRS, the present value of goodwill is subject to annual assessment. Over the past five years, France Telecom-Orange recognized significant impairment losses in respect of its interests in Poland and Egypt, in particular. At December 31, 2011, the cumulative amount of impairment losses on continuing operations was 3.3 billion euros.

New events or adverse circumstances could conduct France Telecom-Orange to review the present value of this goodwill and to recognize further substantial impairment losses that could have an adverse effect on its results. In this regard, at December 31, 2011, the specific random factors that may affect the estimate of recoverable amounts were as follows:

in Europe, potential developments resulting from the financial and economic crisis and the impact on consumer behavior and direct or indirect taxation levels; the operators’ reactions to this environment, through changes in offers and pricing (particularly in Spain), or in response to new entrants; and ability to adjust costs and capital expenditure in keeping with potential changes in revenues;

in emerging countries: changes in the political situation and the ensuing economic and regulatory impacts.

For further information on the impairment of goodwill and the recoverable amounts (notably key assumptions and sensitivity), see Note 6 Impairment Losses and Goodwill to the consolidated financial statements and Section 9.1.2.2 From Group Reported EBITDA to Operating Income.

23.  France Telecom-Orange’s results and financial position could be adversely affected by a downturn in the equity markets.

Volatility in the equity markets, and especially a downward trend in such markets, could have an adverse impact on France Telecom-Orange’s results, in the event of a fall in the stock prices of France Telecom-Orange’s listed subsidiaries, in particular TP S.A. (Poland), Mobistar (Belgium) and ECMS (Egypt), if it subsequently becomes necessary to recognize impairment losses on the corresponding assets.

Equity Risk

24.  Future sales by the Public Sector of shares in France Telecom may negatively impact France Telecom’s share price.

At December 31, 2011, the French Government directly owned 13.4% of the shares, and the Fonds Stratégique d’Investissement owned 13.5% of the shares of France Telecom (see Section 18 Major Shareholders). Should the Public Sector decide to reduce their interest in France Telecom, such a sale, or even the belief that such a sale is imminent, could have an adverse effect on France Telecom’s share price.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   25






[REDACTED SECTION: CERTAIN TEXT THAT FOLLOWS HAS BEEN REDACTED]

5.1   HISTORY AND EVOLUTION OF THE COMPANY

5.1.1  Company Name

France Telecom

5.1.2  Place of Registration and Registration Number

Paris trade and companies register (Registre du commerce et des sociétés – RCS)

RCS number: 380 129 866

APE (Activité Principale Exercée - Principal Activity) Code: 642C

5.1.3  Date of Incorporation and Term

France Telecom was incorporated as a French société anonyme on December 31, 1996 for a 99 year term. Barring early liquidation or extension, the Company will expire on December 31, 2095.

5.1.4  Registered Office, Legal Form and Applicable Law

6, place d’Alleray, in Paris (15th arrondissement), France.

Telephone: +33 (0)1 44 44 22 22

At its meeting on March 21, 2012, the Board of Directors decided to transfer the Company’s registered office to 78, rue Olivier de Serres, Paris (15th arrondissement), effective at the end of the Shareholders’ Meeting of June 5, 2012, which will be called upon to ratify this decision.

France Telecom S.A. is governed by French corporate law, subject to specific laws governing the Company, notably Act 90-568 of July 2, 1990 on the organization of public postal and telecommunications services, as amended by Act 96-660 of July 26, 1996 and Act 2003-1365 of December 31, 2003.

The regulations applicable to France Telecom S.A. as an operator are described in Section 6.6 Regulation.

5.1.5  Important Events in the Development of the Company’s Business

Since the 1990s, France Telecom’s area of activity and its regulatory and competitive environment have undergone significant changes which have affected the composition of its revenues, its activities and its internal organization. In France, all telecommunications services have been open to competition since January 1, 1998 (apart from local communications, which became open to competition on January 1, 2002).

In a context of increased deregulation and competition, France Telecom, between 1999 and 2002, pursued a strategy of developing new services and accelerated its international development by making many strategic investments (acquisitions, equity investments, UMTS licenses). During that period it acquired, in particular, Orange Plc., and therefore the Orange brand, as well as Global One and Equant, and made equity investments in Polish operator TP S.A., NTL in the United Kingdom (which has since been sold) and MobilCom in Germany (now called Freenet, of which France Telecom holds less than 1%). Mostly, these strategic investments could not be financed by issuing shares, which has led to a significant increase in the Group’s debt.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   27





At the end of 2002, France Telecom started a large-scale refinancing plan for its debt to reinforce its balance sheet, as well as an operational improvements program, the success of which has allowed the Group to develop a global integrated-operator strategy by anticipating changes in the telecommunications industry.

This strategy was carried out at the end of 2003 through the acquisition of the minority interests in Orange S.A., Wanadoo and Equant, the implementation of a new Group organization consistent with this strategy and the launch of new offers at a sustained pace.

In 2005, France Telecom acquired 80% of the capital of Spanish mobile operator Amena, whose activities were then regrouped with the fixed and Internet activities of France Telecom in Spain into a single entity operating under the Orange brand. In 2008 and 2009, France Telecom acquired almost all of the remaining capital of France Telecom España.

In parallel, France Telecom has streamlined its asset portfolio by selling non-strategic subsidiaries or holdings such as Casema, Eutelsat, Wind, Compañia de Telecomunicaciones de El Salvador, Telecom Argentina, Noos, Bitco (Thailand), Orange Denmark, ST Microelectronics, Télédiffusion de France (TDF), Intelsat, as well as its mobile and Internet activities in the Netherlands.

Furthermore, PagesJaunes, the Group’s directories subsidiary, was floated on the Paris stock exchange in 2004, and the balance of the France Telecom stake was sold in 2006.

In 2006, “Orange” became the single brand of the Group for Internet, television and mobile services in most countries where the Group operates, and “Orange Business Services” the brand for services offered to businesses throughout the world.

As of 2007, France Telecom-Orange has pursued a selective acquisition policy mainly focused on emerging markets (in particular Africa and the Middle East), while also attempting to grasp opportunities for consolidation in markets where the Group was already present. Thus, in December 2010 France Telecom acquired a 40% stake in Moroccan operator Méditel, then, in July 2011, an indirect stake of 20% in Iraqi mobile operator Korek and in October 2011 100% of mobile operator Congo Chine Telecom in the Democratic Republic of Congo. France Telecom also signed an agreement with Deutsche Telekom which led to the creation of the joint venture Everything Everywhere in the United Kingdom on April 1, 2010, and disposed of TP Emitel, a subsidiary of TP S.A. in Poland, in June 2011, and in February 2012 of Orange Suisse as well as its stake in Orange Austria.

In July 2010, the Group launched a new strategic plan, “Conquest 2015”. This initiative is aimed at its employees, customers and shareholders as well as, on a larger scale, at the society in which the Company operates. For more information on France Telecom-Orange’s strategy, see Section 6.2 France Telecom-Orange’s Strategy.

The introduction to Section 6.3 Overview of Business provides information on France Telecom-Orange’s competitive position in its various markets.

The Company’s stock has been listed since October 1997 on both Euronext Paris and the New York Stock Exchange. The listing was part of the French State’s disposal of 25% of its shares to the general public and France Telecom employees. The French State’s interest was subsequently reduced in steps to 53.1% prior to the Act of December 31, 2003 on telecommunications public service obligations and on France Telecom, which authorized the Company’s privatization, eventually taking place on September 7, 2004 when the French State sold an additional 10.85%. As of December 31, 2011, the French State held, directly or together with the FSI (Fonds Stratégique d’Investissement), 26.94% of France Telecom S.A.’s share capital.


[REDACTED SECTION: CERTAIN TEXT THAT FOLLOWS HAS BEEN REDACTED]




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   28





6  overview of the group’s business



6.1   THE TELECOMMUNICATION SERVICES MARKET

30

Overall background of the Digital Market

30

6.2   FRANCE TELECOM-ORANGE STRATEGY

33

Conquests 2015

33

Innovation, the centerpiece of the Group’s plan

34

Other operational programs

35

6.3   OVERVIEW OF BUSINESS

36

6.3.1  France

37

6.3.2  Poland

59

6.3.3  Spain

76

6.3.4  Rest of the world

89

6.3.5  Enterprise Communications Services

141

6.3.6  International Carriers and Shared Services

152

6.4   EXCEPTIONAL EVENTS

158

6.5   DEPENDENCY ON PATENTS

158

6.6   EUROPEAN REGULATIONS

159

The European regulatory framework

159

Key European regulation events in 2011

159

6.7   SUPPLIERS

166

6.8   INSURANCE

167




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   29





This chapter contains forward-looking information about France Telecom-Orange.  By its nature, the achievement of these targets is subject to numerous risks and uncertainties that may give rise to differences between the stated objectives and actual results. The most significant risks are described in Section 4 Risk factors. Please also consult information under the heading Forward-looking information at the start of this document.

6.1   THE TELECOMMUNICATION SERVICES MARKET

Overall background of the Digital Market

FIGURE 1: GEOGRAPHICAL BREAKDOWN OF TOTAL TELECOMMUNICATIONS MARKET REVENUES, IN BILLIONS OF EUROS

[f7frt2011drfen001.jpg]

Source: Idate, IMF

In 2011 the telecommunications sector was relatively resilient to the global financial crisis. Growth over the medium term is being driven by two main segments: mobile data services and Internet services.

In terms of usage, customers are increasingly interested in speed, triple play and quadruple play offerings, and simplicity, as well as expecting customer assistance and trustworthiness from their carriers.

2010 was marked in particular by:

the expansion of social networks, which keep attracting users: Facebook customers amounted to 845 million at end-December 2011 (source: Facebook);

the impact of economic uncertainty on telecommunications industry and market in developed countries despite of sustaining growth in the sector.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   30





Telecommunications Sector Developments

The global market for telecommunications services maintained its growth in 2011, up 3.2%, confirming the moderate recovery started in 2010, when it was up 2.3% (source: Idate). This growth approximated the evolution of GDP, which was 4% in 2011, down one point from 2010 (source: IMF).

Overall, the sector resisted the deterioration in the general economic environment fairly well in 2011, but nevertheless did not recover its prior levels of growth, given the still challenging economic situation and the maturity level of some of its markets.

The markets

Mobile services remain the main driver of total growth, showing a significant upturn in 2011 of 6.2%. This market was up 13.1% (source: Idate), with almost 6 billion mobile customers at the end of 2011, due primarily to high growth in mobile communications in the world’s emerging countries. With total revenues for 2011 estimated at around 640 billion euros, mobile devices accounted for over half of all telecommunications services revenues worldwide and represent twice those of fixed telephony (source: Idate). On the strength of an explosion in mobile data usage, mobile broadband gave huge impetus to the sector. The new forms of communication, especially via social networks like Facebook or Twitter, have made it possible to expand mobile data usage.

The increasing demand for broadband mobile services, the appearance on the market of new mobile devices and the development of mobile applications and services are expected to offset the loss of revenues associated with declining voice services.

Fixed-line telephony now accounts for only 21.4% of total telecommunications services, compared with 50% in 2001, mostly due to the migration from fixed line to mobile telephony and a move to IP-based telephony. The decline in fixed telephony continued worldwide: the 2011 revenues from fixed telephony of 236 billion euros are down nearly 18% from 2008.

Internet services have continued to increase, reaching over 228 billion euros in value, and today represent 20.6% of total telecommunications services, nearly the percentage for fixed-line services. But they still do not make up for the fall in value of fixed-line services, where we find a decrease for voice of 22.5 billion dollars versus an increase for data of 13.7 billion dollars, according to Idate (The Global Market for Telecom Services—Markets & Data—July 2011).

Telecommunication sector generally stood up well to the economic slowdown of the past few years, but in order to better serve their customers, operators have had to adapt, under difficult circumstances, to customers’ expectations and new uses. The strategic partnerships forged between telecommunications operators and media companies, such as between France Telecom-Orange and Dailymotion or Skyrock.com, have improved the customer experience with a wealth of service offerings enabling people to exchange, discover and share media.

Geographic regions

When looking at development by geographic regions, growth in telecommunications remains very uneven. The sector’s 1,105 billion euros worldwide are split nearly equally between the advanced countries of North America and Europe and the emerging countries of Latin America, Africa, the Middle East and Asia-Pacific.

Asia-Pacific today represents the biggest telecommunications market in the world, with revenues of 333 billion euros in 2011. China makes up nearly a third of this market (29.1%) and is catching up with Japan, which at 32% has started a slow decline.

Growth of services in Europe stayed negative at -0.8% as compared with -0.4% and -1.6% in 2010 and 2009 respectively. Russia is the growth leader in Europe with very strong positive rates (+6.4%) versus the negative ones of the European Union which saw a fall of -1.9%.

The region of Africa and the Middle East has experienced the world’s fastest growth (+10.4%), but its revenues, about 80 billion euros (Figure 1), are among the lowest.

The large emerging countries are still providing the growth in the market globally, while the gap between them and the advanced countries is getting wider.

In terms of mobile services, the differences between the various markets were more pronounced in 2011, owing to the different maturity levels. The saturated European market posted meager value growth of 0.9% while the Latin American market grew at 8.9% and the Indian and Chinese markets made leaps of 21.1% and 12.5% respectively. Africa and the Middle East also showed double digit growth at 11.6%.

Regarding to mobile phone penetration rates (number of subscribers per 100 inhabitants), it has reached very high levels in the advanced countries, especially wherever there is a strong trend toward prepaid subscriptions (Figure 2). This is particularly true in Italy, where the penetration rate is over 150%, or Germany, where it is 139% (source: Idate). By contrast, emerging economies in Asia and Africa, where SIM card penetration rate is still very low (e.g. 74.4% in China and 74% in Africa and the Middle East), offer significant potential for growth (source: Idate).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   31





FIGURE 2: PENETRATION OF MOBILE PHONES AND BROADBAND IN 2011 (AS A % OF THE POPULATION)

[f7frt2011drfen002.jpg]

Source: Idate

In terms of revenues, migration to the Internet has sparked a substantial decline in traditional fixed-line telephony, especially in Europe and Asia-Pacific, where the penetration of traditional telephony is higher and the migration to broadband more advanced. The substitution of mobile for fixed telephony, combined with a switch to IP, is also a reason for this broad decline in revenues. Africa and the Middle East is the only region to maintain a positive growth rate, of 2.6% (Figure 3).

In 2011, the worldwide growth of the Internet market is higher than in mobile market for the first time in most geographic areas, the exceptions being North America and Asia Pacific (Figure 3). Eventhough broadband internet is a newer service and far from achieving its saturation level, the penetration rate is already very high in Europe: According to the ITU (International Telecommunication Union), of the 1.8 billion households in the world, 700 million had a PC in 2011. One third, or 600 million, has Internet access—in comparison with one in five only five years ago. This level of hardware equipment blends two very different penetration rates: 74% in the developed world and 25% in the developing world.

FIGURE 3: ANNUAL GROWTH IN TELECOM REVENUES IN 2011

[f7frt2011drfen003.jpg]

Source: Idate

Dynamics of the ICT sector and new uses

The telecommunications industry, where information and communication technologies (ICT) come together, has a potential for high growth and value creation.

The major ICT players are moving away from their traditional core businesses and diversifying into related sectors such as information technology and broadcasting. The addition of these new areas is creating an “ecosystem” in which several sub-sectors and different players interact, both in partnership and in competition. The new players can be sorted into four categories: network equipment and handset manufacturers (like Apple, Cisco and Ericsson); network operators (like Orange and Vodafone); suppliers of services via the Internet (like Google and eBay); and content producers (like Canal+ and Sky).

This movement increases competition among the players because it challenges the classic service provider model. However, the reorganization of the ecosystem also generates synergies, because the innovations brought to the market by one player circulate and benefit all strata of the ecosystem. Apple’s entry into the telecommunications market, after initially causing apprehension among telecom operators, has radically changed the way in which mobile phones are used, and led to considerable expansion in the use of the mobile Internet.

2011 was a boom year for mobile Internet. The wide range of services offered and a lowering of prices saw it come into everyday use. Mobile handsets are now being used for much more than simply making calls and sending messages. They are used to read emails, access information, watch television and take photos and videos and share them on the Internet. Mobile handsets have thus become veritable multimedia platforms able to provide access to a multitude of services.

Over the next few years, the handset market should continue to grow rapidly and gain more ground in the ITC sector, according to Cisco research (VNI Global Mobile Data Traffic Forecast 2011-2016, February 2012). While the annual rate of growth in Internet traffic on PCs is expected to be 33% from now till 2015, the rates for televisions, tablets, smartphones and Machine-to-Machine (M2M) could be, respectively, 100%, 216%, 144% and 258%.



2011 REGISTRATION DOCUMENT / FRANCE TELECOM   32




The trend towards smartphones, which favors the penetration of new uses such as 3G, Wifi and GPS, is not without consequences for operators. In 2011 smartphones accounted for only 12% of all handsets but over 82% of total handset traffic. A basic smartphone generates 35 times more mobile data traffic than a traditional handset, according to that same Cisco report. In addition, in certain countries, mobile Internet may come to substitute completely for fixed Internet. This growth will need to be supported by a network able to provide reliable, good quality access and increasingly powerful handsets. Operators will therefore need to reinvest heavily, particularly in the new generation of LTE (Long Term Evolution) mobile networks.


FIGURE 4: ESTIMATED GROWTH IN IP TRAFFIC BETWEEN 2010 AND 2015

[f7frt2011drfen004.jpg]

The robust expansion in IP traffic (Figure 4) is based largely on the increasingly large number of handsets connected to IP networks. The number of such handsets is expected to become twice as great as the total population by 2015. Video Internet traffic is also a major component in the growth of IP traffic. It should account for over 50% of consumer Internet traffic in 2012.

Enterprise Internet traffic will grow faster than the extended IP network (WAN). Overall IP traffic will grow at 18% versus 79% for enterprise mobile Internet and 19% for enterprise fixed Internet (source: Cisco VNI Forecast and Methodology 2010-2015.)

Fixed-line Internet services also shared in this rapid expansion. Pay television, Video On Demand, Internet content and catch-up TV are driving the market forward in the developed countries. Idate estimates that in 2010 there was one television per household in 1.35 billion households in the world, over half of which were located in the Asia Pacific region (source: Idate, Worldwide Television Market - January 2012.)

These new uses, combined with the growing number of users, have also led to an explosion in traffic, requiring large investments of capital to increase network capacities, and to a surge in costs for telecommunications operators. Service quality and network management accordingly remain a priority and a strategic driver for these operators.

6.2   FRANCE TELECOM-ORANGE STRATEGY

On July 1, 2010 Stéphane Richard launched Conquests 2015, the France Telecom-Orange Group strategic project. It is the product of a broad collaboration among the Group’s various units and countries and is organized around four themes: people, networks, customers and internationaldevelopment. The Group’s ambition is to make Orange the preferred choice of all its stakeholders: its customers, its employees, its shareholders and society as a whole.

The year 2011 ended in the context of a difficult global environment for France Telecom-Orange, marked by major uncertainties and accelerating transformations, particularly in the telecommunications sector. More than ever, France Telecom-Orange must adapt to changes in the environment and seize new opportunities that will enable us to realize our strategic objectives.

Conquests 2015

Orange’s men and women, at the heart of our priorities

The Group has an ongoing goal: to base our priorities on our people. The quality of social relations within the Company remains the basis of our performance in every other way.

In France, the new social contract project was launched in 2010, including measures to recruit 10,000 new employees over three years, an employee survey and a new mediation process.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   33





A new organization structure was also put in place to enhance the latitude of operating managers and local management teams.

The launch of Orange Campus sparked a change in managerial culture in France and internationally, with sites iin Poland and Spain.

Lastly, in November 2011 the Group introduced the Orange People Charter, (Charte Orange in French-speaking countries in the AMEA region), based on six commitments the Group has made towards developing its people.

Networks, the foundations of growth

Networks, the spinal column of the digital world, make up the Group’s core business line and area of expertise. They are, more than ever, our key source of growth.

In 2011 the Group spent 12.7% of revenues on capital improvements, of which 55% was on the networks, as can already be seen in:

fixed-line, high capacity broadband networks—with the launch of a fiber optic rollout calling for two billion euros by 2015;

mobile high capacity broadband—for which the Group has purchased 4G licenses in France, Spain and Belgium;

Mobile High Definition Voice, introduced in 14 countries, while 3G was launched in 13 countries of Africa and the Middle East, and 2,065 solar sites are up and running in 18 countries.

The french regulator (Arcep) has ranked the Group at the top of mobile networks in France, with speeds measured at two- to five-times faster than its competitors’ (source: Arcep - 2011 Results of the Quality Report on Voice and Data Services of 2G and 3G Mobile Networks in Continental France).

Customers

It is the objective of the France Telecom-Orange Group to be for its customers a comprehensive, popular, trustworthy carrier and to become their preferred partner for all their digital experiences. In a highly competitive sector, service quality improvements, awareness of user needs and customer satisfaction are critical issues for the Group.

The Customer experience 2015 program was launched in 2011 in all the European and AMEA countries, involving these areas: service quality, simplification and segmentation of product offerings, simplified relationships in all sales channels and recognition of customer loyalty.

The Group has positioned itself in Europe with such new offerings as contactless services (NFC), machine-to-machine communications and cloud computing.

In the AMEA region, the Group continues to develop products and services tailored to local markets, such as Orange Money.

International development

The Group’s international development is based on several objectives being met over the next three years:

reaching 300 million customers worldwide (vs. 226 million at the end of 2011);

in the emerging markets: doubling revenues to 7 billion euros and achieving 1 billion euros of revenue in the B2B market.

In terms of this development strategy, significant events of 2011 included:

new acquisitions or equity investments in telecommunications operators: Meditel in Morocco (end 2010), Korek Telecom in Iraq, and CCT in the Democratic Republic of Congo;

continuation of the policy of partnerships and collaboration with the signing of a strategic partnership framework between Orange and China Telecom, and the creation of a purchasing joint-venture with Deutsche Telekom, Buyin, for the purpose of reducing costs through economies of scale (price, volume) and increasing standardization in purchasing.

2012 Priorities: adaptation to achieve Group objectives

The Group strategic plan, “adapt to conquer”, is the quantified and operational expression of conquests 2015. It makes it possible to quantify the effect of the project on the Group and to determine the resources necessary for implementing it. The plan makes use of specific operating programs that will help us attain our objectives.

Innovation, the centerpiece of the Group’s plan

Innovation is a key factor for the Group in seizing new opportunities and developing its fundamentals.

The Group has defined five fields of innovation for its products and services and two fields to develop and transform its assets and strength. Our research and innovation will focus on these issues:




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   34





existing activities, in order to protect and grow revenues from monetizing traditional businesses: communication services and monetization of data;

new activities, such as secured transactions and data protection (“safety, identity and privacy”), “cloud services” and the “Internet of things” (integrated solutions for particular sectors like energy or water distribution and transportation);

the convergence of access, screens and services as a differentiating and loyalty-building feature in the market (“Orange universe”); networks face major challenges in the coming years – better quality of service, data explosion, deployment of very high broadband as a key differenciator…- and we need to strengthen them and monetize their intelligence towards third parties (other operators or services and content providers) (“smart network”).

The Group has one valuable advantage in meeting the innovation challenge: more than 5,000 research scientists, engineers and technicians around the world. The goal is to make the best use possible of their skills.

This is the purpose of the nova+ program, which lays out three principles for the Group’s innovation chain: joint responsibility of the countries and the markets, involved from the very start in the choice of the innovations to be developed, fully integrated projects, with a single leader to orchestrate resources in research, development and marketing, a clear distinction within the organisation between research, forward planning and conception/rollout.

Among our strategy priorities, six programs were identified as needing sharp acceleration and calling for special attention from the organization: “Orange user interface”, “content aggregation”, “seamless wireless access”, “payment and contactless (NFC)”, “smart cities” and “smart networks for wholesale” intelligence.

New management processes were established for these six programs, which will be managed directly by the Group’s Executive Committee, in order to allow all the relevant teams to work across organizational boundaries and in perfect alignment on their shared objective. The other strategic priorities (e.g. cloud, social communication, M2M…) will remain managed under the existing traditional organization.

Other operational programs

These programs aim to ensure the development of the men and women who work at Orange through the Orange people charter and its French version, the Social Contract.

They are also intended to base Group development on more efficient and more better shared operating models, through these programs:

customer Experience 2015, introduced to make Orange the leader in customer service by 2015 in all its markets, by involving all Group business lines in improving service quality, simplification and segmentation of products, better sales service and after-sales service in all channels, the right customer support throughout their Orange experience and loyalty recognition;

Chrysalid, set up to identify and encourage operating efficiencies initiatives throughout all operations, business lines and regions, in order to control costs increase – especially in networks, customer relations, marketing and sales – with savings targets of 2.5 billion euros in 2015, including 1.5 billion euros by 2013. The purpose is to improve our current processes while adopting the approaches and business models that will make us the operator of the future. Steps taken in 2011 have enabled savings of 470 million euros including 250 million euros in networks. In 2012, the main savings areas are expected to be networks, customer service and marketing.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   35





6.3   OVERVIEW OF BUSINESS

[f7frt2011drfen005.jpg]

(1) The Everything Everywhere customer base in the UK is 50% consolidated in the France Telecom-Orange customer base.

At the end of 2011, the France Telecom-Orange group had 226.3 million customers in the world, an 8% increase over 2010. These customers included 167.4 million mobile phone customers excluding MVNOs (11.3% increase) and 14.4 million broadband customers (5% increase).

The increase in the number of customers is related mainly to mobile services growth in Africa and the Middle East, these areas representing 74.6 million customers on December 31, 2011, an increase of 26.4% (+15.6 million additional customers). Orange Money is being marketed in eight African countries and covered 3.2 million customers at the end of 2011.

In Europe, smartphone use had increased 57% to 16.2 million customers at December 31, 2011. Digital television (IPTV and satellite) was up 24.8% with 5.1 million subscribers at December 31, 2011, located mainly in France and Poland. Lastly, subscriptions to the Deezer service (online music) as part of Orange’s mobile and ADSL offerings reached 1.2 million customers at December 31, 2011. Similarly, the MVNO customer base for the Group in Europe has expanded 21.3% (5.6 million customers at December 31, 2011).

In 2011, the Group generated 45.3 billion euros in revenue.

The Group’s activities are detailed in the Registration Document, broken down by the following operating sectors: France, Poland, Spain, Rest of the World, Business Communication Services, International Carriers and Shared Services. The financial indicators mentioned in this chapter, such as Ebitda and Capex, are financial aggregates that are not defined by IFRS. For more information, see Chapter 9, Section 9.1.5.4 and the Financial glossary appendix. Unless otherwise indicated, the market shares indicated in this chapter correspond to market shares in terms of volume.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   36





6.3.1  France

6.3.1.1   The Telecom Services Market

KEY MACROECONOMIC INDICATORS

 

2011

2010

2009

Population (in millions) (1)

65.2

64.6

64.3

Households (in millions) (1)

28.0

28.0

27.7

GDP growth (%) (3)

+1.7%

+1.5%

-2.7%

GDP per person (in dollars PPP) (2)

35,049

33,910

33,237

Change in consumption per household (%) (3)

+0.7%

+1.4%

+0.2%

Source:

(1)  Insee

(2)  IMF

(3)  European Commission


TELECOM SERVICES RETAIL MARKET REVENUES
(IN BILLIONS OF EUROS)

[f7frt2011drfen006.jpg]

Source: Arcep (Year 2011: year-on-year cumulative to 3rd quarter 2011)

NUMBER OF CUSTOMERS (IN MILLIONS)

[f7frt2011drfen007.jpg]

Source: Arcep (Q3 2011)

Since the second half of 2011, France has seen a slowdown in economic activity in most business segments, fueled by the sovereign debt crisis. This downward trend was apparent at the Company level through a decline in capital expenditures, exports and job creation. Nevertheless, GDP growth for 2011, estimated at 1.7%, turned out slightly higher than the 1.4% seen in 2010 (source: Insee, October 2011). At the same time household consumption slowed down, by 0.7 points.

The telecommunications market followed the same trend and shows signs of flattening out. The total market for electronic communications services fell 3.1% for the year (source: Arcep, January 11, 2012).

The revenue decrease in fixed-line services continued at an annual pace of 2.6%. For the first time, mobile services revenue declined, down 1.4% on the year (source: Arcep, January 12, 2012, calculated year-on-year), while the mobile penetration rate grew by 2.5 points in 2011 to 103.2% as of September 30 (source: Arcep, November 2011).

According to a Médiamétrie study, the penetration rate of household multimedia equipment continued to rise in 2011, with an especially sharp increase in netbooks (up 55%) and touch-screen tablets, which became hugely popular. Thus 73.2% of households had computers at the end of the third quarter of 2011, which was a yearly increase of 2.1 points. The omnipresence of the Internet in all business segments as well in the private sphere constituted a true engine of growth, promoting digital convergence in content and in devices. Televisions, computers, audio systems and mobile phones are all interconnected at this point.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   37





Fixed-line telephony market

NARROWBAND

 

2011

2010

2009

Revenues (in millions of euros)

6,538

7,329

8,483

o/w PSTN access

4,085

4,372

5,097

o/w PSTN calls

2,278

2,717

3,115

o/w narrowband Internet

34

46

72

o/w other (phone cards and public phones)

141

194

199

Number of subscriptions (in millions)

39.8

40.4

41.2

PSTN access

19.7

21.5

24.1

VoIP access

20.1

18.9

17.0

o/w VoIP-only

14.2

12.6

10.5

Traffic

112,433

111,768

109,482

PSTN traffic (in millions of minutes)

41,956

47,402

53,446

VoIP traffic (in millions of minutes)

70,477

64,366

56,036

Source: Arcep (year-on-year cumulative to Q3 2011)


At end September 2011 the number of fixed telephone subscribers had fallen 1.6% from the prior year, owing to the decline in the switched telephone network, partly offset by the 6.3% increase in Internet telephony. This trend has been growing stronger since early 2010 with the reduction in the number of double telephone subscriptions (PSTN and VoIP) in favor of single VoIP subscriptions (dual play, triple play and quadruple play offers).

Revenues from fixed-line services (fixed-line telephony and Internet) continued to decrease (down 2.6% yearly as of end September 2011) owing to the decline in subscriptions (down 8.5% yearly as of end September 2011) and in message volume (down 11.5%). The expansion of ADSL offers proposed by a lot of providers that include unlimited calling to mobile phones from modem/routers also hurt revenues from out-of-bundle VoIP traffic.

BROADBAND AND HIGH CAPACITY BROADBAND

 

2011

2010

2009

Revenues (in millions of euros)

9,572

9,213

7,398

o/w Internet access and VoIP service

7,847

7,578

6,234

o/w billed VoIP calls

700

755

691

o/w other Internet access revenues

1,025

880

473

Number of subscriptions (in millions)

22.4

21.3

19.8

Broadband

21.8

20.9

19.5

o/w ADSL

20.7

19.9

18.586

o/w other broadband subscriptions

1.1

1.0

0.957

High capacity broadband

0.6

0.5

0.288

Number of IPTV subscriptions (in millions)

11.7

10.7

8.8

% of lPTV in ADSL access

56.5%

53.8%

47.5%

Sources: Arcep (year-on-year cumulative to Q3 2011)


The total number of broadband and high capacity broadband Internet subscriptions continues to increase, at an annual rate of 5% as of end September 2011. ADSL represents 92.5% of these customers, while high capacity broadband (fiber optic access) grew by 29.3% over the first nine months, to 600,000 customers at end September 2011.

The growth in revenues from broadband and high capacity broadband continued, linked to the greater number of customers, but was negatively impacted by a decrease in revenues from broadband voice communications, once these became included in certain single-price packages for calls to mobile phones.

ISP revenues from multiplay packages as well as subscriptions and communications on VoIP services, which accounted for 89.3% of total revenues from broadband and high capacity broadband, were up 2.6%.

The increase in usage was buoyed by the growth in social networks, television, and downloading music and video. Television over ADSL has experienced strong growth, with the proportion of ADSL subscribers taking a television service up 2.7 points, to 56.5%.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   38





Mobile telephony market

 

2011

2010

2009

Revenues (in millions of euros - excluding revenues from incoming calls)

19,243

19,511

19,031

o/w voice

14,137

15,006

15,249

o/w messaging (SMS, MMS)

2,601

2,416

2,213

o/w access to data

2,505

2,089

1,571

Number of customers (in millions)

67.0

65.1

61.5

o/w subscriptions

48.1

46.4

42.7

o/w pre-paid

18.9

18.7

18.8

o/w active 3G customer base

26.0

22.9

17.4

o/w Internet data subscribers only

3.0

2.7

2.1

Average bill (euros per month, year-on-year)

25.1

26.7

26.6

Traffic (in millions)

 

 

 

minutes from mobile phones

105,983

103,235

101,204

number of SMS

136,834

103,186

63,351

AUPU (minutes per month)

134

137

146

Sources: Arcep (year-on-year cumulative to Q3 2011)


The number of subscribers to mobile telephone services (number of SIM cards in use) was 67 million at the end of the third quarter of 2011, or a yearly increase of 3%. This growth is attributable both to our ongoing work on improved network quality, accommodating expanded use of mobile multimedia (Internet and email) and to our greater use of unlimited offers.

The mobile penetration rate is 105.5% of the population at end December 2011 (source: Arcep fourth quarter 2011), up nearly 5 points on the year.

The growth in subscriptions started to slow down (to 3.7% versus 8.6% the year before), largely due to slower growth in cards for non-telephone uses (Internet-only cards and cards for communications equipment). Nonetheless, the proportion of customers with single-price packages has not stopped growing and represents seven out of ten customers (source: Arcep January 2012). Blocked contracts have grown, letting customers control their usage in tight economic times. Prepaid cards grew nearly six points as operators appeared with inexpensively priced international calling plans, in particular to emerging countries.

The rate of growth in customers using the 3G network remained high, in line with the growth both of higher performing mobile handsets and of unlimited mobile Internet plans. At end September 2011 this annual growth rate was 13.7%, though this was slower than at the end of 2010.

While the volume of mobile telephone usage remained stable, SMS volume grew by 32.6% on the year as unlimited offers proliferated.

Revenues from mobile telephony saw a slight deceleration (down 1.4% annually at end September 2011 versus up 2.5% in 2010) due to the elimination of the reduced VAT on broadcast access as of February 1, 2011 and also to the price decline and stagnation in the volume of communications. On the other hand, revenues from data transfer (SMS and MMS messages, and Internet access) grew by 13.3%, although at a lesser pace than in 2010 (+19%).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   39





6.3.1.2   The Competitive Environment

Fixed-line telephony and Internet

BROADBAND MARKET SHARE

[f7frt2011drfen008.jpg]

Source: Orange (2011 data as of end September 2011)

In 2011, France Telecom-Orange’s main competitors in the consumer fixed-line telephone market were SFR-Neuf Cegetel, Free, Bouygues and Numericable.

Despite heightened competition, Orange remained the broadband Internet market leader, with a market share at end September 2011 of 42.3%, down by 0.9 point compared with 2010. SFR lost 0.5 point while Bouygues picked up 1.2 points, cable operators 0.3 point and Free 0.1 point, virtually unchanged. The arrival of Iliad group on the mobile market could make Free more attractive on the Internet broadband market in 2012.

Internet offerings increased during 2011, with a proliferation of unlimited calling plans from a modem/router to a nation’s mobile phones. SFR and Free marketed offers for their new modem/routers with enhanced functionality and content. In April 2011 Orange simplified its product line and introduced two new, customizable, enhanced-content offers (Livebox Zen and Livebox Star). All the major ISPs employed the same strategy, which was to enhance their triple play offers and upgrade their hardware, together with a pricing increase. Quadruple play offers were highly successful. Introduced at Orange and Bouygues in 2010, these group fixed-line telephony, mobile, Internet and television into one package. They now also include unlimited calling to mobile phones plus added services. SFR does not offer quadruple play, strictly speaking, but a Multipack offer which allows the customer to build up discounts from his or her fixed and mobile subscriptions.

In contrast, we see new virtual operators appearing on the ADSL market, such as Prixtel, who offer cut-rate plans with Internet access and full unbundling, with no commitments and no cancellation charges.

High capacity broadband

In December 2008, the major operators rolling out fiber optic (Orange, SFR, Free and Numericable) had undertaken to work together to standardize technical solutions for pooling the terminating segment of fiber optic networks (see the Section below on the regulatory environment).

The number of high capacity broadband subscriptions was estimated at 600,000 at end September 2011, of which 175,000 were fiber-to-the-home (FTTH) or bottom-floor connections, and 425,000 fiber optic connections with coaxial termination (source: Arcep third quarter 2011). At the same date, the total number of households open to FTTH was 1,350,000, an increase of 11.6% from June 30, 2011.

Numericable already has a substantial high capacity broadband network of over 8.2 million terminal connections, built on ultra high speed cable and fiber.

In July 2011, Orange introduced a wholesale scheme for expanding fiber optic networks to subscribers outside very densely populated areas. This arrangement, offered to all other operators, will pool capital spending made in these less profitable areas while maintaining competition on the retail market. After it was introduced, Free and Orange entered into a co-financing arrangement to install fiber optic networks to the end-user throughout some 60 communities totaling five million households.

Mobile telephony

MOBILE MARKET SHARE  

[f7frt2011drfen009.jpg]

Source: Orange (2011 data as of end September 2011)

The slower growth in revenues, despite growth in the number of mobile phones in use, reflects heightened competition. Creating value in data communications has become essential to offsetting the drop in voice revenues that has occurred as unlimited calling offers have become commonplace. Differentiation in the market is no longer largely a matter of offering numbers of hours but volumes of data, plus content included in the package price.

The elimination in January 2011 of the tax law allowing telecommunications operators to apply a reduced rate of VAT forced operators to make up that loss via revenue.

Additionally, new virtual operators appeared on the market such as Numericable, Prixtel and la Poste Mobile, while those already there, such as Virgin and NRJ, strengthened their position with completely unlimited, low-price offers for voice, data and texting as well as packages with no commitment and no handset fees. In this way, virtual operators picked up market share in 2011 at the expense of traditional operators – 12.7% in December 2011 versus 8% a year earlier (source: Arcep: 4th quarter 2011).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   40





The reaction from the three operators—Orange, SFR and Bouygues—was to modify their offers (such as SFR’s Square Deals or Orange’s Origami) and leverage their Internet subscriber base by offering low-priced quadruple play plans. They also expanded their no-handset, single-price plans, which carry a monthly discount on the basic rate, and introduced new, no-commitment offers sold only on line. Orange offered Sosh, Bouygues Telecom B&You, followed by SFR’s line of low-priced packages, RED. These new plans are similar to the no commitment, no handset fee plans offered by the MVNOs.

Finally, in anticipation of Free Mobile’s (Iliad group) arrival in the market in early 2012, Orange and Free Mobile signed a national 2G and 3G roaming contract in March 2011 (see Section 9.1.1.4 Key events). In early 2012, Free encountered a number of problems in its mobile network. Despite the presence of roaming between the Free Mobile and Orange France networks, these difficulties did not impact Group infrastructures or Orange customers.

6.3.1.3   The Regulatory Environment

French legal and regulatory framework

The electronic communications sector is primarily governed by the French Postal and Electronic Communications Code (CPCE) as well as Bylaws relating to e-commerce, the information society, consumer protection and data protection. The audiovisual communication services produced or distributed by the France Telecom-Orange Group come under the specific regulations governing this sector and are managed by the law of September 30, 1986.

For information concerning risks linked to regulation, see Section 4.2 Legal Risks.

Regulatory Authorities

The Arcep (Autorité de Régulation des Communications Electroniques et des Postes) is the body responsible for regulating the electronic communications sector in France.

The French Competition Authority, established in January 2009 following the restructuring of the French Competition Council, is an independent government authority responsible for ensuring open market competition and compliance with government economic policy. It has jurisdiction over all business segments, including the electronic communications sector. This Authority has its own investigations department and sanction powers for anti-competitive practices.

The ANFR (Agence Nationale des Fréquences - French national agency for frequencies) is responsible for planning, managing and controlling the usage of radio frequencies and for coordinating the establishment of certain radio transmission facilities. The frequency spectrum is the domain of 11 controlling authorities: government ministries, the Arcep and the French Broadcasting Authority (CSA). The Arcep and the CSA are in turn responsible for allotting to users the frequencies they control.

The CSA is an independent government authority established by the law of January 17, 1989 responsible for ensuring the freedom of audiovisual communication in France, i.e., radio and television, by any electronic communication process, under the terms and conditions defined by the law of September 30, 1986.

Key Events

Transposition of the new EU regulatory framework for electronic communications known as the “telecoms package”

In 2009 the European Parliament and Council passed a reform of the electronic communications regulatory framework for the purpose of fostering competition and supporting the rights of consumers. It consisted of two directives: 2009/140/EC and 2009/136/EC. This new telecoms package aims to increase the autonomy of national regulators while ensuring improved regulatory consistency. To that end, it established the Body of European Regulators for Electronic Communications (BEREC) and provides for a functional separation as a possible, extraordinary remedy if other remedies fail to ensure effective competition and if serious competitive problems persist.

Moreover, these specific provisions are intended to maintain and foster competition primarily in the following respects:

improved information available to consumers;

reducing to one day the portability time for fixed and mobile numbers;

objectives for promoting user access to electronic communications services, as well as arbitration authority granted to the Arcep to settle disputes between operators and content providers regarding Internet neutrality. In this area, however, the European Commission acknowledges that operators shall have the discretion to set different quality levels service by service. Customers must also be given personal data protection guarantees.

The French government transposed the “telecoms package” into French law by Ordinance no. 2011-1012 on electronic communications, dated August 24, 2011, following the adoption of the Enabling Act no. 2011-302 of March 22, 2011. The process of approving the law ratifying the Ordinance and the texts constituting the regulatory aspect of the transposition is currently underway.

Controversy over mobile phone masts

Comop/Copic

In 2009 the Government set up an Operational Committee (Comop) to perform a rigorous scientific assessment of the possibility of reducing human exposure to radio waves and to do so by calling on all interested parties. This technical work, the complexity of which was seriously underestimated when begun, continued through 2011. The first assessments of the exposure to radio waves emitted by mobile phone masts in the towns that volunteered for the study showed that it is very weak. The outliers, where exposure was significantly greater than the observed average, need to be inventoried so that they can be reduced.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   41





In parallel with the technical work, a methodology to inform and consult with residents on plans to install new towers was devised and needs to be tried out. In the summer of 2011 the Comop became known as the Copic and was tasked with studying the recommendations that came out of the 2 years of work, principally the field testing.

Decision of the French Administrative Supreme Court (Conseil d’Etat) on the powers of Mayors

Basing its decision on the legal framework provided by the French Postal and Electronic Communications Code, which thoroughly lays out the special policy on electronic communications that is administered by the Minister of Electronic Communications, the Postal and Electronic Communications Regulatory Authority (Arcep) and the National Frequencies Agency (ANFR), the French Administrative Supreme Court ruled that town and city mayors could not use their police powers to regulate the installation of mobile phone masts.

IARC classification of radio waves

The International Center for Cancer Research, a division of the World Health Organization, has classified electro-magnetic fields from radio frequencies in Group 2B of its schema, i.e. “possibly carcinogenic for humans”. This classification reflects the fact that the link between cancer and radio waves has not been demonstrated by current scientific data. This is a reason for further research and preserving the precautionary measures that operators have been taking for several years, including earbud kits that come with the phone. No special measures have been adopted by WHO or by the French Government as a consequence to these findings.

Amended Finance Law 2011 and Finance Law 2012

The French Amended Finance Law of 2011 and Finance Law of 2012 provides the following tax reforms:

modification of the taxable basis for the tax paid by distributors of television services and allocated to the French national center of cinematography and the moving image (CNC). The CNC is the beneficiary of this tax, calculated as a percentage of revenues but not to exceed 229 million euros, with any surplus beyond that going towards a reduction of the deficit in the State budget;

for 2012 and 2013, a special 5% increase in the income tax applicable to large corporations;

a new tax benefiting ANFR to cover the costs incurred in gathering and processing claims by users of DTTV concerning interference from the operation of 4G radio transmission facilities.

Law on private copying fees

The law adopted by the Parliament on December 19, 2011 changes the national rules on private copying fees, thereby inserting into the Intellectual Property Code the case rulings made by the Administrative Supreme Court on the matter.

The legitimate acquirer of a work has the option of reproducing that work without the prior consent of the author, if it is for his own personal use. But against that he is subject to the private copying fee, levied on the available memory capacity of media devices. Orange is liable for this fee on certain devices that it markets.

The private copying fee law stipulates that only copies made from lawful sources can create a right to compensation. The mechanism for payment or exemption through conventional means, moreover, is broadened to include purchasers of recording devices for purposes other than private copying, and these are primarily professionals. When recording devices are offered for sale, the fee must be brought to the attention of the purchaser, together with a notice explaining the fee and how it is used.

Finally, this law allows the ad hoc Commission, charged with determining which devices are covered and the amount of fees, one year to bring such fees into line with new legal requirements based on usage studies.

Law on guidelines and programming for the conduct of internal security (LOPPSI 2)

The law on guidelines and programming for the conduct of internal security (LOPPSI 2), passed by Parliament on March 14, 2011 and mainly concerning duties of police and military concerned with civil order for the period 2009-2013, contains a number of provisions affecting the electronics sector.

In Article 6 of Law no. 2004-575 of June 21, 2004 for confidence in the digital economy, LOPPSI 2 puts a duty on Internet service providers to block pedophilic pornographic sites simply on demand of the Office Against Information and Communications Technology Crime (OCLCTIC), without prior court order.

In addition, this law amends Article L. 34-3 of the Postal and Electronic Communications Code to now require mobile operators to block mobile devices for four business days from the time they receive an official declaration of theft from the police or gendarmerie.

The Hadopi 1 and 2 Laws – their implementing decree

The set of rules provided by the laws of June 12, 2009 to promote the dissemination and protection of created works on the Internet (known as the Hadopi law) and of October 28, 2009 concerning the criminal protection of literary and artistic property on the Internet (called Hadopi 2) were supplemented by the Decree of March 11, 2011 concerning automated processing of personal data authorized by Article L. 331-29 of the Intellectual Property Code titled “A system for applying measures for the protection of works on the Internet”.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   42





This decree amends the procedure originally contemplated in the “System for applying measures for the protection of works on the Internet” of March 5, 2010, whose purpose was to authorize under certain conditions the automated processing of personal data of subscribers covered by the graduated response process. The new clauses modify the last phase of the graduated response by calling for the automated forwarding of case files to the public prosecutor so that the latter may decide whether to start criminal proceedings against subscribers flagged for gross negligence.

Low-income mobile rates

During the round table of March 7, 2011 under the auspices of the Minister for the Digital Economy, Eric Besson, and the Secretary of State for Consumers, Frédéric Lefebvre, Orange, together with other mobile telecommunications operators, signed an agreement binding them to offer a low-income mobile phone plan for people receiving public aid. This offer was to meet specifications set by the government so as to qualify as a certified low-income rate.

This certification was awarded to Orange in September 2011 for its RSA Blocked Plan, which met the required criteria, in particular a package including 40 minutes of calling and 40 text messages for a limited price, as well as no time commitment and no cancellation charges.

Infrastructure and networks

Fiber installations in new buildings starting April 1, 2012

A new implementing decree for the Anti-Digital Divide law of December 17, 2009 was adopted on December 14, 2011 amending Article R. 111-14 of the Construction and Dwellings Code, which deals with optical fiber in new buildings. The decree provides that in high-density areas and under conditions defined by a ministerial order, the number of fiber cables per dwelling shall be as many as four. Moreover, the decree is broadened to include all buildings for which a building permit is requested from April 1, 2012 onward.

New regulation for a census of underground, aerial and underwater networks.

Following Grenelle 2, the government decided to establish a new regulation effective as of July 1, 2012 to prevent damage to pipelines and underground networks whenever construction requires digging. This reform of the decree of October 14, 1991 concerning requests for information and declarations of intent to build, puts new obligations on all companies that manage infrastructure and all network operators. Henceforth a single office for network mapping, under the aegis of Inéris, will identify operating companies and make a survey of their networks.

The office is opened from April 1, 2012, free of charge to project owners and builders, who applies there for their building permits. Companies doing underground work are also required to furnish geo-coded maps with their permit applications. These new provisions call for user fees to finance the single office where applications shall be submitted for electronic communications installations, which are projects considered to be economically critical. The size of the fees will be determined by order of the Minister of Transport and Distribution Network Security and are expected to be published at some point in 2012.

2012 Outlook

Completion of the transposition of the regulatory component of the new European electronic communications framework known as the “telecom package”: regulatory component.

Ordinance no. 2011-1012 dated August 24, 2011 concerning electronic communications constitutes the legislative component of the telecom reform package. This set of rules will be supplemented by a regulatory component that includes:

an Administrative Supreme Court decree pursuant to the Data Privacy Law concerning the prevention and notification of personal data violations;

an Administrative Supreme Court decree transposing the new European regulatory framework into the French Postal and Electronic Communications Code (CPCE) and providing heightened security against interceptions of electronic communications;

a decree amending the duties of operators contemplated in the CPCE in accordance with the new European framework.

Drafts of all these decrees have been submitted for comment to the Consultative Commission for Electronic Communications (CCCE), the Superior Commission of Postal and Electronic Communications Public Services (CSSPPCE) and the National Digital Council (CNN). The National Data Privacy Commission must also issue an opinion on these drafts. Then the Administrative Supreme Court is to rule on the decrees that fall within its jurisdiction.

Controversy over mobile phone masts

Copic will continue its work, including measures to check the coverage impact of lowered power in mobile phone masts.

Bill strengthening consumer rights, protection and information

On June 1, 2011 the Council of Ministers adopted a bill to strengthen consumer rights, protection and information in the main aspects of everyday living, and specifically in the area of electronic communications. The bill was reviewed and passed on first reading by the National Assembly and then the Senate, in December 2012. The text was not then included in the parliamentary agenda, in preparation for its second reading in the National Assembly. Parlementary Cession has been suspended on March 7, 2012.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   43





Low-income Internet pricing

As part of the continuing low-income mobile tariffs, in September 2011, Orange made a commitment to the French government to offer a low-income Internet rate. This offer, available from February 2012, enables low-income households to access broadband Internet at up to 20 Mbits/s as well as unlimited telephone calls to fixed lines in metropolitan France and French overseas departments. It meets the requirements laid down by the government, being available throughout metropolitan France at a monthly rate of 23 euros (incl. VAT), including Livebox rental, and having no deposit, prepayment for usage, or activation costs, and no obligation to commit for a specific time period.

Regulation of mobile telephony

Frequency spectrum management

The French Postal and Electronic Communications Code gives the Arcep responsibility for assigning the frequencies used for electronic communications. In the event of scarcity of resources, it establishes the principles for selecting candidates when the Minister of Electronic Communications calls for applicants, on recommendation by the Arcep, using criteria related to terms of use or by an auction process.

The frequency spectrum management required for personal mobile television (PMT) comes under the responsibility of the CSA as does the whole spectrum allocated to broadcasting (DTTV, TDR, FM radio).

Allocation of 800 MHz and 2.6 GHz frequencies for high capacity broadband

After the allocation in January 2010 of the fourth 3G license to Free Mobile followed by the allocation in June 2010 of two residual channels in the 2.1 GHz band to Orange and SFR, a significant event of 2011 was the start, on June 15, of the process for allocating so-called 4G frequencies in the 800 MHz and 2.6 GHz band for new high capacity broadband.

The process took place in two stages, with candidates applying for 2.6 GHz on September 15 and for 800 MHz on December 15, 2011. In the 2.6 GHz band, Orange France and Free Mobile each obtained one 20 MHz channel for 287 million euros and 271 million euros, respectively. Bouygues Telecom and SFR each obtained one 15 MHz channel for 228 million euros and 150 million euros, respectively. The Arcep granted its authorization to Orange France on October 11, 2011 for a period of 20 years.

The 800 MHz band, also called the “digital dividend”, refers to the 790-862 MHz band, that is, the portion of frequencies freed up with the analogue television switch-off on November 30, 2011 in keeping with the planned schedule and now allotted exclusively to use by electronic communications.

In this band, four blocks were offered in the call for candidates, with varying reserve prices. Block A of 10 MHz, the nearest to DTTV frequencies, had a minimum price of 400 million euros; blocks B and C of 5 MHz, 300 million euros each; and block D of 10 MHz, 800 million euros minimum. Orange France won Block D for about 891 million euros; SFR won Blocks B and C together for about 1,065 million euros, and Bouygues Telecom won Block A for about 683 million euros. The Iliad Group (Free Mobile) was a candidate, but won no frequencies. Free Mobile does have roaming access rights, however, on the SFR network. The Arcep granted its authorization to Orange France on January 17, 2012 for a period of 20 years.

The authorizations carry with them certain coverage requirements. In particular, 99.6% of the population must be covered by high capacity broadband mobile within 15 years and there is a special, 800 MHz-only rollout scheduled for rural areas, with closer deadlines of between five and ten years.

Each operator agreed to allow Full MVNOs (1)  on its high capacity broadband network, and the three companies awarded 800 MHz frequencies committed to provide increased coverage.

The following table summarizes the principal frequency allocations made in the bands used for mobile services:

800 MHz

Digital Dividend

(790-862 MHz)

•   authorizations given to Bouygues Telecom, Orange France and SFR in January 2012 for 10 MHz each.
Free Mobile has roaming access on the SFR network.

900 MHz

•   2G/3G operators authorized to refarm the 900 MHz band for 3G since February 2008;

•   sale back to the fourth candidate, Free Mobile, of 2 x 5 MHz in high-density areas by Orange France and SFR on January 1, 2013 and by Bouygues Telecom in the remaining parts of the country since July 12, 2011.

2.1 GHz

•   Free Mobile awarded the fourth 3G license, with a 2.1 GHz channel;

•   two other channels awarded to SFR and Orange France in May 2010.

2.6 GHz

•   authorizations given to Orange France and Free Mobile in October 2011 for 20 MHz each, and to Bouygues Telecom and SFR for 15 MHz each.





(1)  A full MVNO operates his own core network components and his own applications platforms; this entitles him to receive call termination fees.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   44





3G coverage commitments

The commitments made at the time UMTS licenses were awarded in 2001 called for coverage of 98% of the population by August 2009. Following an audit of these commitments by the Arcep in 2009, the Authority put Orange on notice to honor its obligation to cover 98% of the population by the end of 2011, with an intermediate milestone of 91% by the end of 2010. Orange honored this commitment.

On February 12, 2010 the three mobile carriers—Bouygues Telecom, Orange France and SFR—signed an agreement to share 3G network infrastructures, anticipating coverage by the end of 2013 of approximately 2,500 sites in the country’s least populated areas. Added to this agreement was an agreement signed on July 23, 2010 with Free Mobile outlining how that operator would fit into the plan in the future.

3G COVERAGE OBLIGATIONS AND ACTUAL COVERAGE OF THE THREE OPERATORS

France

Orange

SFR

Bouygues Telecom

Free Mobile

3G coverage obligations

(initial authorizations or following the Arcep’s formal notices to perform in December 2009)

91% end-2010
and

98% end-2011

88% end-2010,
98% end-2011 and

99.3% end-2013

75%

as of end-2010

90% as of
01/2018

3G coverage of the population at end-2011

(source: operators’ publications)

98%

98%

82% as (end-2010)

27% in
January 2012


REGULATION OF MOBILE CALL TERMINATION BY THE ARCEP

MTR euro
cents/min

Market analysis
1st cycle

Market analysis 2nd cycle

Market analysis 3rd cycle

  

 

Price cap 1

Price cap 2
(December 2008 decision) (1)

(March 2011 decision)

2005

2006

2007

January 
2008-

June 2009

July 2009-

June 2010

July  2010-
December 
2010

January 
2011-

June 2011

July 2011-
December 
2011

January 
2012-

June 2012

July 2012-
December 
2012

January 
2013-

June 2013

Orange France

12.50

9.50

7.50

6.50

4.50

3.00

3.00

2.00

1.50

1.00

0.80

SFR

12.50

9.50

7.50

6.50

4.50

3.00

3.00

2.00

1.50

1.00

0.80

Bouygues Télécom

14.79

11.24

9.24

8.50

6.00

3.40

3.40

2.00

1.50

1.00

0.80

Asymmetry

18%

18%

23%

31%

33%

13%

13%

0%

0%

0%

0.00

(1)  For Bouygues Télécom, decision 2010-0211 dated February 18, 2010, setting the tariff for the second half of 2010 at 3.40 euro cents


Mobile termination rate

In May 2011, the Arcep adopted a pricing framework for mobile voice call termination services in continental France by Orange France, SFR and Bouygues Telecom for the period July 1, 2011 to December 31, 2013. In this regard, the Arcep set symmetric mobile termination rates for the three operators as of July 1, 2011. On the other hand, in its draft ruling issued on December 13, 2011, the Authority proposes to introduce asymmetric Mobile Call Termination Rates for Free Mobile, Lycamobile and Oméa Télécom, so as to offset the temporary extra costs arising from their status as new entrants. On March 13, 2012, Arcep notified its draft decision on the regulation of the mobile voice call terminations of Free Mobile, and Lycamobile and Oméa Télécom to the European Commission and European regulators. The Authority deemed it appropriate to apply the following rate framework: a maximum of 2.4 euro cents per minute until June 30, 2012; an initial reduction to 1.6 euro cents per minute for a six-month period starting July 1, 2012; followed by a second reduction to 1.1 euro cents per minute for a 12-month period starting January 1, 2013.

Even if the impact on wholesale revenues is negative, a uniform drop in MTRs is largely neutral on the wholesale business profitability of an operator such as the Orange group which has both fixed-line and mobile operations. The asymmetries granted to the new entrants have been incorporated into the Group’s forecasts.

SMS termination rate

On July 22, 2010, the Arcep took a decision based on the review of the wholesale market for SMS terminations on mobile networks in France. It sets the maximum rates for SMS terminations invoiced between mobile operators that will reach one euro cent per SMS as of July 2012.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   45





Euro cents/SMS

2009

February 2010

October 2010

July 2011

July 2012

Orange France

3.00

2.00

2.00

1.50

1.00

SFR

3.00

2.00

2.00

1.50

1.00

Bouygues

3.50

2.17

2.17

1.50

1.00


On February 17, 2012, as part of the regulation of new entrants to the mobile telephony market (Free Mobile, Lycamobile and Oméa Telecom), the Arcep announced its decision to conduct an analysis of the wholesale SMS call termination market. Following preparatory work, a public consultation will be launched during 2012.

Regulation of fixed telephony and broadband Internet

Since July 2008, excluding retail offerings for fixed telephony under Universal Service, all of France Telecom-Orange’s regulatory obligations concerning fixed telephony retail (access and communication) on the consumer and business markets have been lifted. There is no ex ante regulation over France Telecom-Orange retail broadband offers in the residential and business markets. Accordingly, the regulation of fixed-line services in France involves retail offers falling within the scope of the universal service and wholesale offers so as to ensure effective competition in the retail markets (call origination, call termination, wholesale line rental, unbundling, bitstream).

Universal Service

France Telecom-Orange applied for and was designated Universal Service operator for telephone services for the period 2009 to 2012. A new call for candidates was tendered for the public phone component, which had also been awarded to France Telecom-Orange for two years in November 2009. France Telecom-Orange once again was a candidate and was designated universal operator in charge of public phones in February 2012 for a new two-year term.

Principles governing the price capping of Universal Service fixed-line communications

Universal Service rates are subject to price caps for the duration of the allocation for two rate service batches, one representing subscribers located in mainland France, the other representing subscribers in French overseas departments. The average annual price of each batch is set so as to reflect changes in the consumer price index (excluding tobacco products), less reductions in mobile and fixed-line call termination rates, and less 3% productivity gains representing the minimum level that France Telecom-Orange is expected to pass on to its customers. The price cap for the 2009-2012 period set in January 2011 by the regulatory authority was reflected in April 2011 by lower communication prices from France’s overseas departments and from continental France to the overseas departments. The rate on fixed-line communications to mobile phones in the “continental batch” also decreased as of December 1, 2011.

Low income plans under Universal Service

As part of the Universal Service, France Telecom-Orange offers a low income plan for PSTN access at a price of 5.43 euros (ex-VAT) (representing a reduction of 60% of the regular price). As a result of the public consultation of the Ministry of the Economy and under an agreement with the State, Orange offered a low-income Internet plan of 20 euros per month (incl. VAT), plus 3 euros (incl. VAT) for monthly Livebox rental. This offer, introduced in February 2012, is not part of Universal Service.

Regulation of fixed-line services wholesale offers

Cut in fixed-line call termination rates (FTRs)

In July 2011 the Arcep published its latest analysis of the fixed-line telephone markets (third analysis cycle) for the period 2011-2014, according to which France Telecom-Orange will have to apply call termination rates that reflect the incremental long-term costs of a generic efficient operator who has installed a new generation network (NGN). As part of this new analysis, the asymmetry of Mobile Call Termination Rates enjoyed by France Telecom-Orange’s competitors has been eliminated.

Caps in euro cents per minute

France Telecom-Orange FTR

Alternative operators’ FTR

Asymmetry level

Year 2007

0.5486

1.088

98%

Q1 - Q2 - Q3 2008

change

0.4935

-10.0%

1.088

0.0%

120%

Oct 1, 2008

change

0.45

-8.8%

0.9

-17.3%

100%

Oct 1, 2009

change

0.425

-5.6%

0.7

-22.2%

65%

Oct 1, 2010

change

0.4

-5.9%

0.5

-28.6%

25%

Oct 1, 2011

change

0.3

-25%

0.3

-40%

0%

July 1, 2012

change

0.15

-50%

0.15%

-50%

0%

January 1, 2013

change

0.08

-46.6%

0.08

-46.6%

0%





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   46





Rate changes for wholesale offerings subject to cost orientation (unbundling, analog and digital wholesale line rental, and call origination)

In 2011 France Telecom-Orange published new, lower rates for the regulated wholesale offers (mainly partial unbundling, services related to unbundling, and wholesale line rental). The rate for full unbundling was not changed, however. It should be noted that France Telecom-Orange is still ranked below the European average for wholesale rates related to fixed-line service offers (see Section 6.6 Regulations).

Rate changes on the bitstream offers

France Telecom-Orange is required to provide third-party operators with a DSL access and aggregation service (called bitstream) enabling them to offer their own broadband service throughout France. This wholesale offer is purchased from France Telecom-Orange by third-party operators in areas where they generally do not use an unbundling offer, and represented under 20% of broadband lines purchased by such third-party operators. The Arcep’s market analysis decision no. 2011-0669 of June 14, 2011 withdraw the regulated rate in areas where there is a third-party operator offering a bitstream product (i.e., about 80% of lines) and requires that rates be based on costs in the remaining area. This led to a new pricing scheme, taking effect in September 2011.

France Telecom-Orange’s obligations regarding cost accounting and accounting separation in the fixed-line business

The Arcep’s decision no. 06-1007 of December 7, 2006 sets forth France Telecom-Orange’s obligations as to cost accounting and accounting separation in the wholesale and retail businesses. When the retail activities use network resources that correspond to wholesale services subject to a separate accounting obligation, these resources are valued in the separate accounts at wholesale rates and not at cost. These obligations were first implemented in 2007 in respect of FY2006. The fiscal year was deemed compliant by the Arcep and has been extended to every year since.

Regulation of high capacity broadband Internet (FTTH) and increased speed on copper (FTTC)

Key Events

January 18, 2011

Approval by the Minister of Electronic Communications of the decision relating to special regulations that apply outside densely populated areas

March 8, 2011

Opinion of the Competition Authority concerning drafts of market analysis decisions 4 and 5

May 26, 2011

Opinion of the European Commission concerning drafts of market analysis decisions 4 and 5

June 14, 2011

Decisions no. 2011-0668 and 2011-0669 concerning analysis 4 and 5 of relevant markets, together with a recommendation to local municipalities specifying the regulatory framework relating to higher speeds

June 14, 2011

Recommendation by the Arcep concerning ways to provide access to fiber optic, high capacity broadband lines in certain buildings in very densely populated areas, particularly those with fewer than 12 dwelling units

October 19, 2011

Approval by the European Commission of Part B of the national high capacity broadband program


Regulatory framework governing high capacity broadband offers at end 2011

Summary of principles defined since 2008 applicable at national level:

no ex ante regulation on retail prices;

same obligations regarding access to the terminal portion of FTTH networks, applying to all operators equipping buildings with optical fiber;

non-discriminatory access to France Telecom-Orange underground civil works systems, at a rate that reflects the costs. Decision no. 2010-1211 of November 9, 2010 specifying the rule for allocation of costs between copper and fiber and the method of determining rates.

These principles were confirmed in the conclusion to market analysis 4 and 5 completed in June 2011.

Regulatory framework for sharing in high-density areas

On January 17, 2010, the Arcep published a decision and a recommendation on the sharing of the terminating segment of FTTH networks that bears on:

the definition of high-density areas including 148 communes representing 5.5 million households;

the option to place the distribution point at street level for buildings with 12 or more apartments or hooked up to walk-through sewer ducts;

the obligation to agree to requests from operators made prior to the fitting out of the building to have one dedicated fiber per apartment;

the principles governing cost sharing enabling in-building operators having elected to go with a single fiber not to have to bear any additional cost incurred by the laying of additional fibers;




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   47





several versions of the wholesale offer have been published by France Telecom-Orange since February 2010.

A recommendation published in June 2011 specifies the terms of network rollouts when the distribution points are not located on private property.

Regulatory framework for sharing outside high-density areas

A decision adopted by the Arcep on December 14, 2010 and approved by the Minister in charge of electronic communications on January 18, 2011 specifies the provisions applying outside high-density areas:

the size of sharing points (1,000 apartments in general with the possibility of going down to 300 apartments subject to an offer to connect these network points to the networks of upstream operators);

consultation, before the rollout, of other operators and local authorities concerned;

co-financing from the beginning and afterwards, and the requirement of a per-line offer from the sharing point.

France Telecom-Orange published a first wholesale offer outside of high-density areas in July 2011.

National high capacity broadband program

This program aims for, outside high-density areas, a system for labeling and public co-financing of private operator projects for the densest segments within these areas, completed by public initiative projects beyond these sectors.

The national program is organized into three parts:

the first part provisioned at 1 billion euros (window A) consists of support for development of FTTH networks from investors (public and private) via the granting of long-term loans or capital contributions;

the second part provisioned at 750 million euros (window B) consists of additional government grants for public initiative FTTH network projects outside of areas for which investors have communicated their intention to roll out under part A;

the third part provisioned at 250 million euros (window C) consists of supporting additional projects to cover the least dense areas (modernization of existing networks, rollout of terrestrial or satellite wireless networks).

Finally, on December 14, 2010 the Arcep adopted a decision on the terms and conditions for the use of the regional digital rollout fund (FANT) provided for by the Pintat Law and destined to finance high capacity broadband in the least dense areas.

Higher speed on copper

The objective of higher speed on copper is to offer greater ease of use and access to a larger range of services to subscribers already eligible for ADSL but whose line is located far from the switch. The decision based on market analysis 4 requires France Telecom-Orange to respond affirmatively to any request to reconfigure its local loop in that it allows France Telecom-Orange to offer wholesale packages to operators on economic terms that bring the new subscriber access node closer to the “unbundle-able” customer despite his small size.

A recommendation published by the Arcep on June 14, 2011 lays out the framework in which requests for reconfiguration must be made, including its technical, legal and economic conditions. Pursuant to obligations arising from the market analysis, France Telecom-Orange published a wholesale offer for reconfiguring operators (located outside of areas where the installation of a high capacity broadband network has been planned in the medium term by a private operator) and placed into its offer of access to the local copper loop the specific services associated with unbundling as part of increased speeds on copper.

Regulation of broadcasting and content

Key Events

April-December 2011

Online TV task force, mandated by the government.

October 2011

Personal mobile television: launch by the CSA of the final regulatory phase before closing the case.

October 2011

CSA authorization on television sound levels (advertising and program screens).

July and December 2011

Partial repeal of the CSA decision concerning on-demand media programming or ODMP
(mandatory application).





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   48





Online TV task force

The debate begun by the colloquium of the French Broadcasting Authority (CSA) in April 2011 about on-line television was extended by the formation of a task force mandated by the Ministers of Culture and Industry and in which Orange participated. The report published in December 2011 suggests regulatory changes in this area.

Personal mobile television (PMT)

The terms and conditions devised in laws and regulations have thus far been unable to generate an economically viable solution to deploying a dedicated television network on mobile terminals via a wireless link. The CSA should withdraw the authorizations extended to all the mobile television developers selected in the call for candidates (including Orange Sport Infos) and so close the book on DVB-H standard PMT.

On-demand audiovisual media services (SMAD)

In July 2011 the CSA partially repealed its mandatory application decision on ODMP dating from December 2010 and in December 2011 published a new version in the Official Journal, after notifying the European Commission. This version is less burdensome to implement and less restrictive on distributors, while still providing a high level of security in terms of the protection of minors in particular.

Sound intensity of television programs

The CSA decision regarding the sound intensity of television programs, published in the Official Journal on October 11, 2011, takes into account the latest measurement standards devised by standard-setting organizations and establishes an implementation schedule for these standards by broadcasters and distributors.

6.3.1.4   Orange France’s activities

FINANCIAL INDICATORS

(in billions of euros)

2011

2010

2009

Revenues

22.5

23.3

23.7

Fixed-line and Internet

12.9

13.5

14.1

Mobile

10.9

10.8

10.8

Reported Ebitda

8.6

8.8

9.3

as a % of revenues

38.0%

37.8%

39.2%

Capex

2.6

2.6

2.2

as a % of revenues

11.6%

11.0%

9.1%

Source: Orange


France Telecom-Orange provides the following additional financial indicators for its Internet and fixed-line and mobile telephony activities in order to compare them with the domestic data of its peers. These additional indicators do not replace the indicators in Chapter 9.1 Analysis of the financial position and earnings, which reflect the monitoring per operation which took place at Group level.

(in billions of euros)

2011

2010

2009

Fixed-line and Internet Ebitda

4.9

4.9

5.3

Mobile Ebitda

3.7

3.9

4.0

Fixed-line and Internet Capex

2.0

1.9

1.5

Mobile Capex

0.6

0.7

0.6

Source: Orange





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   49





Fixed telephony and Internet activities

KEY INDICATORS

 

2011

2010

2009

Revenues (in billions of euros)

12.9

13.5

14.1

Consumer Services

7.9

8.4

8.7

Wholesale Services

4.5

4.5

4.6

Other services

0.5

0.6

0.7

Number of telephone lines (in millions)

30.0

29.7

29.4

o/w Consumer lines

18.5

19.6

20.6

o/w wholesale lines

11.4

10.2

8.7

Number of Internet customers (in millions)

9.8

9.4

9.3

o/w narrowband

0.2

0.2

0.3

o/w broadband

9.6

9.2

8.9

“Voice over IP” subscribers

8.0

7.5

6.8

ADSL TV or satellite subscribers

4.4

3.5

2.8

Pay-TV subscribers

2.1

2.0

1.5

ARPU (in euros per month)

 

 

 

Fixed telephone lines

34.6

34.9

34.2

Broadband Internet

36.5

37.0

36.2

Source: Orange


The range of services in the Home segment in France is made up of:

traditional fixed-line telephony services;

other consumer services;

online, Internet access, and multimedia services;

advertising-management and Internet portal business;

content-related business;

carrier services.

Traditional Fixed-Line telephony services and other consumer services

France Telecom-Orange’s traditional fixed-line telephony services provide access to the network, local and long-distance telephone communication services throughout France, and international calls. In addition, France Telecom-Orange offers its fixed-line telephony subscribers a broad range of value-added services.

The price of telephone communications services is subject to regulation.

Further to the rapid growth in full unbundling, wholesale subscriptions, and wholesale naked ADSL access to third-party Internet service providers, traditional telephone service business is on the decline. Other consumer services (public phones, cards, information services) have also been in decline for several years. France Telecom-Orange, while gradually reducing the number of public telephones, does maintain existing public telephones under Universal Service. Competition for phone cards is very strong, particularly for international destinations. In the context of information market deregulation, France Telecom-Orange, backed by its experience, offers a full range of telephone information services, organized into multi-channel voice and Web formats (118712.fr and orange.fr, “directories” section).

Online Internet access, and Multimedia services

Along with mobile, Internet and Multimedia is one of the Group’s growth engines. The Internet market, however, is reaching maturity, reflected in high customer volatility. To build customer loyalty, Orange has been continuously improving its quality of service by simplifying its Internet offerings while enhancing them with value added services, such as content, fixed-line communications to mobile devices, VOD and TV recording, and replacing ADSL equipment in the customer’s home.

At the end of December 2011, the total number of Internet customers was 9.8 million, an annual increase of 3.4%. There were 8 million Liveboxes rented at end December 2011, up 1.2% compared with end December 2010. Sales were given a significant boost in 2011 by the success of the Open quadruple play offers, with over one million customers in November 2011, and by the simplification of our triple play offers, available for ADSL or fiber and in only two forms, with and without classic phone service: Livebox Zen and Livebox Star. With the new Livebox Zen and Livebox Star plans, Orange offers unlimited calling to fixed-lines in continental France and to over 100 destinations, unlimited calling to mobile phones, VOD catalogs and a TV recorder. These ADSL plans are also available on fiber, where, for five euros more, one can enjoy faster speeds and additional services such as 17 stations of high-definition, 3D and multi-screen television.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   50





The Orange share of the new subscriber market increased by 2.3 points on the year, reaching 38.3% at year end. IP telephony continued to grow (up 7.6% on a yearly basis) and represents 8 million customers. Television on ADSL and by satellite continued its strong annual growth—up 24.8% with 4.4 million customers at year end.

In addition, the value of broadband ARPU remained nearly level (36.5 euros at end December 2011 versus 37 euros at end December 2010). The decrease in IP telephony revenues, due primarily to the geographic spread of unlimited use and to the inclusion in new offers of unlimited calling to mobile devices from a modem, was offset by the increase in revenues from television and from content.

Revenues from the Internet and on-line services grew 2.2% over the year on a comparable basis but lost 4.6 points compared with 2010. This is equivalent to 31.6% of all Consumer revenues. This decrease is due to lower prices, the inclusion of unlimited calling from fixed-line to mobile in the triple play and quadruple play offers and to the impact of higher VAT.

For business customers, Orange introduced a new offer, “Fibre pro”, in December. As compared with the traditional ADSL offers, this solution makes it possible to have faster access to the Internet and to messaging services and to download more quickly; to transfer very large files; to take part in video conferences with a very high image quality; to synchronize data rapidly with remote servers and to take advantage of cloud computing services.

This formula has been coupled with other services like call waiting, Internet, pro messaging, e-faxing and technical support.

Since August 2008, Orange has been offering a range of laptop computers available with an optional broadband subscription or the Internet Everywhere package.

Internet portals and advertising management business

The France Telecom-Orange Group has several portals:

Orange.fr is the third largest Internet portal in France in terms of audience, behind the search engine Google and Microsoft with its MSN/Windows Live instant messaging feature, and the sixth busiest website in France (source: Nielsen/NetRatings, France panel, December 2011). In December 2011, its audience reached 21.4 million unique visitors and 50.8% of Internet users have consulted the portal at least once (source: Nielsen/NetRatings, France panel, December 2011);

Voila.fr (8.3 million unique visitors in December 2011) and Cityvox (entertainment and leisure listing site in France) in its different formats: Cityvox.fr, Cinefil.com, Spectacles.fr, Concert.fr and WebCity.fr;

in the mobile market, the Orange group is in third place in terms of audience with 10.2 million unique visitors, after Google/YouTube and Facebook, but ahead of SFR and Bouygues Telecom. Orange is thus ranked first among portals of telecommunications operators (source: Médiamétrie/Nielsen official panel for the 4th quarter of 2011).

The primary revenue source is on-line advertising sold by the Orange Advertising Network. This advertising management department sells advertising space for about 20 third-party sites, both web and mobile. For the second year in a row, there was growth in revenues from advertising sales in 2011. On the other hand, due to the intense competition from Google, Voila search engine revenues declined in 2011.

Content-related activities

The development of the Group’s range of content services on all of its networks (fixed-line, mobile, Internet), in France and abroad, relies on partnership agreements or equity investments, as well as on rights acquisition relating to cinema, music, games, sports and information.

France Telecom-Orange works to offer the most attractive and richest content possible as a result of various partnerships, such as those signed with Arte, France Télévisions, Warner and Sony. In addition, Orange’s equity investment in Deezer in August 2010 has enabled us to market Internet and mobile plans that include music.

To deliver its content services, the Group has implemented a set of service platforms that include technical protection measures as well as tools for digital rights management, which ensure the integrity of the works and compensation for the copyright holders. France Telecom-Orange also participates actively in content security through its subsidiary, Viaccess.

For more information on offers and content, see the Content paragraph of Section 6.3.6.2 Shared Services.

Carrier services

Carrier services include interconnection services for competing operators (regulated by the Arcep) and unbundling and wholesale market services. The growth in business on the wholesale market partially offsets the decline in interconnection service revenues.

The first wholesale offers available to alternative operators (national IP offer, regional bitstream offer, and partial unbundling offer) required that the end customer also have a telephone subscription with France Telecom-Orange. In 2004, with the growth in full unbundling, operators were able to start offering broadband access with no subscription for traditional telephone services. Since the introduction by France Telecom-Orange in 2006 of a wholesale sales offer for subscriptions to telephone service and a wholesale offer for naked ADSL, the other operators have been able to propose offers which include line subscriptions. Nonetheless, the full unbundling offer remained France Telecom-Orange’s most-subscribed offer in 2010.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   51





Since 2006, naked bitstream has been added to full unbundling outside unbundled areas to allow alternative operators to extend their non-subscription broadband offers to the entire territory. Since then, this type of access has steadily increased.

In March 2011, Orange and Free signed a six-year national roaming agreement for 2G and 3G, giving Free access to Orange’s France-wide network of cell towers (see Section 9.1.1.4 Key events).

Mobile telephony activities

KEY INDICATORS

 

2011

2010

2009

Revenues (in billions of euros)

10.9

10.8

10.8

Total number of customers (in millions)

27.1

26.9

26.3

o/w contracts

19.5

19.0

17.9

o/w prepaid

7.6

7.9

8.4

o/w broadband (3G)

11.0

9.4

7.6

o/w broadband only (3G dongles)

1.6

1.4

1.1

Number of MVNO customers

3.4

2.8

2.4

Total ARPU (in euros per year)

375

387

402

ARPU subscriptions

476

492

515

ARPU prepaid

129

149

159

ARPU voice

240

266

296

ARPU data

135

120

106

Total AUPU (in minutes per month)

193

188

196

Churn rate (%)

27.5%

25.8%

23.2%

Source: Orange


The total number of Orange mobile customers increased by 0.6% year-on-year in the fourth quarter of 2011, down 1.7 points compared with the previous year. This trend reflects a decline of 3.3 points versus 2010 in the growth of contract customers (+2.5% year-on-year at end-December 2011), while the number of prepaid customers also continued to decline. The customer mix continued to improve in 2011, with subscription contracts accounting for 71.8% of total customers at end-December 2011, up from 70.5% a year earlier. This increase mainly reflects the success of the Origami segmented offers and Open offers.

Moreover, the MVNO customer base hosted on the Orange network expanded by 20% over the year.

Average revenue per user (ARPU) was down 3.1% year-on-year in the fourth quarter of 2011. This decrease reflects both an average fall of 33% in voice interconnection charges between French mobile operators, and the impact of tariff adjustments to the quadruple play Open packages. Stripping out inter-operator revenues, ARPU rose, boosted by rapid growth in data transfer revenues on the back of expanding mobile multimedia usage and the sale of smartphones and 3G USB dongles.

In 2011, Orange continued to develop multimedia content offers in order to benefit from the growth of non-voice usage and mobile Internet access.

Orange France’s offers

Mobile offers

Orange provides subscription and prepaid offers, with or without a handset.

Subscription offers

The line of subscription offers is geared toward unlimited contracts and the inclusion of multimedia uses (Internet, television, and messaging). It is structured around:

Smart offers and M6 mobile offers, particularly targeted at young customers with all-inclusive contracts, which can be capped or uncapped, allowing for control of consumption while including unlimited SMS and MMS (avantage ZAP) to all operators;

Origami uncapped contract offers. These offers respond to the growth in smartphone sales and multimedia usage, as well as the increased demand from customers for unlimited voice and SMS deals. They include unlimited sharing between four persons for all contracts in the range, access to a premium music service, and plans tailored to young customers. With Origami style, Orange includes mobile Internet use for smartphones starting at the one hour subscription level. In November 2011, an Origami service was launched that enables customers to review their package every six months and alter it depending on their needs and usage patterns.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   52





Prepaid offers

Orange provides two prepaid options, with calls charged by the second from the first second, or an entry-level offer marketed under the Sosh brand:

the Mobicarte includes a range of top ups from 5 to 100 euros, and allows customers to receive free credit and rewards in the form of calls, SMS or access to social networks. In November 2011, Orange launched two new 5 euro top ups, valid for one week, providing either unlimited texts or mobile Internet (reduced speed after 100 MB);

Orange Initial, representing the simplest form of mobile telephony access, whereby the customer is billed monthly for actual usage, at a preferential rate;

Sosh is mainly intended for the high-usage 18-35 age group, for which good value is important. There are three prepaid choices available, which include the option to buy a handset and pay for it in installments.

Finally, responding to a government directive, Orange offers a prepaid, capped usage plan, reserved for people receiving the RSA (Revenu de Solidarité Active) low-income allowance, which provides 40 minutes’ worth of calls and 40 texts for 10 euros per month.

Fixed-Line and Internet offers

In fixed telephony, Orange offers three prepaid packages including line rental under the “les Optimales” name. New services for people in need of assistance now enhance these contracts thanks to a partnership with Mondial Assistance.

In Internet services, Orange simplified its offers in 2011, and now offers two contract types, with or without TV:

Optimale Internet, which includes Internet access and unlimited phone calls;

Livebox Zen or Livebox Star, which includes Internet access, unlimited phone calls and TV.

The enhanced services provide access, depending on the offer, to 140 TV channels and a selection of 150 movies on demand, and include an 80 GB TV recorder. These two offers are available for ADSL or fiber access.

Convergence offers

Orange also has various offers that pair mobile use and mobile Internet access with all-in-one offers including both the hardware (3G+ USB dongle) and an Internet access contract. The new range of Let’s go contracts launched in June 2011 allow up to five devices, such as a laptop computer, multimedia cell phone, or a tablet PC to connect to the Internet via the mobile broadband network or the Orange public Wifi network, using the Domino 3G USB dongle.

The quadruple play Open offer, which was launched in September 2010, continues to be a great success with customers. At the end of November 2011, it crossed the threshold of 1 million subscribers. This offer was enhanced in 2011, and is also available in a fiber version in the Paris area. It has a single contract and a single invoice that includes:

Internet access (up to 20 Mbits/s, or 100 Mbits/s in the fiber version);

Orange TV (with 140 channels);

unlimited telephone by Internet to cell phones (all operators in metropolitan France) since February 2011 and to all fixed lines (in metropolitan France and to more than 100 destinations);

cell phone with the opportunity to choose between four types of mobile contracts including unlimited calls, SMSs, MMSs, emails, and unlimited 24-hour Internet and TV (20 channels) access.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   53





The main offers as of the date of this document are:

FIXED TELEPHONY AND INTERNET OFFERS

Type

Name/Price

Main Features

High-Speed Internet - ADSL or Fiber-Optic Broadband

Découverte Internet,
19.90 €/month

•   no minimum period or cancellation fee

•   requires a fixed-line telephone subscription

•   Internet access from 1 to 8 Mbits/s

Optimale Internet, 38.90 €/month

•   12-month subscription

•   requires a fixed-line telephone subscription

•   broadband Internet access up to 20 Mbits/s

•   unlimited calls to fixed lines (100 countries)

Livebox Zen or Zen Fiber,

28.90 € or 33.90 €/month

(prepaid or contract) (+5 € for fiber)

•   12-month subscription

•   broadband Internet access, 20 Mbits/s or 100 Mbits/s for fiber

•   unlimited VoIP calls to fixed lines (100 countries)

•   TV (up to 140 channels)

•   premium music service with Deezer (5 €/month)

•   mobile Internet with Domino (5 €/month)

Livebox Star or Star Fiber,

34.90 € or 39.90 €/month

(prepaid or contract) (+5 € for fiber)

•   12-month subscription

•   broadband Internet access, 20 Mbits/s or 100 Mbits/s for fiber

•   unlimited VoIP calls to fixed lines (100 countries)

•   unlimited calls to cell phones in France

•   TV (up to 140 channels)

•   access to a selection of 150 films on demand

•   80 GB TV recorder

•   premium music service with Deezer (5 €/month)

•   mobile Internet with Domino (5 €/month)

TV Offers

 

•   various thematic bundles proposed
(Orange Cinéma Séries, Orange Sport, etc.)

Narrowband Internet

Postpaid or prepaid, 10 €

for 30 hours, 20 € for unlimited

 

Fixed-Line Telephony

Optimale from 2 hours to unlimited, from 19 € to 39 €/month

•   a choice of 2 hours unlimited calls to fixed lines or cell phones from selected geographical regions

•   fixed-line telephone subscription included

•   enriched range of services included (caller ID, call transfer,
call signal, etc.)





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   54





MOBILE TELEPHONY OFFERS

Type

Name/Price

Main Features

Capped contracts

Orange Smart,

from 13.99 €/month with subscription

SIM Only: 5 €/month reduction

prepaid option: 3 €/month reduction

•   offer targeted at teenagers

•   12-month or 24-month subscription, or prepaid option

•   capped or uncapped

•   four contracts from 40 minutes to 2 hours (excluding special offers)

•   SMS and MMS deducted from credit each month

•   unlimited calls to a designated number (any operator) for the 90-minute and 2-hour contracts

•   avantage ZAP (under 18): 1 hour of free calls to 2 designated numbers (any operator); unlimited SMS and MMS 24/7 or from 4pm to midnight

M6 Mobile by Orange

from 19.99 €/month for a 24-month subscription (1hr)

SIM Only: 5 €/month reduction

prepaid option: 3 €/month reduction

•   offer intended for 18-25 year-olds

•   12-month or 24-month subscription, or prepaid option

•   three all-inclusive contracts

•   three contracts with 200 MB Internet and email

•   unlimited voice calls to all M6 cell phone numbers for the 90-minute and 2-hour contracts

•   unlimited SMS to all operators

•   unlimited online access to the M6, W9, Music, and Téva channels

•   access to social networks

Origami contracts

Origami zen (simplicity),

(between 29 € and 49 €/month)

Origami style (for youths),

(between 29 € and 49 €/month)

Origami star (unlimited Internet)

(between 39 € and 69 €/month)

Origami jet (unlimited in France or internationally),

(between 79 € and 169 €/month)

SIM Only: 5 €/month reduction

•   offers intended for users of mobile broadband

•   12-month or 24-month subscription

•   four ranges of contracts for adjustable durations according to needs (from 1 hour to unlimited for Origami jet in France or internationally)

•   extension of unlimited hours/shared (three people) and access to multimedia use on mobile phones

•   unlimited SMS and MMS in metropolitan France 24/7

•   premium music service (5 €/month except Origami style: included)

•   Internet access, 30 or 70 TV channels and unlimited emails available 24/7 (except zen)

•   iPhone version available: Origami style, star, and jet

Prepaid

La Mobicarte

national voice calls: 0.54 €/minute

SMS: 0.135 €/SMS

data: 0.50 €/minute

•   a range of top ups (eight offers from 5 € to 100 €)

•   free rewards worth up to 50 €

•   unlimited SMS and unlimited Internet top ups for 5 €, valid for one week

•   choice of three rewards (more calls and SMS, more social networking, or more international calls)

•   3G and videophone access

Sosh

from 9.90 € to 24.90 €

•   offer intended for 18-35 year-olds

•   prepaid

•   no handset

•   contracts from 2 hours to unlimited with data limited to between 500 MB and 1 GB

•   unlimited SMS and MMS

•   100% digital

Mobile, Tablet, and iPad Broadband

Let’s go packages

(from 8 € to 35 €/month)

•   prepaid or postpaid for 3G+ Internet on cell phone

•   four options, depending on requirements, between 100 MB and 3 GB

•   two contracts for tablets between 100 MB and 1 GB with unlimited SMS, MMS, and emails, TV access (between 20 and 70 channels), and a premium music service

•   one iPad contract with 1 GB

•   unlimited emails

•   unlimited Wifi access at Orange Wifi hotspots in mainland France





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   55





Distribution

BREAKDOWN OF DISTRIBUTION CHANNELS (AS A % OF SALES)

[f7frt2011drfen010.jpg]

Source: Orange

The Retail Sales and Services department of the Orange France Division is responsible for customer relations for all Group products and services intended for the general public. The Operators division in France distributes France Telecom-Orange products and services to other telecommunication service providers and operators.

Consumer products are sold through a variety of channels:

a physical distribution network spread across the whole of France and consisting of: 618 Orange stores at the end of 2011 (630 at end-2010, 641 at end-2009), 562 exclusive partners (of which 386 are Orange franchisees) and 4,100 points of sale in the competitive network. At the end of 2011, 100% of the points of sale had been rebranded (compared to 99% at the end of 2010);

customer telephone contact centers, specialized in distance selling and customer relationships, and in charge of customer accounts management;

a unified customer service around the call number 3900, which provides after-sales service and remote assistance for fixed-line, Internet, fiber and mobile products since December 2010. Call number 1014 is used to access all sales services and 1013 is the number reserved for calls relating to universal service. Customers can also benefit from on site technical services and an offer to assist them in their use of France Telecom-Orange products and services (installation, assistance);

self-service channels via a voice portal (the 3000 call number) and the Orange.fr Internet portal. This portal allows customers to discover the Internet, broadband multimedia and mobile offers provided by France Telecom-Orange, to order them directly online and to track their Internet and mobile bills.


The Network

Fixed Network

FIXED-LINE UNBUNDLING IN FRANCE (IN MILLIONS)

[f7frt2011drfen011.jpg]

Source: Arcep Q3 2011

FIXED-LINE BROADBAND COVERAGE

(as a % of the population)

2011

2010

2009

< 512 Kbits/s

1.0%

1.2%

1.5%

≥512 Kbits/s ≤ 2 Mbits/s

10.6%

10.9%

11.1%

> 2 Mbits/s

88.3%

87.9%

87.4%

Number of copper lines (in thousands)

30,723

30,515

30,176

Number of FTTH-connectible households (in thousands)

926.0

575.5

540.9

Number of NRAs (in thousands)

15.1

14.3

13.5

Number of Cross-Connection Points (in thousands)

93.7

93.4

93.1

Source: Orange





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   56





2011 was marked by:

a program of ADSL access migration to the more economic Gigabit Ethernet (GE) technology, enabling television offers and GE offers intended for businesses to be developed;

the continuation of coverage of ADSL shadow zones by forming partnerships with public authorities;

the continuation of the FTTH rollout and the increase in customer connection capacity;

the growth in the VoIP network, with the continuation of the H323 migration to SIP and preparation for the opening of the VoIP interconnection between operators;

a modernization program of the copper local loop and technical environment in order to improve network quality.

Orange anticipates the continuation of these programs in 2012, with notably an acceleration of the FTTH rollout and a resumption of copper wire connections. Orange also plans to launch a rationalization program for television and Video On Demand (VOD) broadcast infrastructure, with a new convergent architecture between TV, ADSL, and FTTH.

Mobile Network

Coverage (as a % of the population)

2011

2010

2009

GSM Voice/Edge

99.8%

99.8%

99.0%

3G (UMTS)/HSDPA

98.0%

95.0%

87.9%

Number of 2G radio sites (in thousands)

19.8

19.3

18.9

Number of 3G radio sites (in thousands)

16.2

14.1

11.9

Source: Orange


2011 was marked by:

the extension of 3G coverage, notably with the rollout of UMTS 900 in rural areas to attain 98% 3G coverage of the population at the end of 2011, in accordance with license commitments;

the start-up of 3G coverage in no coverage areas by using shared infrastructure with other operators (RAN sharing);

the extension of 14.4 Mbits/s coverage to 75% of the population at the end of 2011;

the expansion of core network capacity to support the growth in data traffic;

the generalization of new generation HLR equipment.

In 2012 Orange forecasts:

the continuation of the rollout of 3G coverage in no coverage areas (RAN sharing);

the expansion of the 2G and 3G networks to improve service quality, particularly as regards indoor coverage, and the start-up of the 3G program for TGV train lines;

the continuation of the increase in speeds on the 3G+ network, with the rollout of improvements to HSPA+ (21 Mbits/s and 42 Mbits/s);

the continuation of a multi-year program of rationalization of the 2G and 3G access networks in North-East and South-West France, and research on this subject in the Paris area.

Cluster, Transmission, and Transport Network

In 2011, Orange continued the gradual migration of data traffic collection on the ATM network to Gigabit Ethernet technology, and started a program for simplification of the data collection network as well as gradual migration to the IP V6 protocol.

Finally, Orange has continued to increase the capacity of the transport network, both at the network backbone for data gathering as well as at the network transmission level (fiber optic and WDM equipment).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   57





Key Events

2011 was marked by an increase in competition in line with the increasing maturity of the Internet and mobile markets. In this context, Orange continues to put the customer at the core of its strategy by simplifying its offers and enhancing its value-added services by improving its service quality.

December 2010

Abolition of the tax measure (adopted in 2008) enabling telecoms operators to apply a reduced VAT rate to television services (IPTV, mobile TV, and Web TV)

January 2011

Orange includes unlimited calls to all cell phones in its Internet plans

February 2011

•   Orange enhances its TV services by creating a new “extra” package and a new “practical services” channel

•   Origami mobile contracts are made available in SIM-only versions

March 2011

Orange and Free Mobile sign a 2G roaming agreement, later expanded to 3G

April 2011

•   Orange launches the Cinéday offer (2-for-1 cinema deal for Orange customers on Tuesdays)

•   Orange launches a new range of triple play contracts with Livebox Star and Livebox Zen. These are enriched plans that can be customized

•   The Origami jet plan was enhanced by including unlimited international SMS

June 2011

Orange launches Let’s go, a new range of mobile Internet contracts

July 2011

•   Orange launches a plan offering access to other operators via shared use of the fiber optic network (FTTH) outside high-density areas, enabling end customers to choose their service provider

•   CANAL+ and Orange announce a publishing, marketing, and technology partnership in relation to the Orange Cinéma Séries package of channels

August 2011

•   Orange rolls out a customizable service of unlimited SMS and MMS, and offers an unlimited daytime contract

September 2011

•   Orange acquires a 4G license for the high-frequency 2.6 GHz band

•   Orange makes a commitment to offer, from early 2012, an Internet package in France for low-income households in receipt of certain welfare benefits

•   Orange takes over all distribution activities of CET (Compagnie Européenne de Téléphonie), enabling it to provide its customers with access to sales outlets in their local areas, and to leverage the Company’s expertise in the photography sector

•   Orange TV adds a number of new channels

October 2011

•   Orange launches Sosh, a new prepaid web-based mobile brand aimed at the 18-35 age group

•   The Open plans are enriched, and SIM-only versions are made available

November 2011

•   Orange and SFR announce an agreement to roll out fiber optics outside high-density areas

•   Orange announces a partnership to host the virtual mobile operator Ortel Mobile on its network - Orange signs a partnership agreement with Google and enhances its range of local advertising offers for SMEs and micro businesses

December 2011

•   Orange launches its Fiber Pro plan for the business market, aimed mainly at SMEs

•   Orange and Dailymotion launch a 3D channel

•   Orange acquires a 4G license for the low-frequency 800 MHz band

•   Orange signs a partnership agreement with Evernote, enabling it to offer its customers data storage space of 1 GB


Outlook

2011 was marked by a step-up in competition in a difficult macroeconomic environment, while 2012 will see a peak in investment spending aimed at accelerating the rollout of the fiber network and increasing the coverage and capacity of the mobile network.

With the arrival of a fourth mobile operator, Free, in early 2012, in a market with penetration rates already in excess of 100%, the margins of most operators could be squeezed. Orange will therefore strive to rein in its costs, thanks to a partnership with Deutsche Telekom, to improve service quality and customer experience, and to monetize its network capacity via roaming agreements signed with Free and various MVNOs. A rationalization of capital expenditure was embarked on at the end of 2011, with a reformulation of customer loyalty programs and the launch of SIM-only plans and the Sosh brand.

Orange will thus:

continue to strengthen its loyalty building actions as well as the customer experience by developing new help services and TV/VOD uses;

segment its offers in line with customer requirements and the competitive environment;

prioritize innovation both at the technical and marketing level by:

enriching its Open offers,

developing the monetization of data offers,

fostering the penetration rates of smartphones;




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   58





enrich content offers through new partnerships with publishers such as those previously entered into with Deezer and Dailymotion;

continue the transformation of its infrastructures with the objective of “ever larger bandwidth”;

finally, on the business side, Orange will continue its development in the integration market with, among other targets, cloud computing, enabling data to be stored on a virtual network.

6.3.2  Poland

6.3.2.1   The Telecom Services Market

KEY MACROECONOMIC INDICATORS

 

2011

2010

2009

Population (in millions) (1)

38.2

38.2

38.2

Households (in millions) (3)

13.5

13.4

13.3

GDP growth (%) (1)

+4.2%

+3.8%

+1.6%

GDP per capita (in dollars PPP) (2)

20,137

18,981

18,069

Change in household consumption (%) (1)

+3.1%

+3.2%

+2.1%

Source:

(1)  Polish Central Statistics Office

(2)  IMF

(3)  TP Group


REVENUES FROM TELECOM SERVICES
(IN BILLIONS OF ZLOTYS)

[f7frt2011drfen012.jpg]

Source: TP Group

NUMBER OF CUSTOMERS (IN MILLIONS)

[f7frt2011drfen013.jpg]

Source: TP Group

The Polish economy continued its recovery in 2011:

growth was boosted by robust household consumption, while investment levels were maintained over the year;

the rise in commodity prices had a negative impact on the consumer price index, which stood at 4.3% in 2011, compared with 2.6% in 2010;

the unemployment rate was broadly flat in 2011, at 12.5%.

Against this backdrop, the value of Poland’s telecommunication services market declined by just 0.4% in 2011 compared with a 1.9% decrease in 2010 (source: TP Group). The main factors that impacted on market value in 2011 were related to the mobile telephony market: (i) a decrease in call termination costs, from 0.1677 to 0.1520 zloty per minute on July 1, 2011, which accompanied a reduction in the asymmetry that benefits Play and other small operators and (ii) the decrease in SMS termination costs from 0.15 to 0.07 zloty. Although competition was less fierce on the mobile market than in 2010, the price erosion that resulted was only partly offset by an increase in usage, leading to a further fall in ARPU and operators’ business performance. The broadband market continued to show signs of stagnation in terms of volumes in 2011, mainly due to the ongoing migration from fixed to mobile.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   59





Fixed-line telephony market

The fixed-line penetration rate continued to fall in 2011, reaching 25.8% of the population at the end of December 2011 (compared to 26.6% at the end of December 2010).

The growth in the penetration rate and popularity of cell phones led customers to migrate from the fixed to the mobile networks. In Central and Eastern European countries, such as Poland, where fixed-line penetration was low at the time of the introduction of mobile technology, mobile telephony is more of a direct substitute for fixed-line telephony than a complementary service.

Throughout 2011, cable television operators further expanded the range of fixed-line voice and Internet access services, while mobile operators promoted joint fixed-mobile offers of the Home Zone type, and reduced their voice tariffs in an attempt to attract fixed-line customers. The number of WLR lines had increased and was accompanied by growth in services based on local loop unbundling (LLU).

Regulatory decisions had a negative impact on operators’ revenues, mainly due to reductions in interconnection rates and mobile termination rates.

Internet on the fixed network market

 

2011

2010

2009

Broadband revenues (in millions of zlotys)

3,621

3,452

3,232

Number of broadband subscriptions (in millions)

6.9

6.5

6.1

ARPU (in zlotys per month)

44.6

45.4

46.3

Source: TP Group


In 2011, fixed-access broadband lines in Poland increased by 5.5% compared with 2010 (source: TP Group), which is a significant slowdown compared with the 7% growth seen in 2010 and 9.3% in 2009. The broadband market increased in value terms by around 4.2% in 2011, compared with 6.1% in 2010.

Mobile telephony market

 

2011

2010

2009

Revenues (in millions of zlotys)

25,161

24,838

24,840

Number of customers (in millions)

50.7

47.5

45.0

ARPU total (in zlotys per month)

42.8

44.8

46.4

Source: TP Group


The mobile telephony market is in the saturation phase. The number of mobile users increased in 2011 by 7% and reached 50.7 million at the end of December 2011. As a result, the mobile penetration rate (among population) reached 132.7% (up from 124.3% at the end of December 2010).

Mobile broadband, which is the fastest growing telecommunication market in Poland, continued its dynamic development in 2011. Market players offer access services for increasingly lower prices and at higher speeds, building on the success of portable computers and smartphones both for business and consumer markets.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   60





6.3.2.2   The Competitive Environment

Fixed-line telephony and Internet

FIXED LINES SEGMENTATION

 

2011

2010

2009

Total fixed lines (in millions)

9.9

10.2

10.5

o/w retail-billed lines

8.3

8.7

9.3

o/w wholesale-billed lines

1.6

1.4

1.2

Source: TP Group


BROADBAND INTERNET MARKET SHARE

[f7frt2011drfen015.jpg]

Source: TP Group

On the broadband market, TP Group is still under strong competitive pressure from cable television operators in terms of both offering and infrastructure investments. However, the market share of these operators, estimated at 28% in volume terms and 27% in value terms, stabilized in 2011. The gradual strengthening of the position of cable operators on the market is due to the popularity of the bundles they can offer, thanks to their advantageous position on the television market. Moreover, these operators are able to increase the speeds offered for the same price, or even at slightly lower prices.

Consolidation is a major trend on the broadband market, with the acquisition of small Internet providers by the major players. In 2011, Netia finalized the acquisition of Dialogue, while Crowley and UPC completed the acquisition of Aster. Alternative telecommunication operators, including Netia, continued to offer service through the use of the wholesale BSA and LLU based services, and to a more limited extent, by developing their own networks. In 2011, BSA continued to fall, while the number of unbundled lines had increased to 186,000 by the end of the year, from 130,000 at the end of 2010.

New technologies, including radio access, are aiding the development of small local Internet providers, which, though very fragmented, represent together a significant force in the broadband market.

A marked increase in Internet penetration rates is expected in the near future. Cable operators have been very active in this area, investing in the DOCSIS 3.0 standard, which enhances network capacity and Internet service parameters and facilitates implementation of new applications and value-added services.

TP Group’s broadband market share fell from 35.2% in 2010 to 34.2% in 2011. In May 2011, it launched a number of broadband offers based on VDSL technology. TP Group also provides broadband services based on the CDMA radio technology.

Mobile telephony

MOBILE MARKET SHARE

[f7frt2011drfen016.jpg]

Source: TP Group

Poland has four main mobile operators: PTK Centertel (owned by TP Group, and which operates under the Orange brand), PTC (wholly owned by Deutsche Telekom), Polkomtel (acquired in 2011 by Spartan Capital Holdings, owned by Polish entrepreneur Zygmunt Solorz-ak, which operates under the Plus brand) and P4 (owned by two investment funds, Tollerton Investments Ltd and Iceland, which operates under the Play brand).

The three biggest mobile operators have lost market share to Play and the MVNOs. The combined market share for these operators fell from 87.8% to 84.3% between the end of 2010 and the end of 2011. The market share of PTK Centertel was estimated at 29% at the end of December 2011 in volume terms and 30.2% in value terms.

In an increasingly saturated mobile market, Play’s main objective has been to win customers over from other operators. As a result of aggressive marketing and pricing policies and intensive advertising campaigns, Play has become the leader in the mobile number portability market. The operator has grown its revenues on the back of an increase in customer numbers and the benefits of MTR asymmetry.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   61





6.3.2.3   The Regulatory Environment

Polish legal and regulatory framework

Legal framework

The TP Group’s businesses are governed by the stipulations of the law of July 16, 2004 on telecommunications, which transposes the 2002 European “Telecom Package” concerning electronic communications into Polish law, and by the law of February 16, 2007 concerning competition and consumer protection.

The law of July 18, 2002 that governs provision of electronic services transposes European Directive 2000/31/EC concerning electronic commerce and it defines electronic service supplier obligations. The applicable framework concerning personal data protection is defined by the law of August 29, 1997 concerning personal data protection, as amended in 2002. The 2004 Telecommunications Act also defines certain rules applicable to data protection and storage.

A law concerning broadband network development came into effect in 2010. This law provides a framework for intervention by local authorities in investment in telecommunications infrastructures and civil works.

In 2011, the Telecommunications Act was amended to introduce regulation of premium services in accordance with European law.

In November 2011 the European Commission sent to the Polish government a “reasoned opinion” regarding the transposition of directives in 2009 and about the lack of implementation of new directives in Polish law.

For information concerning risks linked to regulation, see Section 4.2 Legal Risks.

Regulatory Authorities

The Ministry of Administration and Digitization, created in November 2011, took over the missions of the Ministry of Infrastructure regarding telecommunications.

The Office of Electronic Communications (UKE) is specifically responsible for telecommunications regulation and frequency management, as well as certain functions of the National Broadcasting Council (KRRiT).

The Office of Competition and Consumer Protection (UOKiK) is responsible for the application of competition law, merger control and consumer protection.

Memorandum of understanding between TP Group and the UKE

Implementation of the Agreement signed between the UKE and TP Group on October 22, 2009 is verified by an external auditor. The eight quarterly audits performed to date confirm the proper execution of the Agreement. TP also delivers to the UKE a monthly report describing the progress made in implementing the Agreement, published on the UKE website.

The MoU includes in particular the following:

if TP applies the provisions of the Agreement, the Chairman of the UKE will abandon functional separation remedee intentions;

TP would implement technical and organizational solutions, instead of the physical separation of information systems, to ensure compliance with the additional principles in the supply of non-discriminatory access to information for alternative operators and protection against the unauthorized flow of illegal information as defined in the Agreement (Chinese walls);

TP Group has agreed to make significant investments in broadband access over the next three years (1.2 million lines, including 0.5 million new lines and 0.7 million existing lines upgraded). It is expected that some 1 million lines will offer speeds of at least 6 Mbps;

wholesale rates will be frozen until the end of 2012 at current reference offers. Bitstream access prices will be determined using the “cost+” methodology instead of the current “retail minus” method.

Universal Service

According to the UKE decision of May 8, 2006, TP Group was responsible for universal service obligations until May 9, 2011. In July 2011, the UKE made decisions concerning termination of the universal service obligations imposed on TP. The UKE has not initiated the procedure for appointment of a new universal service provider, which it will appoint when the amendment to the Telecommunications Act comes into force. In accordance with the draft amendments to the Telecommunications Act, the main universal service obligations are as follows: the scope of universal service remains the same; universal service will be provided in accordance with the principle of technological neutrality, with the appointment of the universal service provider(s) being preceded by market analysis of the availability of services.

Concerning compensation for the universal service deliverables, in May 2011 the UKE issued its decisions on the net cost of the universal service for the periods 2006 to 2009. The UKE decided that the total net cost is 67 million zlotys, whereas TP was asking for 803 million zlotys. In June 2011, TP appealed the UKE’ decisions in order to have these decisions on the net cost reviewed. Following the dismissal of its initial appeal, TP petitioned the courts in October 2011 to challenge these decisions.

In June 2011, TP filed with the UKE a request for compensation for the net cost in 2010 for a value of 269 million zlotys. In January 2012, the UKE issued a decision on the net deficit in 2010 and granted a rebate of 55.1 million zlotys. TP has appealed the UKE decision in order to have it reviewed.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   62





Regulation of mobile telephony

Key Events

March 2011

Mobile voice termination rates: In July 2011, the UKE publishes for comment a draft decision setting the termination rate at 9.66 g/min.

March 2011

Network sharing: the UOKiK validates the network sharing agreement (RAN) between Orange and Era.

May 2011

Mobile voice termination rates: The UKE adopts decisions requiring Centertel, Polkomtel and PTC to reduce mobile termination rates, taking into account investment commitments.

May 2011

Spectrum: The UKE issues a decision amending earlier coverage requirements.

July 2011

Mobile call access and origination: The UKE issues a decision on this mobile market, confirming that it is effectively competitive.

August 2011

Market for mobile voice termination: The UKE publishes for comment proposed decisions on the market for mobile voice call termination (third round), imposing regulatory obligations on PTK and other operators.

October 2011

Spectrum: PTK Centertel applies for renewal of its license in the 1800 MHz band for a further period of 15 years.

November 2011

Market for mobile voice termination: The European Commission expresses serious doubts regarding the UKE’s draft decisions on mobile voice termination rate on PTK Centertel, PTC, Polkomtel and P4 networks.


Mobile voice termination rates

In March 2011, the UKE published for comment a draft decision to be imposed on the three largest mobile operators which defined, for an application in July 2011, a change of voice termination rates to 0.0966 zloty/min. On the same date, the mobile network operators requested application of the mechanism introduced by Article 43a of the Telecommunications Act, in order to benefit from lower mobile voice termination rates, agreed in exchange for investments in 2G and 3G networks. In April 2011, the European Commission indicated that this approach was compliant neither with European directives nor with its recommendation on termination rates.

In May 2011, the UKE issued a decision applying to PTK lower mobile voice termination rates for the period from July 2011 to December 31, 2012, in exchange for investment commitments. Investment commitments were also taken by Polkomtel and PTC, as well as by P4. The reduction in mobile voice termination rates for P4 is expressed as percentages of the reduction applied to other operators until 2012. The mobile voice termination rate for PTK, PTC, Polkomtel and P4 will become symmetrical in January 2013.

Reductions in mobile voice termination rates can be summarized as follows:

Gradual reduction

July 2011/
December 2011

January 2012/
June 2012

July 2012/
December 2012

PTK Centertel, PTC, Polkomtel
(UKE’s decision of May 2011)

0.1520 zł/min

no change

0.1223 zł/min

P4 (UKE’s decision of June 2011)

0.4208 zł/min

(179% of 0.1520 zł/min)

0.39976 zł/min

(163% of 0.1520 zł/min)

0.3021 zł/min

(147% of 0.1223 zł/min)





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   63





In August 2011, the UKE initiated consultation proceedings on the revision of the wholesale market for call termination on mobile networks (7/2007 - third round). The UKE’s proposed decision stipulates that PTK Centertel keeps its significant market power position. Mobile voice termination rates should be based on costs incurred up to the end of 2012. After December 2012, the UKE does not intend to adopt legally binding decisions based on the LRIC bottom-up model, but to publish on its website the recommended mobile voice termination rates, based on the results of the model.

In November 2011 the European Commission commented that the UKE’s proposed decisions could create barriers to the Single Market and expressed serious doubts about the compatibility of the proposed measures with EU law. Following the opening of phase II of the European Commission procedure, the UKE has withdrawn its draft decisions and should issue new proposals in early 2012.

Network sharing

In March 2011, the UOKIK approved the mobile network sharing agreement between PTK and PTC and the creation of a joint venture responsible for optimizing and managing shared networks.

Call access and origination market

In July 2011, the UKE adopted a decision on the mobile market for access and call origination, confirming that this market is effectively competitive and will not be ex ante regulated, as had already been decided in 2008.

Spectrum

In May 2011, the UKE issued a decision amending all previous CDMA coverage obligations. In particular, PTK is now required to cover 87.47% of Polish territory from 796 base stations, instead of 946.

The current 1800 MHz license was issued in August 1997 for a period of 15 years and expires in August 2012. In October 2011, PTK Centertel applied for renewal of its license in the 1800 MHz band for a further period of 15 years. The UKE’s decision is expected in 2012.

In 2011, the UKE also adopted decisions that introduce technological neutrality in the 900, 1800 and 2100 MHz frequency bands.

Regulation of fixed telephony and broadband Internet

Key Events

April 2011

Integrated reference offer: the UKE changed the reference offer.

April 2011

Wholesale broadband access market (market 5/2007): the UKE adopts its final decision in this market and removes ex ante regulation in municipalities where competition is deemed sufficient.

April 2011

Neostrada retail offer: the competent court on competition and consumer protection finds in favor of TP.

May 2011

Regulatory costs: the UKE issues a decision on the cost calculation for 2012 and on accounting separation for 2010.

June 2011

Wholesale broadband offer: the European Commission issues a decision imposing a fine of 127.5 million euros on TP for abusing its dominant position.

July 2011

Reference offer on infrastructure: the UKE changes the reference offer at the request of TP, intending to review the decision of July 2010.

July 2011

Integrated reference offer: TP submits to the UKE a change in the reference offer following adoption of the decision on the wholesale market for broadband access.

August 2011

Call origination market (2nd round): the UKE adopts its final decision on this market, considering that TP is dominant and maintains the ex ante regulatory obligations.

October 2011

Integrated reference offer: the UKE changes the reference offer for the VDSL service.

November 2011

Integrated reference offer: TP submits to the UKE a change following adoption of the decision relating to call origination on the fixed telephony market.

December 2011

Leased lines reference offer: the UKE launches a consultation on process improvement for alternative operators’ orders.





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   64





Integrated reference offer for interconnection, unbundling and wholesale broadband offers

In April 2011, the UKE issued a decision amending the integrated reference offer for interconnection, unbundling and wholesale broadband offers, following requests for review filed by TP and KIGEIT. In October 2011, the UKE further amended the integrated reference offer to include the VDSL service, in order to enable provision of the new Neostrada fiber offer (40 Mb/s and 80 Mb/s). Following adoption in August of the decision on the market for call origination on the fixed telephone network (market 2), in November 2011 TP proposed the introduction of a new modification to adapt retail offers in relation to wholesale line rental.

Wholesale broadband access market (market 5/2007)

In April 2011, the UKE adopted its final decision for the wholesale broadband access market (second round). This decision designates TP as a dominant operator in the domestic market, with the exception of eleven municipalities (including Warsaw). These municipalities, which are no longer regulated ex ante, account for approximately 8% of the Polish population. The relevant market includes xDSL and FTTx access technologies. TP must provide new bitstream access levels, including Ethernet.

TP’s Neostrada retail broadband offer

The European Court of Justice issued a decision in May 2010 on the compatibility with European law of the Neostrada retail broadband offer, in which it stated that the UKE should not regulate this retail offer since the Telecommunications Act does not allow it and no legal provision had been introduced for this purpose in the market analyses. On the basis of the decision of the European Court of Justice, the Polish courts have ruled in favor of TP in the cases of fines on retail broadband offers.

Regulatory costs

In May 2011, the UKE issued a decision on the cost calculation for 2012 and accounting separation for 2010, based on the “pure LRIC” (Long Run Incremental Costs) methodology for the calculation of access and interconnection rates. In August 2011, Ernst & Young presented its audit report on the cost calculation results for 2012 and its report on accounting separation for 2010. The audit report states that the costing of wholesale access services ignores the approach of “avoidable costs” in the LRIC methodology imposed by the UKE.

Decision by the European Commission on the broadband wholesale market

Following the statement of objections sent in March 2010 to TP by the European Commission, in June 2011 the latter issued a decision imposing a fine of 127.5 million euros on TP for abuse of dominant position, taking the form of a denial of access to its wholesale broadband services. The European Commission ruled that TP, between August 2005 and October 2009, committed a single and continuous breach of Article 102 of the Treaty by refusing access to its wholesale broadband products. In September 2011, TP appealed the decision of the European Commission.

Reference offer on infrastructures

In July 2011, the UKE changed the reference offer on infrastructures following a request from TP for a review of the July 2010 decision. In November 2011, the UKE launched a public invitation to tender for the reference offer, proposing some important changes, such as the establishment of a dedicated web mechanism with which alternative operators could place orders and the introduction of rules covering joint ownership of the wiring.

Call origination on the fixed-line telephony network

In August 2011, the UKE made its final decision on call origination on the public telephone network from a landline (2/2007 market - 2nd round). TP is designated as the dominant operator in this market. TP is now required to set wholesale rates based on costs incurred. For equal treatment, the UKE imposed obligations on TP comparable to the obligations imposed on the 4/2007 and 5/2007 markets under the TP-UKE agreement.

Leased lines reference offer

In July 2011, TP filed an application to change the leased lines reference offer, approved by the UKE in October 2010. In December 2011, the UKE launched a public invitation to tender to change the leased lines reference offer. The draft reference offer contains changes concerning the placing of orders by alternative operators via a dedicated web mechanism, as well as the applicable rates.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   65





6.3.2.4   TP Group’s activities

FINANCIAL INDICATORS

(in millions of zlotys)

2011

2010

2009

Revenues

14,922

15,715

16,560

Fixed-line and Internet

8,282

9,028

9,863

Mobile

7,706

7,711

7,745

Reported Ebitda (1)

5,928

4,711

6,279

As a % of revenues (1)

39.7%

30.0%

37.9%

Capex (2)

2,606

2,716

2,207

As a % of revenues

17.5%

17%

13.3%

Source: TP Group

(1)  As published by TP Group

(2)  Including Capex financed by leasing for 2009


TP Group also publishes the following financial indicators for its Internet and fixed-line and mobile telephony activities. These indicators do not replace the indicators in Chapter 9.1 Analysis of the financial position and earnings, which reflect the monitoring per operation which took place at Group level.

(in millions of zlotys)

2011

2010

2009

Fixed-line and Internet Ebitda (1)

3,629

2,451

4,062

Mobile Ebitda

2,299

2,260

2,217

Fixed-line and Internet Capex (2)

1,991

2,007

1,419

Mobile Capex (2)

615

709

788

Source: TP Group

(1)  As published by TP Group

(2)  Including Capex financed by leasing for 2009


Fixed telephony and Internet activities

KEY INDICATORS

 

2011

2010

2009

Revenues (in millions of zlotys)

8,282

9,028

9,863

Number of telephone lines (copper and FTTH, in millions) (1)

7.1

7.7

8.3

o/w retail lines

5.6

6.3

7.1

o/w wholesale lines

1.5

1.4

1.2

Number of Internet customers (in millions)

2.3

2.3

2.3

o/w narrowband

0.0

0.0

0.0

o/w broadband

2.3

2.3

2.3

Voice over IP subscribers

0.2

0.1

0.1

ADSL or satellite TV offer subscribers

0.6

0.5

0.4

ARPU (in zlotys per month)

 

 

 

Fixed telephone lines

47.8

49.7

53.1

Broadband Internet

57.1

59.7

59.8

Source: TP Group

(1)  Excluding PTK wireless local loop technology


The total number of lines served by TP Group decreased in 2011 by 604,000, a 7.8% decline compared with 2010. This erosion was the result of a fall of 723,000 in retail lines (-11.4% year-on-year), partly offset by an increase in wholesale lines and unbundled lines (+8.8%).

TP is trying to limit further erosion of its fixed subscriber base, mainly through customer loyalty programs and promotions relating to fixed- line subscription periods. In April 2011, TP launched new doMowy tariff plans, at lower prices than the standard plans, with 12-month or 24-month loyalty agreements. The new plans are aimed at meeting customer requirements by combining international and fixed-to-mobile calls in the subscription.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   66





In September 2011, TP increased the access costs of its tp socjalny plan for disadvantaged households, at the same time renaming it tp podstawowy. The reason for this change was the need to adapt the offering to meet regulatory obligations imposed by the regulator (UKE) and designating TP as an operator with significant market power on the retail market. In order to mitigate the impact of this increase on customer satisfaction, TP included broadband services in its new tariff plan and reduced the price of calls.

To address customer expectations, TP began to sell bundled services in the fourth quarter of 2011. The FunPack HD offer includes a VoIP service with unlimited calls to fixed lines in Poland.

In the area of voice services for the business market, TP continues to develop a service portfolio based on call plans and other benefits included in the subscription fee. These offers are mainly intended for SMEs.

Broadband access

Despite the fierce competition, mainly from cable operators, TP Group’s number of retail broadband lines increased by 2.6% in 2011 (including PTK Centertel’s CDMA and BSA lines). At the same time, broadband ARPU fell from 56.70 zlotys in 2010 to 53.40 zlotys in 2011. Following the implementation of sales and marketing campaigns, the retail customer base expanded in the third quarter of 2010, a trend that continued throughout 2011.

The new Neostrada plans launched on October 1, 2010 and based on a “cost plus” price structure increased the appeal of the pricing applied to TP’s range of services and boosted customer numbers. The increase in demand for higher speeds is an established market trend, fuelled by lower prices. Owing to a promotional offer for the Neostrada versions introduced in October 2010, the plans offering more than 6 Mbits/s accounted for approximately 50% of new subscriptions, compared to 36% in 2010.

Corporate market

The rapid growth in IP VPN services continued throughout 2011. Customers are looking to these services to streamline their operations and reduce sales and marketing costs.

Services offered on the Internet are also on the rise, for example the e-Store options available from March 2011.

The Business Package offering has also attracted keen interest from corporate customers. The package combines broadband access with an attractive tariff plan for voice calls, security tools, web space, and email addresses.

The development of IT services continued in 2011, with the introduction of a new offering called IT for Business in November. This package includes hardware, software, and IT support.

Lastly, the implementation of local area networks (LANs) at customer sites is becoming increasingly popular.

Mobile telephony activities

KEY INDICATORS

 

2011

2010

2009

Revenues (in millions of zlotys)

7,706

7,711

7,745

Total customers (excl. MVNO, in millions)

14.7

14.3

13.7

o/w contracts

7.0

7.0

6.6

o/w prepaid

7.7

7.4

7.1

o/w broadband (3G)

8.0

7.4

5.5

o/w broadband only (3G dongles)

0.7

0.5

0.4

Number of MVNO customers

0.1

0.1

0.1

ARPU (in zlotys per month)

40.3

42.5

44.0

ARPU subscriptions

64.6

66.9

71.2

ARPU prepaid

17.9

19.6

20.4

ARPU voice

30.1

31.5

33.0

ARPU data

10.2

11.0

11.1

Total AUPU (minutes per month)

161.7

159.0

135.8

Churn rate (%)

40%

38%

43%

Source: TP Group





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   67





Orange (the brand under which TP Group subsidiary, PTK Centertel trades) had a total of 14.7 million customers at the end of 2011, up 2.3% year-on-year after a 4.5% increase in 2010, compared with an average market growth rate estimated at 7%. The number of subscription customers was flat, and their proportion of the total customer base was maintained at 47.6% at the end of 2011. The growth in customer numbers can be considered satisfactory, given the high levels of activity of new market players, notably P4 (Play), which benefit from significant asymmetry in MTR costs, as well as MVNOs.

ARPU was 40 zlotys in 2011, down 5.2% on 2010. This fall in ARPU was chiefly due to the reduction in MTR and SMS costs, in addition to downward pressure on the price of voice calls. The subscriber acquisition cost was 128 zlotys in 2011, down 2.5% year-on-year. This improvement was mainly due to the significant increase in the proportion of smartphones sold.

In April 2010, Orange modified its subscription offers to meet customer needs more effectively. The range included Panther offers for users of mobile data services (Internet, email, etc.), Dolphin tariffs for frequent users of voice services, and Pelican for customers focused on text and community services.

For corporate customers, the Discount Optimum offering was introduced in April 2011. This promotional offer is based on the Optimum and Optimum with Internet plans, with a reduced subscription fee for a period to be chosen by the customer. In the high-end segments, the Negotiate Plan and Business Package were updated.

Mobile data services

The new HSPA+ DC technology was launched by PTK Centertel in the first quarter of 2011 in five cities, and was then extended during the year.

The Combo offer was launched by Orange in May 2011. It offers a discount to customers on bundled packages including mobile and fixed broadband, mobile and fixed telephony.

In 2011, a mobile broadband plan for tablets and netbooks was launched (Orange Free Set) at a promotional price.

At the same time, Orange modified its basic mobile Internet package (Orange Free), adding a modem at a promotional price. The new package includes data transfer speeds of 14 to 20 Gbits/s. Lastly, the SIM-only mobile Internet plan was modified, with a promotional discount of 10% on access charges.

In May 2011, Orange introduced the Business Everywhere Everyday plan for corporate customers, with an option for reduced or zero subscription fees. This is the first plan where the subscription fee is charged only in proportion to the number of days on which the data transfer service is used. This nomonthly fee option is also available to consumers.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   68





TP Group offers

The main offers as of the date of this document are:

FIXED TELEPHONY AND INTERNET OFFERS

Type

Name/Price per month

Description

Fixed TP services

doMowy 60 TP plan

Fixed plan with call package: LC & DLD: 60 min (24hrs) or 120 off peak, 50 zł monthly subscription fee.

doMowy 300 TP plan

Fixed plan with call package: LC & DLD: 300 min (24hrs) or 600 off peak, 70 zł monthly subscription fee.

doMowy 1200 TP plan

Fixed plan with call package: LC & DLD: 1,200 min (24 hrs) or unlimited off peak, 90 zł monthly subscription fee.

Fixed loyalty offers

A selection of promotions offering various bonuses (such as discounts, free call packs, cheap handsets etc.) in exchange for a loyalty contract 12 to 36 months long.

TP Broadband Internet

Lekki Internet

Low-end Neostrada offer (512 Kbits/s and 1 Mbits/s speeds for the same price).

Wymarzony Internet

Main Neostrada offer (2 – 20 Mbits/s) with pricing especially competitive for high-speed options. Accompanied by gadget (GPS, USB dongle) promotion for retention and Try&Buy option (for one month) for acquisition. Incentives (low installation fee) provided for customers using e-invoicing.

Super Promocja

Neostrada plan for the highest speeds (40 Mbits/s and 80 Mbits/s VDSL).

Neonetbook za 1 zł

Neostrada plan (2 – 20 Mbits/s) for Netbook with a 24-month subscription for 1 zł.

Internet z Extra TV

Bundled Neostrada offer with TV (IPTV and DTH). Maintenance is included in the subscription fee. Selection of bundles with extra channels (including HD).

Promocja pakietowa z Extra TV

Neostrada bundled offer with TV (IPTV and DTH) and VoIP (unlimited calls to fixed lines). Maintenance is included in the subscription fee. Selection of bundles with extra channels (including HD).

Internet z telefonem HD

Neostrada with options for speeds from 2 – 20 Mbits/s and VoIP (unlimited calls to fixed lines).

Internet z telefonem HD

Neostrada with VoIP (unlimited calls to fixed lines) and 40 Mbits/s and 80 Mbits/s VDSL.

Orange fixed services

Orange Stacjonarny

Orange fixed-line offer based on wholesale subscriptions. 35 zł, 49 zł and 85 zł options are available, with a call pack depending on contract length and monthly subscription fee (75 – 3,000 minutes). 24-month and 36-month contracts. Additional call pack for customers of Orange mobile.

Orange Strefa

GSM-based “Fixed” offer (works only within a designated zone close to home) with 24-month and 36-month contracts. Additional call pack for customers of Orange mobile.

Orange Broadband Internet

Orange Freedom

Orange broadband offer based on BSA. Speed range 256 Kbits/s – 20 Mbits/s, competitive pricing depending on contract length (12-month and 24-month contracts available).

Orange Freedom Pro

Orange broadband with CDMA technology; max. speed 1 Mbits/s; 3 GB data limit.12-month, 24-month, and 36-month contracts (influencing price of modem), 49 zł monthly subscription fee (same as Orange Freedom: 1 Mbits/s for 12 months). Offer targeted at customers without the technical possibility of normal broadband access.





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   69





MOBILE TELEPHONY OFFERS

Type

Name/Price

Description

Subscription and Mix

Dolphin tariff subscription/mix 29 zł/month

•   40 minutes all-in

•   Options:

•   1,200 minutes intra-net or fixed

•   30 minutes all networks

•   49 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Dolphin II tariff subscription/mix 39.90 zł/month

•   60 minutes all-in

•   Options:

•   1,200 minutes intra-net or fixed

•   30 minutes all networks

•   60 minutes all networks with 1#

•   49 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Dolphin II tariff subscription/mix 59.90 zł/month

•   150 minutes all-in

•   Options:

•   1,200 minutes intra-net or fixed

•   30 minutes all networks

•   60 minutes all networks with 1#

•   29 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Dolphin II tariff subscription/mix 79.90 zł/month

•   225 minutes all-in

•   Options:

•   1,200 minutes intra-net or fixed

•   30 minutes all networks

•   60 minutes all networks with 1#

•   29 gr/min for all networks outside contract

•   Unlimited intra-net minutes

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Dolphin II tariff subscription/mix 99.90 zł/month

•   300 minutes all-in

•   Options:

•   1,200 minutes intra-net or fixed

•   30 minutes all networks

•   60 minutes all networks with 1#

•   29 gr/min for all networks outside contract

•   Unlimited intra-net minutes

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Pelican II tariff subscription/mix 29.90 zł/month

•   40 minutes all-in

•   1,000 SMS intra-net or 200 SMS all networks

•   49 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Pelican II tariff subscription/mix 39.90 zł/month

•   60 minutes all-in

•   Unlimited SMS intra-net

•   400 SMS all networks

•   Free access to social networks – e.g.: Mobile Facebook via phone

•   49 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Pelican II tariff subscription/mix 59.90 zł/month

•   150 minutes all-in

•   Unlimited SMS intra-net

•   800 SMS all networks

•   Free access to social networks – e.g.: Mobile Facebook via phone

•   29 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Pelican II tariff subscription/mix 79.90 zł/month

•   225 minutes all-in

•   Unlimited SMS intra-net

•   2,000 SMS all networks

•   Free access to social networks – e.g.: Mobile Facebook via phone

•   29 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   70





 

Panther II tariff subscription/mix 49.90 zł/month

•   120 minutes all-in

•   1,200 minutes intra-net or fixed line

•   0.5 GB

•   Free HOTSPOT

•   39 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Panther II tariff subscription/mix 69.90 zł/month

•   225 minutes all-in

•   Unlimited intra-net minutes

•   1,200 minutes intra-net or fixed line

•   0.5 GB

•   Free HOTSPOT

•   29 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Panther II tariff subscription/mix 89.90 zł/month

•   300 minutes all-in

•   Unlimited intra-net minutes

•   1,200 minutes intra-net or fixed line

•   1.5 GB (with unlimited data)

•   Free HOTSPOT

•   29 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Panther II tariff subscription/mix 129.90 zł/month

•   450 minutes all-in

•   Unlimited intra-net minutes

•   1,200 minutes intra-net or fixed line

•   2 GB (with unlimited data)

•   Free HOTSPOT

•   29 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Panther II tariff subscription/mix 199.90 zł/month

•   750 minutes all-in

•   Unlimited intra-net minutes

•   1,200 minutes intra-net or fixed line

•   250 minutes to fixed lines

•   3 GB (with unlimited data)

•   Free HOTSPOT

•   29 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)

Panther II iPhone tariff subscription/mix 149.90 zł/month

•   550 minutes all-in

•   Unlimited intra-net minutes

•   1,200 minutes intra-net or fixed line

•   3 GB (with unlimited data)

•   Free HOTSPOT

•   29 gr/min for all networks outside contract

•   Minutes within the monthly subscription are exchangeable for SMS (1 minute = 1 SMS)





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   71





Type

Name/Price

Description

Subscription Only

Dolphin II tariff subscription/mix 29.90 zł/month

Additional service, free of charge until the end of the contract – Stop the clock Pro: unlimited minutes for calls to TP mobiles or fixed lines between the 2nd and 60th minute of the call

Dolphin II tariff subscription/mix 39.90 zł/month

Dolphin II tariff subscription/mix

59.90 zł/month

Dolphin II tariff subscription/mix 79.90 zł/month

Dolphin II tariff subscription/mix 99.90 zł/month

Pelican II tariff subscription/mix 29.90  zł/month

Pelican II tariff subscription/mix 39.90 zł/month

Pelican II tariff subscription/mix 59.90 zł/month

Pelican II tariff subscription/mix 79.90 zł/month

Panther II tariff subscription/mix 49.90 zł/month

Panther II tariff subscription/mix 69.90 zł/month

Panther II tariff subscription/mix 89.90 zł/month

Panther II tariff subscription/mix 29.90 zł/month

Panther II tariff subscription/mix 199.90 zł/month

Panther II tariff subscription/mix 149.90 zł/month

Prepaid

Orange GO

•   Decreasing rate plan with a per minute rate discount which increases according to the top-up value

•   29 gr off-net option available after 50 zł top-up

Orange POP

•   Flat rate 29 gr per minute all networks and 20 gr per SMS all networks

•   Additional cost reducing option available: mostly voice/SMS and MMS packages

Orange Free

•   Data rate plan

•   0.01 zł per 100 kB

•   0.29 zł per minute all networks

•   0.20 zł per SMS all networks

•   Data bonuses for top-ups depending on top-up value

Orange One

•   New tariff plan with two profiles (SMS or Voice) and bonuses after top-ups
(125 – 1,000 intra-net minutes or SMS)

•   0.29 zł per minute all networks

•   0.15 zł per minute all networks

Zetafon

•   Every prepaid offer described above is additionally available in a special model called Zetafon with a 24-month, 30-month, or 36-month contract in exchange for a subsidized handset. From the end of 2011, subscriptions include 25 and 50 zł





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   72





Distribution

TP Group uses different types of distribution channels to address its various customer needs and deliver the right offer for individual, business, and corporate customers. Three types of sales network are used. These serve:

individual and business customers;

corporate customers;

prepaid sales.

Sales to individuals and business customers comprise both active and passive sales channels. The passive distribution network consists of PTK Centertel and TP branded stores, with almost 1,100 sales outlets that are either owned or operated under franchise. The active distribution network involves a door-to-door sales force that operates out of direct sales centers located all over Poland. The direct sales centers operate via two different channels (telesales and online). All distribution channels offer a wide range of mobile services, mobile and fixed subscriptions, television contracts, value-added services, and fixed-line voice services.

Sales to business customers and companies are carried out via diverse distribution channels, including: TP’s own sales force, brokers, telesales, and online. This distribution network provides sales and support services to business customers for the sale of mobile services, mobile and fixed-line Internet subscriptions, fixed telephony, value-added services, and customized telecommunications solutions.

The prepaid sales network comprises sales outlets under the Orange name, as well as those of partners specializing in the sale of mobiles. Basic prepaid kits are widely available in around 66,000 sales outlets, while top ups can be obtained from some 119,000 stores.

The Network

Fixed Network

UNBUNDLING

(in thousands)

2011

2010

2009

Total number of fixed lines

7,039

7,671

8,300

Full unbundling

186.0

130.0

51.6

Partial unbundling

55.0

40.4

19.0

Bitstream

523.0

527.0

456.0

Source: TP Group


In 2011, TP Group continued to enhance the infrastructure of its data networks, in particular, the IP VPN and broadband networks. This involved an increase in the capacity of global Internet links, IP backbone network expansion, enhancement of a network for aggregation of data traffic to and from customers, and an increase in the capacity of DSLAM (Digital Subscriber Line Access Multiplexer) access equipment. A significant portion of investment in backbone, aggregate, and access networks has been carried out pursuant to the Memorandum of Understanding with UKE dated October 22, 2009.

TP has also developed a new generation of ADSL access switches compatible with VDSL2 technology, which provides speeds of up to 80 Mbits/s.

In addition, the infrastructure supporting multimedia services, (TP Videostrada, Video-on-Demand and Digital-to-Home satellite television), was expanded.

As part of the expansion of the IP network infrastructure, TP has put in place new generation routers with switching capacity of more than 1 Tbit/s. In 2011, the capacity of the IP network was increased by more than 20% year-on-year, exceeding 340 Gbits/s.

Under a program to develop access nodes, TP increased the availability of very-high bandwidth services with more than 1,000 DSLAM nodes covering around 25% of xDSL users. A total of more than 2.3 million homes are now in the VDSL coverage area.

Lastly, at the end of 2011, TP’s IPTV services covered more than 70% of its broadband client base.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   73





Mobile Network

Coverage

2011

2010

2009

GSM Voice/Edge

99.6%

99.6%

99.5%

3G (UMTS)/HSDPA

62.4%

58.5%

55.3%

Source: TP Group


In 2011, TP Group continued to develop its core network capacity to keep step with the growth in traffic, by installing new generation network infrastructure entirely based on IP technology. Base station controllers (BSC and RNC) have been gradually migrated to this new generation network (R4), which covered more than 90% of GSM and UMTS/HSPA network users at the end of 2011.

PTK Centertel also extended coverage of its UMTS/HSPA services and increased its GSM capacity, while at the same time continuing to invest in the CDMA network. At the end of 2011, the UMTS/HSPA network was available to 62% of Poland’s population and the CDMA network covered more than 88% of the country. Moreover, the Company continued to roll out a new HSPA DC technology for mobile data, which covered 58% of the population at the end of 2011.

Key Events

March

TP Group sells TP Emitel for 1.7 billion zloty

On June 22, 2011, TP S.A. finalized an agreement with Kapiri Investments, whose sole shareholder is the London-based Montagu IV fund, to sell 100% of Emitel’s shares and voting rights, for 1.7 billion zloty.

March

Agreement between TP and TVN

On March 9, 2011, TP Group enhanced its basic TV package with new content provided by TVN. The TV package was also extended to pay-TV bundles.

May

New Broadband Offer

In May 2011, TP Group launched a broadband offering based on VDSL technology.

July

Letter of Intent for sharing of network infrastructure and radio frequencies

On July 21, 2011, PTK Centertel and Polska Telefonia Cyfrowa signed an agreement for shared usage of mobile radio access networks (“RAN”). The partners also signed a shareholder agreement concerning the governance of the joint venture created previously – NetWorkS! – in which they each hold a 50% stake.

October

PLN 800 million share buyback program

On October 13, 2011, the Extraordinary Shareholders’ Meeting of Telekomunikacja Polska SA approved a PLN 800 million share buyback program to be implemented by December 31, 2012. In 2011, the Company bought 11,313,409 treasury shares for PLN 200 million.

October

Trade union agreement 2012-2013

On October 24, 2011, TP S.A. signed a new agreement with the unions for 2012-2013, which came into force on January 1, 2012. The agreement covers, inter alia, employment policy concerning internal mobility, recruitment and outsourcing, pay, and voluntary redundancy compensation. Between 2012 and 2013, up to 2,300 employees may take advantage of voluntary redundancy.

January 2012

Definitive ruling in DPTG dispute

On January 12, 2012, the Board of Directors of TP S.A. signed an agreement concerning the dispute with DPTG, in the interests of the Company and its shareholders. The compromise ended a dispute ongoing since 2001 over a contract signed in 1991. TP S.A. has paid a total of 550 M€ to DPTG, and DPTG has withdrawn all of its claims relating to the dispute, including those concerning 396 M€ awarded by the arbitration court of Vienna for phase 1 of the dispute, and its claim for 320 M€ in phase 2, as well as all other liabilities, damages, and expenses relating to the legal action brought by the parties.





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   74





Outlook

TP Group’s objective for the next few years is to take full advantage of the opportunities brought by the Memorandum of Understanding with UKE. The Group will still focus on its core activity, where it will strengthen its position as leader and ensure healthy revenues and a solid financial position. Finally, the Group will respond to changing customer needs, developing an attractive range of services.

These objectives will be achieved by focusing on the following priorities:

attaining a leading position on TP Group’s core markets:

in fixed telephony, by increasing customer loyalty and reducing revenue erosion,

in mobile telephony, by achieving excellence on the subscription market, continuing to strengthen the Orange brand, growing ARPU, and improving customer satisfaction through the introduction of new services,

in Internet access, by expanding the broadband customer base and further improving service quality through increases in speed and extension of service coverage,

in TV, by pursuing cooperation with TVN, with the aim of providing TP Group customers with the highest service quality, based on rich content and the best technology solutions,

in innovation capacity, by offering attractive, integrated packages that meet the needs of TP’s customers;

expanding essential network infrastructure on a systematic basis in order to offer customers the latest technologies;

developing a new offering for corporate customers on the ICT market, mainly through a newly-created dedicated company (Integrated Solutions);

improving customer services;

developing a robust sales network, chiefly through direct sales channels that increase the availability of offers for customers;

pursuing transformation and savings programs, to reduce the cost base and improve operational efficiency;

taking advantage of the opportunities arising in relation to Euro 2012, for which TP and Orange are technology partners.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   75





6.3.3  Spain

6.3.3.1   The Telecom Services Market

KEY MACROECONOMIC INDICATORS

 

2011

2010

2009

Population (in millions) (1)

46.1

46.0

45.8

Households (in millions) (2)

17.3

17.2

17.1

GDP growth (%) (2)

+0.7%

-0.1%

-3.7%

GDP per capita (in dollars PPP) (2)

23,300

22,800

22,800

Change in consumption per household (%) (2)

-2.2%

+0.9%

-4.2%

Source:

(1)  IMF

(2)  INE/Eurostat-Orange for 2011


TELECOM SERVICES REVENUES (IN BILLIONS OF EUROS)  

[f7frt2011drfen017.jpg]

Source: CMT, Orange for 2011

NUMBER OF CUSTOMERS (IN MILLIONS)

[f7frt2011drfen018.jpg]

Source: CMT, Orange for 2011

The year 2011 was marked by the weaker-than-expected recovery of the Spanish economy. Carried by exports, GDP once again experienced slight positive growth of 0.7% in 2011; however, this fell short of expectations. The 23% unemployment rate remained at historically high levels while household consumption dropped 2.2% from last year.

In this context, total revenues within the telecommunications industry fell by 4%, versus a 3% drop in 2010, even though the number of customers increased. The fixed-line and mobile markets continued to be characterized by intense price competition, leading to a 3.5% drop in mobile revenues and a 1.5% drop in fixed Internet revenues.

The number of mobile customers increased 3.4% to 58.7 million, while Internet and fixed-line subscribers increased by 4.8% to 11.1 million.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   76





Fixed telephony

 

2011

2010

2009

Revenues (in millions of euros)

5,221

5,765

6,209

o/w PSTN access

2,558

2,749

2,987

o/w PSTN communications

2,523

2,834

2,988

Number of subscribers (in millions)

19.6

19.7

20.1

PSTN

18.7

18.9

19.3

VoIP

0.9

0.9

0.8

Traffic (in millions of minutes)

64,362

65,909

67,186

AUPU (in minutes per month)

287

291

290

Source: CMT, Orange for 2011


Fixed-line telephony revenues dropped 9.4% as customers moved from fixed lines toward less expensive voice and Internet packages and as mobile phones took the place of fixed lines. The number of telephone lines remained more or less stable in 2011.

Internet on the fixed network

 

2011

2010

2009

Revenues (in millions of euros)

3,830

3,888

3,877

o/w narrowband

3

5

7

o/w broadband

3,383

3,392

3,363

o/w other Internet services

443

491

516

Number of subscribers (in millions)

11.1

10.6

9.9

Narrowband

0.1

0.1

0.2

Broadband

11.0

10.5

9.7

o/w ADSL

8.7

8.4

7.7

o/w cable

2.1

2.0

1.9

ARPU (in euros per month)

28.8

30.6

32.9

Number of IPTV subscriptions (in millions)

0.9

0.9

0.8

% of lPTV over ADSL access

10.3%

10.2%

10.3%

Source: CMT, Orange for 2011


Revenues from fixed Internet dropped by 1.5% across the board as a result of the 6.0% decrease in average revenue per customer (ARPU) related to long-term promotions and permanent discounts on fixed-line and mobile services purchased from the same operator.

The number of Internet customers grew to 11.1 million in 2011, an increase of 4.8%. Growth was slower than in previous years—an indicator of the maturity level of this market. High capacity broadband services, however, took off: ONO rolled out its VHBB solution for cable (DOCSIS 3.0) in 7 million households and now serves more than 350,000 customers, while Telefónica is stepping up its selective deployment of fiber-to-the-home services (FTTH) and serves more than 160,000 customers.

Plans that include television have not yet reached expected levels. The number of customers having selected an IPTV add-on increased by 4.8% in 2011 to 0.9 million (i.e., 10.3% of broadband subscribers).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   77





Mobile telephony

 

2011

2010

2009

Revenues (in millions of euros)

13,527

14,015

14,527

o/w subscriptions

11,517

11,777

12,119

o/w prepaid

1,837

2,077

2,300

o/w voice

8,034

9,265

10,375

o/w messaging (SMS, MMS)

1,146

1,249

1,572

o/w data access

2,442

1,963

1,443

Number of customers (in millions)

58.7

56.7

54.8

o/w subscriptions

38.4

36.2

33.8

o/w prepaid

20.3

20.5

21.0

o/w data subscribers only

6.0

5.5

3.8

ARPU (in euros per month)

19.2

20.6

22.1

Contract ARPU

25.0

27.1

29.9

Prepaid ARPU

7.5

8.4

9.1

Data ARPU (excl. SMS, MMS)

3.5

2.9

2.2

Traffic (in millions)

 

 

 

Mobile outgoing minutes

72,923

71,189

70,876

Number of SMS

8,618

8,761

10,577

AUPU (in minutes per month)

104

105

108

Source: CMT, Orange for 2011


Total revenues decreased by 3.5%, due primarily to the drop in telephony revenues, which was not completely offset by the increase in data revenues (+24% excluding SMS messaging). Total ARPU decreased 6.6% as a result of the decline in voice services related to the drop in price per minute and decreased usage (AUPU). Average revenue per user for data increased 20.3%, driven by the rise in the number of smartphones.

The number of subscribers increased 3.4% to 58.7 million customers, which corresponds to a penetration rate of 127%. Customers with a subscription increased 6% to 38.4 million, representing 65.4% of the total customer base. The number of customers with prepaid plans fell by -1.2% to 20.3 million.

6.3.3.2   The Competitive Environment

Fixed-line telephony and Internet

FIXED LINES SEGMENTATION

(in millions)

2011

2010

2009

Total fixed lines

19.6

19.9

20.1

o/w consumer

13.2

13.2

13.1

o/w wholesale

6.4

6.7

7.0

Source: CMT, Orange for 2011





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   78





BROADBAND INTERNET MARKET SHARE

[f7frt2011drfen019.jpg]

Source: CMT

The Internet market is dominated by five main players representing over 90% of the market, with respective market shares of 48.2% for Telefónica, 14.5% for Ono, 11.5% for Orange, 9.9% for Jazztel and 7.7% for Vodafone (source: CMT, Orange estimates for Q4 2011). 79% of the subscriber base is connected by ADSL and 19% by cable. Bundled dual play offerings (telephone and Internet services) continue to be standard in the Spanish market.

The market is characterized by tight competition, resulting in long-term promotions (up to 50% of the price of ADSL for one year) launched by all operators and convergence offers launched by Orange, Vodafone and Telefónica. Under these circumstances, Jazztel’s market share grew by 0.8 point, Orange’s grew by 0.9 point and Vodafone’s grew by 0.6 point, at the expense of Telefónica, whose market share dropped by 5.3 points, while Ono remained stable.

Mobile services

MOBILE MARKET SHARE

[f7frt2011drfen020.jpg]

Source: CMT

The market was dominated by three main operators that, together, represented 89% of the market: Telefónica (41.3%), Vodafone (27.5%) and Orange (20%). Yoigo’s (Telia Sonera) market share was 5.1%, while the MVNOs held a 6.1% share (source: CMT, Orange estimates for 2011). There are 30 different MVNOs, focusing mainly on low value segments, prepaid customers and ethnic segments.

In 2011 the market was characterized by tight competition between the mobile telecommunications operators, with a price war breaking out among the MVNOs over the low value segments and with sizable subsidies for smartphones in the premium segments. These factors led to a 15% increase in churn rate (5.6 million customers changed operators in 2011). In this context, the MVNOs and Yoigo increased their market share by 1.8 and 1.3 points, respectively, while Telefónica lost 1.5 point and VOD lost 1.7 points. Orange’s market share remained stable in terms of volume but increased in value by two points to reach 20.0% (source: CMT, Orange estimates for 2011).

6.3.3.3   The Regulatory Environment

Spanish legislative and regulatory system

The 2002 European “Telecom Package” was transposed into Spanish law by the general Telecommunications Act (law 32/2003 of November 3, 2003), as well as by royal decree 2296/2004 of December 10, 2004 on electronic communications markets, network access and numbering, and royal decree 424/2005 of April 15, 2005 on the supply of electronic communications services, universal service obligations and user rights. The latter was amended by royal decree 726/2011 relating to the supply of the universal service in May 2011. The telecommunications sector is also covered by the law 15/2007 of July 3, 2007 on the implementation of competition rules.

Law 34/2002 of July 11, 2002 relating to the information society and electronic commerce specifies the obligations and limits of responsibility applicable to service providers in the information society. The regulatory framework applicable to data protection in Spain is based around law 15/1999 relating to personal data protection and order 999/1999 relating to security measures. In the field of intellectual property rights protection, law 23/2006 of July 7, 2006 amends law 1/1996 of April 12, 1996 and transposes European directive 2001/29 relating to the harmonization of certain aspects of copyright and related rights in the information society.

The 2009 European guidelines are being transposed into national legislation.

Authorities

The Ministry for Telecommunications and the information society (Secretaría de Estado de Telecomunicaciones y para la Sociedad de la Información, SETSI) that is part of the Ministry of Industry, Tourism and Commerce, is responsible for activities relating to telecommunications and the information society.

The Telecommunications Market Commission (Comisión del Mercado de las Telecomunicaciones, CMT) is the regulatory authority responsible for the telecommunications and audiovisual sectors (excluding content);

The National Competition Commission (Comisión nacional de la Competencia, CNC) is responsible for the implementation of competition law in coordination with industry authorities.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   79





Regulation of mobile telephony

Key Events

February 2011

Universal Service: the law on a sustainable economy, which defines the universal service at 1 MB, is approved.

May 2011

Universal Service: Royal decree 726/2011 amending decree 424/2005 on universal service provision is adopted.

May 2011

900 MHz spectrum: the Spanish authorities allocate a 5 MHz block in the 900 MHz band to Orange Spain.

July 2011

Auction for the spectrum: the Spanish government auctions frequencies in the 800 MHz, 900 MHz and 2.6 GHz bands. Orange Spain purchases 10 MHz in the 800 MHz band and 20 MHz in the 2.6 GHz band.

September 2011

Universal Service: the Spanish government launches the process of designating universal service providers.

September 2011

Universal Service: Orange Spain’s contribution to the net cost of universal service for 2008 is set at 7.61 M€.

November 2011

Auction for the spectrum: Orange Spain acquires 10 MHz in the 2.6 GHz frequency band in TDD mode for 5.2 M€.

December 2011

Universal Service: Telefónica is designated as universal service provider.

December 2011

Universal Service: the net cost of the universal service for 2009 reaches 46.78 M€.

December 2011

Mobile voice termination rates: the CMT launches an invitation to tender on market 7 and offered new mobile voice termination rates until 2014.


Universal Service

The law on a sustainable economy approved in February 2011 stipulates that functional access to the Internet includes a 1 MB broadband connection. The Ministry for Industry gave details of the implementation in a Royal Decree on the provision of the universal service, published in May 2011.

In September 2011, the Spanish government launched the selection process for designated operators to run the various components of the universal service (voice telephony, connection to the 1 MB network, public payphones, directories) for a period of five years. In December 2011, Telefónica was designated as the universal service provider beginning in January 2012.

The net cost of the universal service for 2009 was set at a final amount of 46.78 million euros.

Spectrum

In May 2011, the Spanish authorities allocated a duplex block of 5 MHz in the 900 MHz band to Orange Spain, which made an initial lump sum payment of 126 million euros and committed invest 433 million euros in the Spanish telecom infrastructure (integrated into the 2011-15 investment plan). The license, granted under the principle of technological neutrality, is valid until December 2030.

In July 2011, the Spanish authorities auctioned the 800 MHz, 900 MHz and 2.6 GHz frequency bands. Orange Spain purchased 10 MHz duplex in the 800 MHz band and 20 MHz duplex in the 2.6 GHz band. 11 operators bought 270 MHz duplex (51 blocks of the spectrum) out of the 310 MHz duplex available, for 1.65 billion euros.

The situation is as follows for the three main operators:

Orange Spain has acquired 10 MHz duplex in the 800 MHz band and 20 MHz duplex in the 2.6 GHz band for 437 million euros (cash payment below the European references);

Telefonica bought 10 MHz duplex in the 800 MHz band, 5 MHz duplex in the 900 MHz band and 20 MHz duplex in the 2.6 GHz band for 668.31 million euros (for comparison: 499.31 million euros without the frequencies in the 900 MHz band);

Vodafone has purchased 10 MHz duplex in the 800 MHz band and 20 MHz duplex in the 2.6 GHz band for 517.59 million euros.

The seven remaining blocks were also auctioned in November 2011. Orange Spain acquired 10 MHz duplex in the 2.6 GHz frequency band in TDD mode for 5.2 million euros. Telefónica won the 4.8 MHz block for 169 million euros and Vodafone acquired the remaining national 20 MHz duplex for 10.4 million euros.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   80





Mobile call termination rates

Following its invitation to tender in December 2011 for the wholesale mobile call termination market (market 7), the CMT published a decision involving a new gradual decrease of mobile call termination caps to cover the period from 2012 to 2014. The proposed caps are as follows:

Mobile call termination rates
in euro cents/min

04/16/2011-

10/15/2012

10/16/2012-

04/15/2013

04/16/2013-

10/15/2013

10/16/2013-

12/31/2013

As of
01/01/2014

Telefónica Móviles, Vodafone
and Orange

3.42

2.84

2.25

1.67

1.09

Yoigo

4.07

3.16

2.41

1.67

1.09


Regulation of fixed telephony and broadband Internet

Key Events

April 2011

Local loop unbundling and wholesale line rental: Telefónica increased the rate for local loop unbundling from 7.79 € to 8.32 € and reduced the wholesale line rental price from 11.28 € to 11.19 €.

November 2011

Bitstream offer: the CMT approved the wholesale offer for broadband access (NEBA).


Local loop unbundling

In April 2011, Telefónica increased the price of local loop unbundling from 7.79 euros to 8.32 euros per month.

Wholesale line rental (WLR)

In April 2011, the CMT reduced the wholesale line rental price from 11.28 euros to 11.19 euros per month.

Bitstream offer

In November 2011, the CMT approved the new wholesale offer for access to broadband Ethernet (NEBA), which is intended to replace the current wholesale offers for bitstream access and to take effect in the first quarter of 2012. Current services (GigADSL and ADSL IP) will remain available until the new wholesale services are actually offered.

6.3.3.4   Orange España’s activities

FINANCIAL INDICATORS

 

2011

2010

2009

Revenues (in millions of euros)

3,993

3,821

3,887

Reported Ebitda

839

765

729

as a % of revenues

21.0%

20.0%

18.8%

Capex

405

397

440

as a % of revenues

10.1%

10.4%

11.3%

Source: Orange


Orange España, operating under the Orange, Ya.com and OBS (Enterprise) brands, offers fixed and mobile telecommunication services to more than 15 million customers in the residential, professional, business and wholesale segments.

In 2011, operations were still affected by the macroeconomic environment, competitive pressure and negative regulatory impact on interconnection prices. Nevertheless, Orange España’s commercial growth allowed it to increase its total revenues by 4.5% (3.9 billion euros). Fixed telephony and Internet service revenues increased by 6.6% and mobile revenues increased by 4.1%. Disregarding the impact of regulations, Orange’s revenues were up 7.1%.

Ebitda grew by 9.8%, and the Ebitda margin went up 1 point to 21% compared to 2010.

In 2011, Orange España continued to carry out its transformation programs, strict cost control policies and operational efficiency improvement programs. The savings generated by these programs allowed Orange España to offset the increase in its sales and marketing expenses stemming from new customer acquisition and customer retention.

Orange also pursued its plans to transform its network in 2011 with investments, excluding licenses, up 2%. Furthermore, Orange invested 569 million euros in additional mobile frequencies, which allows it to compete on equal footing with the other operators.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   81





Fixed telephony and Internet

KEY INDICATORS

 

2011

2010

2009

Revenues (in millions of euros)

707

663

671

Number of Internet customers (in millions)

1.31

1.17

1.17

o/w narrowband

0.05

0.05

0.08

o/w broadband

1.27

1.11

1.09

ARPU (in euros per month)

32.4

31.8

28.1

Broadband Internet

32.4

31.8

30.4

Source: Orange


Orange España’s strategy in regard to fixed-line services remained focused on improving customer satisfaction and loyalty, as well as on improving margin by optimizing access costs and enhancing value added services such as VoIP. Priorities related to reduced churn rate and increased value led to a 13.5% increase in the number of broadband customers and a 1.9% increase in average revenue per user, which came to 32.4 euros per month at year-end 2011. The number of unbundled customers increased by 27.2% to 777,000 customers at the end of 2011, with totally or partially unbundled customers representing 78.7% of total broadband customers.

Mobile telephony activities

KEY INDICATORS

 

2011

2010

2009

Revenues (in millions of euros)

3,286

3,158

3,216

Total number of customers (in millions)

12.5

11.9

11.9

o/w contract

7.6

7.1

6.7

o/w prepaid

4.9

4.8

5.2

o/w 3G broadband

7.3

6.3

5.1

o/w broadband only (3G dongles)

0.77

0.64

0.35

Number of MVNO customers

1.48

1.20

0.75

Total ARPU (in euros per month)

20.8

21.5

22.3

Contract ARPU

30.7

31.8

34.2

Prepaid ARPU

5.8

6.7

7.0

Voice ARPU

16.3

17.6

18.8

Data ARPU

4.5

3.8

3.5

Total AUPU (in minutes per month)

163.5

162.4

152.3

Churn rate (%)

-28.3%

-26.9%

-28.5%

Source: Orange





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   82





Orange España’s offers

The plans under the Animals line, launched in June 2010 for clients with subscriptions, are the leading abundance and premium voice plans and combined voice and data plans on the Spanish market. These plans are attractive in their simplicity and excellent value. As regards customer loyalty, Orange is anticipating changes to the regulations on number portability in 2012 and has launched a new plan, called Renove Estilo Orange, offering existing customers the same conditions for upgrades as those offered to new customers.

In 2011, Orange expanded on the concept of the plans under the Animals line in the prepaid segment and was the first operator to offer an abundance rate for Internet (Delfín) for users of prepaid cards. Furthermore, in mid-2011 Orange launched Mundo, a new plan targeting immigrants that includes only a SIM card and competitive rates for international calls.

In the mobile broadband market, Orange launched the Smart SIM offering for customers under the Delfín plan (voice and Internet), allowing them to obtain an extra SIM card for their tablet and to share all data on the SIM card. The number of mobile broadband customers (under the Delfín or dongle plans) increased by a factor of 2.3 in 2011 and representing 26% of the total customer base.

As for the business segment, in 2011 Orange launched new rates under its Habla y Navega (talk and surf) offering, the first combined voice and data plan available on the market, and Oficina Plus Global, which includes mobile, fixed-line and PBAX services with a single contract and billing. For large accounts, Orange has launched new Giganet services based on the Ethernet protocol that make it possible to connect multiple customer sites with fiber optics allowing for speeds of up to 10 Gbits/s.

In 2011, the number of customers with a subscription increased 6.7% thanks to high value offerings such as the León plan (voice rate) or the Delfín plan (voice and Internet), while prepaid customers increased 1.3% despite intense competition between MVNOs. The decrease in total ARPU was limited to 3.2% despite the continued drop in prices, thanks to the value strategy implemented to both acquire and retain subscribers.

The main offers as of the date of this document are:

FIXED TELEPHONY AND INTERNET OFFERS

ADSL

(consumer)

ADSL Máxima velocidad:

40.95 €/month and 30.95 € for convergent customers

Includes ADSL at maximum available speed, free calls to domestic fixed lines, free calls to 15 Orange mobile lines (at 1 € each number), free Livebox (advanced modem) and monthly line rental.

ADSL Máxima velocidad

+ Pay TV: 50.95 €/month and 40.95 € for convergent customers

Includes the same services as Máxima velocidad plus the Orange TV bundle with the football option (Gol TV).

Internet ADSL dual play (business)

+Empresa Indirecto

40 €/month

Targets SOHOs and SMEs: Includes PSTN ADSL at 10 Mbits/s and flat rate for calls to national fixed lines.

Fixed to mobile substitution

(business)

Mi Fijo

15 €/month

Targets SOHOs and SMEs: offers voice fixed line portability based on mobile technologies. Includes free calls to fixed domestic numbers and 0.10 € per call to mobiles.





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   83





MOBILE TELEPHONY OFFERINGS

León 24h

abundance rates

(contract consumer)

León 49 49 €/month

1,000 minutes, 24h

León 32 32 €/month

500 minutes, 24h

León 24 24 €/month

300 minutes, 24h

Delfín 24h

abundance rates and unlimited Internet access

(contract consumer)

Delfín 79 79 €/month

2,000 minutes 24h, 500 SMS, 1 GB

Delfín 59 59 €/month

1,000 minutes 24h, 750 MB

Delfín 40 40 €/month

500 minutes 24h, 500 MB

Delfín 30 30 €/month

300 minutes 24h, 300 MB

Delfín 20 20 €/month

300 minutes (6pm to 8am), 200 MB

Bonos Internet Extra

Additional surfing bundles for Delfín plans (200 MB for 5 €/month, 500 MB for 8 €/month)

SmartSIM 3 €/month

Extra SIM card for tablets to share with data bundles

Panda:

leisure

(contract consumer)

Panda 26 26 €/month

1,200 minutes (6pm to 8am)

Panda 20 20 €/month

300 minutes (6pm to 8am), 300 SMS

Panda 15 15 €/month

300 minutes (6pm to 8am)

Ardilla:

low cost

(contract consumer)

Ardilla 15 10 €/month

Minimum fee 15 €/month, 8 euro cents/min, 150 SMS, 150 MB

Ardilla 8

Minimum fee 8 €/month, 8 euro cents/min

Pingüino

expenditure control

(contract consumer)

Pingüino 10 € or 20 €/month (automatic recharge)

Free calls to Orange numbers 6pm to 8am (max 1,000 min), other calls 4 euro cents/min

& Navegación 20 €/month (automatic recharge)

Free calls to Orange numbers 6pm to 8am (max 1,000 min), other calls 10 euro cents/min. Data traffic 150 MB, 150 SMS

Básico SIM only

(contract consumer)

Básico 6

Minimum fee 6 €/month, 6 euro cents/min, 6 euro cents/SMS

León 24h

(prepaid)

León de Tarjeta

7 €/week

100 minutes 24h, 9 euro cents/SMS

Delfín 24h browsing

(prepaid)

Delfín de Tarjeta

3.5 €/week

9 euro cents/min, 100 MB data, 50 SMS

Ardilla

(prepaid low cost)

Ardilla de Tarjeta

Minimum top-up of 5 €/month, 9 euro cents/min, 9 euro cents/SMS

Mundo

(prepaid for immigrants)

SIM Mundo

7 euro cents/min with reduced rates to fixed-line international numbers (up to 1 ct/min)

Internet Everywhere Premium Plan

(contract data)

IEW35 35 €/month or 25 € for voice contract users

5 GB at max. speed, then 128 kbps

IEW39 39 €/month or 29 € for voice contract users

5 GB at max. speed, then 128 kbps (no commitment)

Internet Everywhere Entry Plan

(contract data)

IEW19 19 €/month or 9 € for voice contract users

1 GB at max. speed, then 128 kbps

IEW23 23 €/month or 13 € for voice contract users

1 GB at max. speed, then 128 kbps (no commitment)

Internet Everywhere

(prepaid data)

Daily bundle  daily rate 3.50 €

250 MB at max. speed, then 128 kbps

Monthly bundle monthly rate 35 €

2 GB at max. speed, then 64 kbps

Planes Profesionales

abundance offer (business)

Planes Profesionales

From 29 €/month to 79 €/month

Different data and time of day bundles depending on rate chosen, from 29 €/month to 79 €/month

Plan Oficina

(business)

Plan Oficina

15 €/month

Free calls during weekends and from 6pm to 8am Monday to Friday.
(Set up fee of 0.15 € per call.)

Internet Everywhere

(business data)

IEW pro

Multiple options available at max. speed depending on rate chosen from 19 €/month to 39 €/month





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   84





Distribution

SEGMENTATION OF DISTRIBUTION CHANNELS
(AS A % OF CUSTOMER ACQUISITIONS)

[f7frt2011drfen021.jpg]

Source: Orange

Orange España’s retail distribution network consists of 2,440 points of sale, including:

Orange’s own shops;

franchises;

specialized shops under the Orange brand;

non-exclusive specialized shops; and

a network of retailers.

Orange España also distributes its services through remote sales channels and its own online sales portal.

The distribution network is evolving toward increased, exclusive direct sales channels, currently representing 79% of total sales. In 2011 seven new directly owned stores and 119 franchises were opened in Spain, including two flagship stores on Madrid’s Gran Via and Puerta del Sol. Online sales also increased, making up 8% of all sales.

The network

Fixed network

UNBUNDLING (IN MILLIONS)

[f7frt2011drfen022.jpg]

Source: Orange

FIXED BROADBAND COVERAGE

(in millions)

2011

2010

2009

Number of accessible copper lines (in millions)

13.20

12.81

12.79

Number of households that can be connected by FTTH

0.06

3.88

2.33

Number of NRA (in thousands)

615

589

585

Source: Orange


Orange España fixed access infrastructure, based on its own optic fiber network and extensive ADSL roll-out, enables delivery of advanced telecommunication services, including broadband Internet access, VoIP, IPTV, TV streaming, VOD and advanced business services.

In 2011, Orange España finalized the integration of the Orange and Ya.com fixed networks, optimizing the geographical roll-out and investments in Telefónica’s MDFs. During the first quarter of 2012, customers have been migrated to the integrated network. This integration makes it possible to improve network maintenance, customer service (delivery and after sales service) and to cut operating costs through a centralized service platform.

Orange extended its fiber optic coverage (FTTH) to 60,000 subscriber households through new agreements with private partners (UFINET) and public institutions (the government of the Region of Asturias), as well as through its own deployment of fiber optics in two new districts of Madrid (Sanchinarro and Montecarmelo).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   85





Mobile network

 

2011

2010

2009

GSM Voice/Edge

99.2%

99.2%

99.2%

3G (UMTS)/HSDPA

90.6%

89.7%

84.8%

Number of 2G radio sites (in thousands)

16.1

16.1

15.8

Number of 3G radio sites (in thousands)

10.8

9.6

8.9

Source: Orange


In 2011, Orange invested 569 million euros in additional frequency and continued to carry out its network transformation plans totaling 500 million euros in order to meet growing demands for mobile broadband, to reduce costs and to become the industry leader in service quality.

In 2011, the Spanish authorities began a process to reallocate the radio-frequency spectrum. Orange acquired the following additional frequencies: 10 MHz in the 800 MHz band, 5 MHz in the 900 MHz band, 20 MHz and 10 MHz of the 2,600 MHz band (The second via TDD). Orange is now positioned on equal footing with the two other major operators.

The main measures taken in 2011 as part of the network transformation plan involved switching 3,604 mobile nodes to multi-band equipment (radio access network renewal plan), connecting 1,085 nodes via PMW (packet-based microwave radio technology) or fiber optics (backhaul transmission network refresh plan) and migrating 75 BSCs toward the core of the integrated network, thereby moving 77% of traffic to IP (IP revolution plan).

Core and transport networks

Orange España has been transforming its core transmission network toward a single convergent network model based on IP architecture, a mobile IP protocol, upgraded WDM multiplexers and switches in order to adapt the network structure to meet current and future customer needs while ensuring a high level of security and service quality.

Key Events

January

Orange and ZTE España signed an agreement to jointly develop innovative services (machine-to-machine, cloud computing, digital home, services for the elderly).

February

Orange launched the new Samsung Wave 578 terminal, equipped with NFC (near field communications) technology.

In collaboration with outside partners (Google, STRATO, MRW, Emprendedores magazines, the Spanish Ministry of Industry), Orange launched an initiative to help small and medium sized companies grow their online business.

March

Orange extended the Animals line to prepaid customers.

Orange launched a new line of pricing plans for professionals and small-to-medium sized companies called Habla (voice services) and Habla y Navega (voice and Internet services).

Orange, Vodafone and Telefónica signed a partnership agreement to develop NFC (near field communications) technology.

April

Orange signed an agreement with Securitas Direct España to develop joint security services based on remote building surveillance.

May

Orange signed an agreement with Gestión de Infraestructuras Públicas de Telecomunicaciones del Principado de Asturias to offer fiber optic communications in Asturias.

Orange announced an innovative project involving M2M technology for remote control of urban services.

Sanofi and Orange signed an agreement to develop a telemedicine platform (remote surveillance of diabetes patients).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   86





June

Orange launched the Basic 6 plan (6 euro cents/minute for all domestic communications and 6 euro cents to send SMS).

Orange launched the SIM Mundo plan, a prepaid plan for foreign customers (1 ct/minute to destinations such as Romania, Poland, Morocco, Colombia, Peru, Mexico and China).

Orange opened its 200th franchised store in Madrid.

July

Orange invested 569 million euros to acquire mobile frequencies.

Orange launched the new Orange Travel roaming plan, without a monthly subscription or access fees.

Orange began to offer 3D-TV broadcasting for a selection of FTTH customers.

August

Orange added the Samsung Galaxy Tab 10.1 tablet to its catalog of devices available with an Internet Everywhere subscription, starting at 329 euros.

Orange took part in World Youth Day in Madrid and invested over one million euros to improve its mobile network during the celebration.

Orange added three new plans to its Animals line: León 24 and 32 and Delfín 30.

Orange launched the Combina y Ahorra plan offering discounts of up to 15 euros per month for customers with at least two Orange products (mobile, ADSL and Internet Everywhere).

September

Orange overhauled its IPTV services with an ADSL plus TV plan at a price of 25.95 euros for customers. This price is permanent for customers under the Combina y Ahorra plan and valid for nine months for other customers.

Orange deployed its Giganet broadband Ethernet network for large corporations in Madrid and Catalonia.

Orange announced the sale of the iPad 2, with Wi-Fi and 3G connections.

Orange launched Ardilla 15 for smartphone customers with per-minute rates (€8 euro cents/min with 150 SMS and unlimited browsing).

October

Orange launched four new mobile Internet and voice rate plans for professionals and small-to-medium sized companies: Habla y Navega 29 and Habla y Navega 39 (voice and data) and Habla 19 and Habla 29 (voice).

Orange invested over 13.2 million euros to renew its fixed and mobile networks in the Canary Islands.

Orange and El Corte Ingles expanded on the partnership they entered into a year earlier: Orange invested 5.5 million euros to install 80 points of sale in El Corte Ingles stores by the end of 2011.

November

Orange joined forces with the public transit company of Málaga to try out a bus fare payment system using NFC technology.

December

Orange opened its two Spanish flagship stores in Madrid in the Puerta del Sol and on Gran Vía (investment of more than one million euros).

Orange launched Renove Estilo Orange, which offers the same smartphone renewal conditions to new customers as to existing customers.

Orange extended its distribution network (directly owned stores and franchises) with 450 new stores in Spain.





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   87





Outlook

The economic crisis affecting Spain together with the maturity level of the market are spurring competition between operators and putting pressure on revenue growth for all market players.

Despite these factors, the Spanish telecommunications market offers considerable opportunities for growth in mobile and fixed Internet and in the development of new services. Orange has the strengths required to become the number one trusted alternative telecommunications operator for basic services.

To meet this goal, Orange España developed a strategic program as part of the Conquests 2015 plan. It has defined strategic priorities for growth, action plans and objectives focusing on increased speed and modernized infrastructure, the simplicity and reliability of its products and services, the role of its employees at the core of the Company, excellence in customer relations and new services.

The main priorities in strengthening Orange’s value proposition are:

developing a portfolio of targeted, unique products;

offering services with the best possible quality/price ratio for price-sensitive customer segments;

increasing presence in growing customer segments that are being overlooked;

using convergence to stand out from the competition through bundled offerings and integrated services;

further transforming the distribution channels;

evaluating next-generation services, focusing on simplicity and segmentation.

The main priorities in improving customer experience and satisfaction are:

restructuring processes to improve the customer experience and satisfaction;

providing a unified customer experience throughout the entire contact chain (points of sale, call centers, sales force);

segmenting customer service and operational support;

further enhancing and developing loyalty programs.

The main priorities in improving operational/technical quality and efficiency are:

modernizing network access and core networks to boost scalability and cost control and to ensure compatibility with next generation networks (4G, VHBB);

improving the quality of customer processes;

upgrading IT platforms toward greater integration and convergence to improve business efficiency and quality and to reduce costs;

optimizing resources and reducing costs through increased network sharing and streamlined purchasing.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   88





6.3.4  Rest of the world

6.3.4.1   Other European countries

Belgium

The Telecom Services Market

KEY MACROECONOMIC INDICATORS

 

2011

2010

2009

Population (in millions) (1)

11.0

10.9

10.8

Households (in millions) (1)

4.7

4.7

4.6

GDP growth (%) (1)

+ 2.4%

+ 2.1%

- 2.7%

GDP per capital (in dollars PPP) (1)

37,677

36,274

35,374

Change in consumption per household (%) (2)

+ 1.6%

+ 1.5%

- 0.3%

Source:

(1)  IMF

(2)  Belgian National Bank


TELECOM SERVICES REVENUES (IN BILLIONS OF EUROS)

[f7frt2011drfen023.jpg]

Source: Mobistar

NUMBER OF CUSTOMERS (IN MILLIONS)

[f7frt2011drfen024.jpg]

Source: Mobistar

Belgium’s telecommunications market saw an increase in the number of Internet lines and mobile customers in 2011. The mobile penetration rate is now above 100%. The fixed broadband market is still strong, with double-digit growth over the year.

Triple play and convergence offers are becoming the rule in the Belgian market. Pricing pressure stemming from both regulation and the fierce competition between the three main players has compounded these trends.

The fixed broadband market is dominated by incumbent operator Belgacom and cable operators, as the level of full unbundling of the local loop is fairly low and prices are relatively high. Fixed broadband offers have evolved towards the provision of broad television services, and the incumbent operator has built up its position in this field thanks to heavy promotion of its convergence offers.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   89





Mobile telephony

 

2011

2010

2009

Revenue (in millions of euros)

3,622

3,741

3,811

incl. subscriptions

2,783

2,847

2,912

incl. prepaid

839

894

899

Number of customers (in millions)

12.4

12.2

11.8

incl. subscriptions

6.4

6.1

5.7

incl. prepaid

6.0

6.1

6.1

Total ARPU (in euros per month)

24.7

26.1

27.5

Source : Mobistar


The mobile market is split more evenly between the three main players: Proximus (Belgacom’s mobile telephony brand), Mobistar, and Base.

The smartphone market continued to grow significantly in 2011 thanks to the launch of equipment and appropriate offers. Consequently, the proportion of data revenues in total mobile revenues rose and data revenues increased substantially over one year. This trend partially offset the decline in ARPU linked to price pressure (stemming from regulation and competition).

The mobile broadband market also continued growing thanks to the launch of numerous services by the three operators.

As regards the business segment, just as in 2010, 2011 was negatively impacted by regulation as well as the economic crisis.

The 6% decline in ARPU stemmed from the negative impact of regulation and competition in the consumer and business markets, despite the growth in mobile data revenues. The drop in mobile call termination and roaming rates negatively impacted ARPU, despite improvement in the use of mobile data and the subscriptions/prepaid ratio.

The Competitive Environment

MOBILE MARKET SHARE

[f7frt2011drfen025.jpg]

Source: Mobistar

Competition continued to heat up in 2011 due to the saturation of the market. According to Mobistar estimates, the number of active SIM cards in the Belgian market represented around 114% of the population at the end of 2011. The proportion of subscription and prepaid services in the Belgian market improved in 2011, with major prepaid users tending to switch to subscription-based plans.

Belgacom subsidiary Proximus maintained its market leadership thanks to increasingly convergent offers. Mobistar slightly increased its market share on the back of its solid positioning in the very buoyant smartphone segment and attractive subscription offerings. Mobistar, a convergent player on the telecommunications market, continued to integrate its subsidiary Mobistar Enterprise Services S.A., acquired in 2010, and to develop a new television experience within the Belgian market. Base (the brand of KPN Group Belgium) maintained a very aggressive customer acquisition strategy, particularly in the prepaid market. Lastly, cable company Telenet maintained its handset subsidy policy in the mobile consumer market.

MVNOs (Mobile Virtual Network Operators) also consolidated their market share in niche segments (mainly ethnic), although their overall share of the Belgian market remained stable, and the three main players, Proximus, Mobistar and Base, strengthened their positions.

The Regulatory Environment

Legal and regulatory framework

The 2002 European “Telecoms Package” law on electronic communications networks and services was transposed into the Belgian Law on Electronic Communications (Loi sur la Communication Electronique) of June 13, 2005, last amended by the law of December 30, 2009. The Law on the Protection of Economic Competition (Loi sur la Protection de la Concurrence Economique) of September 2006 was supplemented in 2009.

A set of measures was adopted in 2011 to strengthen consumer protection (including the drafting of a customer charter, the creation of a code of ethics and Ethics Committee for value added services, and the ability to contact emergency services by SMS).

The European directives enacted in 2009 are in the process of being transposed into Belgian law.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   90





Authorities

The Belgian Ministry of the Economy, Consumers and the North Sea is in charge of electronic communications and the information society.

The Institut Belge des Services Postaux et des Télécommunications (IBPT) is the regulatory authority for the telecommunication sector.

The three media regulators (the Vlaamse Regulator voor de Media, the Conseil Supérieur de l’Audiovisuel and the Medienrat) in charge of broadcast issues in each Belgian Community also have to be consulted by the IBPT on certain decisions that could impact broadcast services. Together, these three media regulators and the IBPT make up the Conférence des Régulateurs du Secteur des Communications Electroniques (CRC).

The Competition Council is in charge of promoting competition and ensuring its effectiveness.

Regulation of mobile telephony

SIGNIFICANT EVENTS 2011

February 2011

Mobile call termination rates: The Appeals Court rejected the mobile operators’ request for suspension of the rates set forth under the mobile call termination market (market 7) and upheld the ruling handed down by the IBPT in 2010.

March 2011

Mobile call termination rates: The IBPT published a consultation on the MTRs applicable to Telenet, in its capacity as a full MVNO.

April 2011

3G: Telenet/Voo applied for the fourth 3G license, following the auction in March 2011.

August 2011

2G: The Constitutional Court referred preliminary rulings to the Court of Justice of the EC in order to determine the government’s right to determine additional payments after a license is extended.

August 2011

3G: The IBPT awarded the license to Telenet/Tecteo Bidco, a subsidiary of Telenet and Voo.

September 2011

M2M: The IBPT issued its numbering plan for M2M communications.

September 2011

Network sharing: The IBPT published a consultation on mobile network sharing.

November 2011

4G: The IBPT granted 4G licenses to Belgacom, BUCD, KPN Belgium and Mobistar.


Mobile call termination rates

In February 2011, the Appeals Court of Brussels rejected the appeal for suspension filed by Mobistar and BASE against the IBPT’s ruling in 2010 on the mobile call termination market (market 7) aiming to reduce call termination rates on the mobile networks in order to reach a rate of 1.08 euro cents/min by January 1, 2013. The ruling remains in force pending a decision on its grounds.

The decision imposes termination rates on the following mobile networks:

(in euro cents per minute)

2009 rate

8/1/2010

1/1/2011

1/1/2012

1/1/2013

Belgacom Mobile/Proximus

7.20

4.52

3.83

2.46

1.08

Mobistar

9.02

4.94

4.17

2.62

1.08

KPN Group Belgium/Base

11.43

5.68

4.76

2.92

1.08


In March 2011, the IBPT published a consultation pertaining to Telnet’s mobile call termination rates, it its capacity as a full MVNO. The rates proposed are aligned with those of its host operator (Mobistar).

3G

The royal decree published on January 25, 2011 sets the conditions for the entry of a fourth mobile operator on the Belgian market in the 2.1 GHz frequency bands in 2011. Telenet/Voo applied for the fourth 3G license in April 2011. The license was awarded in August 2011 to Telenet Tecteo Bidco, a joint subsidiary of Telenet and Voo, which must begin offering services within 18 months from the award of this license.

2G

Following the appeal by the mobile operators against the paid extension of their 2G licenses until 2015, the Belgian Constitutional Court referred the preliminary rulings to the European Court of Justice of the to clarify the terms and conditions applicable to additional payments.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   91





M2M

Following the proposals submitted for consultation in May 2011, the IBPT issued a ruling in September 2011 regarding its M2M numbering plan and introducing a new series of numbers, E. 164, with “77” as service ID number followed by 11 digits. Numbers can be reserved beginning on October 1, 2011.

Mobile network sharing

In September 2011, the IBPT published a consultation on a draft version of guidelines concerning the shared use of mobile infrastructure, with a view to promote competition among the various market players and to help develop the market. In these guidelines, the IBPT recommended a MORAN-type solution (multi-operator radio access network).

4G

In November 2011, the IBPT granted 4G licenses in the 2.5-2.6 GHz band to Belgacom, BUCD, KPN Belgium and Mobistar. The rights of use thus acquired will be valid for a period of 15 years from July 1, 2012. A total of 155 MHz was auctioned. Mobistar acquired 2x20 MHz FDD at a minimum price of 20.02 million euros. In addition, Mobistar can deploy 4G technology in the 900 and 1,800 frequency bands following a ruling by the IBPT in November 2011 authorizing the introduction of UMTS and LTE technologies in these frequencies.

In December 2011, the IBPT published decisions that will allow 4G technology to be deployed in the 900, 1,800 and 2,100 MHz frequencies.

Competition

As part of the claim for damages filed by Mobistar and KPN Belgium against Belgacom Mobile regarding price squeezing practices in the period from 1999 to 2004, the legal experts designated by the Commercial Court submitted a second interim report in December 2010 that assessed damages of 1.86 billion euros. In 2011, Belgacom filed a motion for recusal and replacement of the experts. The lower court did not admit Belgacom’s motion, and this motion is now being heard before the Appeals Court. In the meantime, finalization of the final version of the expert report has been suspended.

Regulation of fixed telephony and broadband Internet

SIGNIFICANT EVENTS

March 2011

Transit services (2nd round): The IBPT eliminated the remedies imposed on Belgacom on the market 10, since this market was deemed competitive.

September 2011

Universal service: The IBPT published a call for tender to review the universal service requirements.

July 2011

Wholesale broadband markets: The Conférence des Régulateurs des Communications Electroniques issued final rulings in regard to the wholesale broadband markets (markets 4 and 5).

July 2011

Television service distribution market: The Conférence des Régulateurs des Communications Electroniques issued final rulings on the television service distribution markets, imposing offers for resale on cable network operators.

September 2011

Fixed-line call termination: The IBPT launched its consultation on the fixed-line call termination market.


Transit services

In March 2011, the IBPT issued its final ruling regarding the transit service market on the fixed public network (market 10) and concluded that this market no longer passed the three cumulative criteria test. Therefore, the IBPT eliminated the remedies imposed on Belgacom since the last ruling made in 2006.

Universal service

In September 2011, the IBPT published a call for tender for a study to be conducted to review the universal service requirements. Recommendations should be presented on the future of universal service components, as well as on the methodology to be used to calculate the net cost of universal service. Proposals will then be submitted for consultation.

Wholesale broadband markets and the television service distribution market

In July 2011, the CRC (Conférence des Régulateurs du Secteur des Communications Electroniques) published its final rulings regarding wholesale service offerings imposed on the DSL and cable networks to allow alternative operators to provide triple play services (TV, Internet and fixed-line telephony).

As regards the cable distribution market, alternative operators will have access to: 1) a resale offering for analog TV service; 2) an offering of access to the digital TV platform; 3) a resale offering for broadband Internet.

Regarding the decisions relative to markets 4 and 5, Belgacom must provide multicast services to allow the alternative operators to provide retail triple play services on the DSL network.

Cable operators appealed the decisions made by the Belgian regulators to open the cable distribution market to alternative operators.

Fixed-line call termination

In September 2011, the IBPT published a draft decision regarding the provision of wholesale fixed-line call termination services for consultation. The IBPT suggested that fixed-line operators be required to satisfy the same requirements as those imposed on Belgacom and that a pure LRIC pricing model be developed for calculating rates.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   92





In January 2012 the IBPT published a consultation regarding a bottom-up pricing model for a next generation fixed access network. This will make it possible to calculate the unit costs of the services provided on this network.

Competition

In April 2009, Mobistar, together with KPN, filed a complaint with the European Commission against Belgacom for abuse of dominant position. This complaint concerns the conditions of the technical and operational implementation of wholesale broadband access. The complaint was transferred by the European Commission to the Belgian competition authority in March 2010. In 2011, the investigation continued and Belgacom raised a number of procedural issues (including linguistic aspects, among others). The case will continue in 2012.

Mobistar’s activities

FINANCIAL AND OPERATIONAL INDICATORS

 

2011

2010

2009

Revenue (in millions of euros)

1,604

1,621

1,529

Number of subscribers (in millions)

   

Fixed lines

0.68

0.65

0.66

o/w Internet lines

0.08

0.06

0.04

Mobile customers

3.5

3.5

3.4

Total mobile ARPU (in euros per month)

30

31

31.4

Source: Mobistar


Mobistar had 3.5 million active mobile customers at the end of 2011, a slight 0.6% increase year on year. This meant that Mobistar maintained its 32.7% market share in Belgium. These figures do not include MVNO or Machine to Machine cards, which increased from about 193,000 at the end of 2010 to around 417,000 at the end of 2011.

Subscription fees accounted for 66.3% of the total subscriber base (excluding MVNOs) at year-end 2011, compared with 63.6% in 2010.

The number of MVNO customers increased from 456,000 in December 2010 to 590,000 a year later, representing an increase of 29.3%. The total customer base (Mobistar S.A. + MVNO) increased by 3.9% year-on-year, from 3.9 million as of the end of December 2010, to 4.1 million one year later.

Average revenue per user (ARPU) edged down due to the impact of regulation, which was not fully offset by the increase in traffic. The growing number of subscribers with a mobile data plan and the increased use of mobile Internet services through smartphones, tablets and PCs have resulted in an increase in mobile data’s share in telephony revenues. Mobile data represented 37.1% of telephony revenues at year-end 2011, versus 32.3% one year prior.

Offers

Mobistar pressed ahead with its convergence strategy based on offerings that combine mobile and fixed-line telephony, including voice and data services, as well as high-definition satellite television.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   93





Type

Name

Main characteristics

Prepaid card

Tempo

Plan designed for young people and customers who do not wish to commit to a contract. Each 10 € recharge includes free SMS, minutes, or sessions on social networking sites (Netlog, Facebook), depending on the options selected.

Subscription

My XX

Plans priced from 5 € to 99 € per month, including a certain number of minutes and SMS depending on the amount of the subscription and the choice of one add-on. Example for the My 25 plan: 119 minutes on all networks or 208 SMS per month and a monthly add-on from among the three available (50% of calls on all networks free and 25 Mb in data, 10,000 SMS on all networks at any time, or 40 hours of communications on the Mobistar network).

Mobile Internet

Multi

Shared smartphone/PC mobile Internet plans (15 €/month for 750 Mb or 30 €/month for 2 Gb).

Convergence offers

in the consumer market

Starpack

Package including digital TV, unlimited Internet, unlimited fixed-line calls and free GSM calls to family, for 55 €/month. Customer also benefit from a 20% discount on their mobile subscription.

Convergence offers

in the business market

One Office Voice Pack

Offer aimed at small- and medium-sized companies, combining fixed and mobile telephony. This offering accounts for 50% of sales in the medium-sized enterprise market.


Distribution

BREAKDOWN OF DISTRIBUTION CHANNELS
(AS A % OF CONSUMER CUSTOMER ACQUISITIONS)

[f7frt2011drfen026.jpg]

Source: Mobistar

Mobistar’s distribution strategy has four main strands:

very dense distribution, thanks to the development of complementary distribution channels and regional partnerships;

an emphasis on exclusive distribution (Mobistar Centers, telesales), with particular efforts going to on-line sales;

the protection of Mobistar’s share of sales in open distribution channels;

segmentation of each outlet depending on its specific sales potential.

In 2011 Mobistar’s network was made up of 165 stores, confirming its status as the biggest retail chain in Belgium. Mobistar owns 49 of these outlets (compared with 47 at the end of 2010). Mobistar is also the exclusive telecommunications supplier of Euphony, a door-to-door distribution company. Online sales increased again, from 7.1% to 7.4% of sales within the consumer segment.

The network

COVERAGE (AS A % OF THE POPULATION)

 

2011

2010

2009

GSM Voice/Edge

100%

99%

99%

3G (UMTS)/HSDPA

97%

90%

87%

Number of 2G radio sites (in thousands)

5.1

4.8

4.6

Number of 3G radio sites (in thousands)

2.1

1.8

1.5

Source: Mobistar





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   94





In 2011, Mobistar pursued its rollout strategy aimed at reinforcing its interior coverage of customers’ homes, allowing swift and inexpensive extension of 3G, and introducing an improved version of UMTS allowing speeds up to three times faster (HSPDA technology available throughout Mobistar’s 3G network).

At the end of 2011, 3G/HSPDA coverage reached 97% of the population. The Mobistar network had 5,483 sites at the end of December 2011, including 730 sites shared with other operators. These sites correspond to a total of 16,449 cells. Mobistar also deployed 1,100 microwave links.

Key Events

April

Launch of “Red Bull Mobile,” a prepaid service marketed jointly by Mobistar and Red Bull. Customers who charge a minimum of 10 € receive 5,000 SMS and 600 minutes on the Red Bull Mobile network, as well as access to Red Bull’s portal and content.

May

Commercial launch by Mobistar of the 4P offer: subscribers to “Starpack” (satellite-based digital television, Internet, and fixed-line voice service) receive a 20% discount on their mobile subscription.

June

Launch, by Mobistar, of mobile Internet plans (“Internet Everywhere Multi”) shared between smartphone and PC (15 euros per month for 750 Mbits or 30 euros per month for 2 Gbits).

July

Launch of the “VT4 Mobile” prepaid service in a partnership between Mobistar and the Flemish television channel of the same name.

August

Mobistar celebrated its 15th anniversary by rewarding its most loyal customers.

October

Mobistar launched the iPhone 4S in Belgium.

November

Commercial launch by Mobistar of Colruyt Mobile, a prepaid plan marketed by the national supermarket chain of the same name.

November

Acquisition of a fourth generation license for 20 million euros (2.6 GHz band).


Outlook

Mobistar reasserts its strategic investment priorities for 2012: to strengthen its mobile networks for increased speed and quality in its voice and data services, to increase the convergence between its services to provide its customers with mobile access wherever they may be, and to continue to boost customer satisfaction in order to become one of Belgium’s leading companies in this regard. Despite an economic situation that looks rather rough in 2012, Mobistar confirms its intention to continue to invest in order to improve its position in the telecommunications market.

The measures taken by the regulator to decrease mobile call termination rates and roaming rates took a toll on the Mobistar’s profits from its mobile services in 2011. The decisions made by the regulatory body (IBPT) regarding its 2010 plans to open up the cable and VDSL network will make it possible to apply the same conditions of competition in the Belgian fixed-line telephony and television markets that already prevail within the mobile market. In this regard, Mobistar hopes that the regulatory changes will have a positive impact on its Mobistar TV and broadband Internet services.

Luxembourg

The France Telecom-Orange Group is present in Luxembourg via Orange Communications Luxembourg S.A., a wholly-owned subsidiary of Mobistar S.A. (Belgium) acquired in July 2007. The 2011 results of Orange Communications Luxembourg S.A. showed excellent progress. At the end of 2011, the Luxembourg subsidiary of Mobistar had a total of 99,233 active mobile customers, up 11.7% on the 88,851 active customers recorded a year earlier. The proportion of postpaid customers in the total customer base continued to increase, rising from 78.9% at the end of December 2010 to 79.8% at the end of December 2011. ARPU increased by 4% year-on-year, from 47.70 euros at the end of December 2010, to 49.80 euros one year later.

The success of bundled offers led to a 20% rise in telephony revenues, from 50.6 million euros at the end of 2010, to 60.6 million euros at the end of 2011. Total revenues were 65.7 million euros at the end of 2011, compared with 55.4 million euros a year earlier, an increase of 19%.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   95





Romania

The Telecom Services Market

MACROECONOMIC DATA

 

2011

2010

2009

Population (in millions) (1)

21.4

21.4

21.5

Households (in millions) (3)

7.4

7.4

7.4

GDP growth (%) (1)

+1.5%

-1.3%

-7.1%

GDP per capita (in dollars PPP) (1)

12,358

11,895

11,893

Change in household consumption (%) (2)

+0.7%

-1.6%

-10.1%

Source:

(1)  IMF

(2)  European Commission

(3)  Eurostat


REVENUES FROM TELECOMMUNICATIONS SERVICES (IN MILLIONS OF EUROS)  

[f7frt2011drfen027.jpg]

Source:
(1) Idate
(2) Orange

NUMBER OF CUSTOMERS (IN MILLIONS)

[f7frt2011drfen029.jpg]

Source:
(1) Idate
(2) Orange

After a contraction of 1.3% in its GDP in 2010, Romania emerged from recession in 2011, with growth of 1.5% over the year. But while inflation was slower than in 2010, the government’s austerity measures (5-point increase in VAT and 25% reduction in public-sector wages) continued to weigh heavily on household consumption.

In 2011, the telecommunications market continued to suffer the effects of the economic crisis and the government’s austerity policies. The decline in value in the telecommunications sector is estimated at 2%, with an ongoing decline in fixed-line and mobile services revenues. Mobile revenues fell by 3%, and the subscriber base was also down. This was due mainly to a decline in prepaid SIM cards. Fixed telephony also remains in a downward spiral; the fixed Internet is the only segment enjoying growth, driven by the success of the broadband services offered by RCS&RDS and Romtelecom. Constant pressure on prices is the main characteristic of this market. Lastly, corporate customers have optimized their telecommunications expenses by reducing their mobile fleets.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   96





Mobile Telephony

 

2011

2010

2009

Revenues (in millions of euros)

2,245

2,322

2,507

Number of customers (in millions)

26,4

28,5

29,3

o/w subscriptions

10,2

10,4

10,3

o/w prepaid

16,2

18,1

19,0

Source: Orange


The overall number of mobile customers is declining, due to a drop in the number of SIM cards on the prepaid market and, to a lesser extent, the number of subscribers. That decline is attributable mainly to the removal of inactive cards from the Vodafone and Orange customer bases. The number of subscribers as a percentage of the total firmed by 2.2 points to 38.7% due to this readjustment.

The Competitive Environment

MOBILE MARKET SHARE

[f7frt2011drfen030.jpg]

Source: Orange

Despite a difficult first quarter, Orange Romania managed to consolidate its leading position in the mobile market over the full year in 2011. It remains ahead of Vodafone Romania, whose market share narrowed. Cosmote confirmed its third ranking, acquired since the introduction of its new brand in late 2005. Orange Romania also remained the leader in respect of net new subscribers, with 82,000 customers gained, compared with losses of 268,000 for Vodafone and 3,000 for Cosmote.

While Cosmote had previously focused on the residential segment, 2011 saw closer ties between Cosmote and Romtelecom in the enterprise segment, allowing it to expand and to win significantly sized contracts.

The Regulatory Environment

Regulatory framework and authorities

Romania’s regulatory framework is based on Government Emergency Ordinance no. 111/2011 on electronic communications, which came into force in December 2011, and Competition Law no. 21/1996, which came into force in February 2007.

The National Authority for Communications (ANCOM) is the regulatory authority for the communications market.

The Competition Council is in charge of the protection and promotion of competition in Romania.

In December 2011, the Romanian government adopted Government Emergency Ordinance no. 111/2011 on electronic communications, which transposes EU directives adopted in 2009, and accordingly amends Government Emergency Ordinances nos. 79/2002 and 34/2002, as well as Law no. 304/2003.

Regulation of mobile telephony

KEY EVENTS

February 2011

Spectrum: ANCOM reduces administrative charges for 2011 and 2012 by 15%.

May 2011

Quality of service: quality of service indicators relative to Internet access services must be published on operators’ websites and included in consumers’ contract.

June 2011

3,400-3,800 MHz frequencies: public consultation on the strategy relating to broadband wireless access systems (BWA).

July 2011

900 and 1,800 MHz frequency bands: public consultation on the extension of utilization rights.

August 2011

Mobile call termination: ANCOM puts proposals for reductions in mobile call termination rates in 2012 to a public consultation.

December 2011

Orange license: ANCOM extends the license by one year for 6.4 M€.


January 2012

Spectrum: the ANCOM launched a public consultation on the release of the spectrum in 800, 1,800 and 2,600 MHz bands by the Ministry of National Defense.

February 2012

Access to the mobile network: the ANCOM launched a public consultation on a guide for the activity of the MVNOs.

March 2012

Number portability: changes to the current process.

March 2012

Spectrum: the ANCOM has launched a public consultation on the terms of reference for the spectrum auction.





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   97





Spectrum

In February 2011, ANCOM decided to reduce administrative charges by 15% in 2011 and 2012, as such charges are only allowed to cover the costs listed in the EU Directive on authorizations.

In June 2011, ANCOM has launched a public consultation on the BWA systems usage in the 3,400/3,800 MHz band, and on the liberalization of the 900 and 1,800 MHz bands in July 2011.

In December 2011, as the licenses held by mobile operators Orange and Vodafone were due to expire in 2011, the regulator extended the said licenses for one year. The license granted to Orange Romania in the 900 MHz and 1,800 MHz frequency bands has been extended until December 2012, at a cost of 6.4 million euros.

In March 2012 the ANCOM has launched a public consultation on the Terms of reference for the spectrum auction in the 800 Mhz, 900 MHz, 1,800 MHz and 2.6 GHz bands. The licenses will include coverage obligations, QoS obligations, access obligations (MVNO, roaming). The calendar of the auction is not established yet.

Categories

frequency band, length of license

number of blocks

reserve price/block
(in euros)

A

(800 MHz, 04/06/2014 - 04/05/2029)

6

35,000,000

B

(900 MHz, 01/01/2013 - 04/05/2014)

5

3,400,000

C

(900 MHz, 04/06/2014 - 04/05/2029)

7

40,000,000

D

(1,800 MHz, 01/01/2013 - 04/05/2014)

6

800,000

E

(1,800 MHz, 04/06/2014 - 04/05/2029)

15

10,000,000

F

(2,600 MHz, 04/06/2014 - 04/05/2029)

14

4,000,000

G

(2,600 MHz, 04/06/2014 - 04/05/2029)

3

3,000,000


Quality of service of Internet access services

ANCOM decided in May 2011 to establish a set of statistical and technical parameters bearing on Internet access services. This decision required operators to set out in customer contracts the quality indicators to be made available to users, to publish the said indicators on their websites, and to give customers the means to verify the data. Operators must also provide ANCOM with more detailed information on Internet access services.

Mobile call termination rates

In August 2011, ANCOM put a draft decision on the market for mobile call terminations (Third round) to a public consultation, proposing mobile call termination rate reductions. This decision was adopted in January 2012.

 

March 2012

September 2012

Orange, Vodafone, Cosmote, Telemobil, RCS & RDS

4.05 euro cents/minute

3.07 euro cents/minute


The draft decision has been notified to the European Union, but has not yet been adopted by ANCOM. ANCOM will propose further reductions when the costing model has been finalized in 2012.

Regulation of fixed telephony and broadband Internet

KEY EVENTS 2011

January 2011

Universal service: ANCOM decides that access to fixed telephony services must include access to Internet services at a rate of at least 144 Kbit/s.

January 2011

Wholesale market for leased lines: ANCOM adopts a decision on the obligations weighing on the dominant operator in last-mile access segments up to 2 Mbit/s.

August 2011

Fixed call terminations: ANCOM puts proposals for reductions in fixed call termination rates in 2012 to a public consultation.





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   98





Universal Service

In January 2011, ANCOM adopted a new decision providing that access to fixed telephony services must include access to Internet services at a rate of at least 144 Kbit/s.

Market for Leased Line Last Mile Access Segments

In January 2011, ANCOM adopted a decision on the market for leased-line last-mile access segments, in which the regulator designates Romtelecom as operator with a significant market power on the last-mile access segments market up to 2 Mbits/s, and imposes classic ex ante obligations (network access, transparency, non-discrimination, cost orientation, accounting separation). Above 2 Mbits/s, the obligations imposed in 2003 were lifted.

Fixed line Terminations

In August 2011, ANCOM put a draft decision on the market for fixed call terminations (third round) to a public consultation, proposing the following rate reductions for 2012:

 

March 2012

August 2012

Romtelecom

0.82 euro cents/minute

0.67 euro cents/minute


This decision was adopted in January 2012.

Orange Romania’s activities

FINANCIAL AND OPERATIONAL INDICATORS

 

2011

2010

2009

Revenues (in millions of euros)

937

973

1,055

Number of subscribers (in millions)

   

Mobile customers

10.2

10.5

11.0

o/w broadband

3.4

3.2

2.7

Total ARPU (in euros per month)

6.8

6.9

7.7

Source: Orange


In 2011, Orange Romania’s total customer base contracted, due to the removal of inactive customers from the subscriber base, as well as a slight decline in the number of prepaid customers. The latter trend was attributable to a sharp increase in inflation, which reached 8% in the first half of 2011 (due largely to the 5-point increase in VAT in 2010), and a lack of confidence in the economic outlook, which is prompting Romanian households to postpone purchases and increase their saving rate. However, the October 2010 launch of new options linked to prepaid offers helped limit the loss of customers in this segment. Accordingly, after a sharp drop early in the year, the number of active prepaid customers returned to its 2010 level by the end of 2011.

The residential subscriber base increased by 80,000 customers. This increase was primarily attributable to the continued success of the Animals offers launched in 2009. The launch of a new Colibri offer in the first quarter of 2011 also helped boost sales.

Lastly, the corporate subscriber base stabilized compared with 2010, despite the increased competition in this market segment.

In terms of usage, growth continued in 2011, with diverging trends depending on the type of offer. Usage by residential subscribers under the Animals offers, which include a large number of minutes to all destinations, increased by 16%. In the prepaid segment, usage was boosted by the launch of new options, increasing by 24%. By contrast, corporate subscribers increased their traffic by only 2%, due mainly to the economic crisis. Lastly, mobile broadband Internet usage grew strongly (+45%), thanks mainly to the home market (+50%).

Distribution

SEGMENTATION OF DISTRIBUTION CHANNELS
(AS A% OF CUSTOMER ACQUISITIONS)

[f7frt2011drfen031.jpg]

Source: Orange

In 2011, Orange Romania focused on optimizing its distribution network, and established a new organization to manage its own stores and those of its partners. This resulted in the creation of a team dedicated to coordinating and training this network. Orange Romania also increased the proportion of its online sales through the www.orange.ro portal, which accounted for nearly 9% of total sales as of end-2011 (up from 6% in 2010).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   99





The Network

COVERAGE (AS A % OF POPULATION)

 

2011

2010

2009

GSM Voice/Edge

99.9%

99.5%

98.9%

3G (UMTS)/HSDPA

82.5%

52.3%

47.4%

Number of 2G radio sites (in thousands)

3.9

3.5

3.3

Number of 3G radio sites (in thousands)

2.6

1.4

1.2

Source: Orange


In 2011, Orange Romania focused its network investments on improving the customer experience and the quality of service, launching a program to expand 3G network coverage in rural areas. 3G network coverage increased from 52.3% in 2010 to 82.5% in 2011, and is expected to reach 99% by the time the program ends in mid-2012. The program also includes the replacement of obsolete 2G equipment in the relevant areas. This change further enabled Orange Romania to limit its energy consumption, and to reduce the number of on-site interventions.

In addition, the site co-location program continued in 2011 (105 new sites co-located).

Lastly, Orange continued to improve its HSDPA network, increasing the speed of the mobile Internet to 43 Mbits/s in Bucharest and to 21 Mbits/s in Romania’s 20 largest cities. Everywhere else, Orange Romania offers its customers speeds of 14 Mbits/s. This development made Orange’s mobile Internet network the fastest in the Romanian market in 2011 (source: Orange Romania).

At the same time, Orange Romania continued to invest in modernizing its transmission network, reinforcing its capacity and security. Two major projects were finalized: the Mobile Backhaul Refresh program and the renewal of the microwave links to Bucharest and Romania’s 20 largest cities, providing the necessary capacity for broadband data transport.

Key Events

February

Launch of network coverage, an online application allowing customers to obtain information on service quality and to provide feedback on network coverage.

Launch of Colibri 5.5, an entry-level mobile data offer.

March

Launch of Flamingo, Romania’s first mobile offer including international calls to mobile and fixed lines.

March

Launch of a program to extend the coverage of Orange’s 3G network in rural areas, with a target for mid-2012 of providing 98% of the population with speeds of 14.4 Mbits/s.

April

Launch of the Orange group’s new slogan in Romania: Today changes with Orange.

May

Orange becomes the first Romanian operator to offer a HD voice service.

June

Launch of Orange First Step, an educational program allowing students in the final year of their Masters to become acquainted with the Company.

July

Launch of Orange Wifi hot spot in Bucharest’s old town.

August

The Orange Senior fixed telephony offer launched in 2010 was enhanced by a new combination of fixed and mobile services.

October

Orange offers the highest mobile Internet speeds in Romania at 43.2 Mbits/s (source: Orange Romania).

November

Orange opens its Orange Care centers (immediate on-site repair of mobile phones).





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   100





Outlook

In 2012, Orange Romania is aiming to:

maintain its share of the mobile market in value terms, building on the quality of its customer service, the extensive nature of its distribution network, its loyalty programs and the strength of its brand;

retain its leadership in terms of contract subscriber acquisitions;

boost revenues in the prepaid and enterprise segments, which have been hit hard by the economic slowdown.

To achieve these goals, Orange Romania will focus its efforts on:

improving service quality and ease of use so as to reduce churn and improve the customer experience along the entire chain (technical, sales, and after-sales service);

an acquisition program in the corporate segment, with the priority going to five geographical areas;

growth in mobile data traffic.

In addition, Orange Romania will continue to invest to improve the coverage, quality and capacity of its network. Lastly, Orange will continue its existing transformation programs, and will launch new ones in order to keep its cost structure aligned with changes in its revenues.

Slovakia

The Telecom Services Market

KEY MACROECONOMIC INDICATORS

 

2011

2010

2009

Population (in millions) (1)

5.4

5.4

5.4

Households (in millions) (3)

1.75

1.76

1.76

GDP growth (%) (1)

+3.3%

+4.0%

-4.8%

GDP per capita (in dollars PPP) (1)

23,384

22,195

21,115

Change in consumption per household (%) (2)

+0.2%

-0.7%

+0.2%

Source:

(1)  IMF

(2)  European Commission

(3)  Eurostat





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   101





REVENUES FROM TELECOM SERVICES (IN MILLIONS OF EUROS)

[f7frt2011drfen032.jpg]

Source:
(1) Idate
(2) Orange Slovensko

NUMBER OF CUSTOMERS (IN MILLIONS)

[f7frt2011drfen033.jpg]

Source:
(1) Idate
(2) Orange Slovensko

The market for telecommunications services contracted by 2.6% in 2011, despite an economic recovery marked by growth estimated at 3%, driven mainly by exports. Adjusted for inflation, household consumption stagnated, while unemployment, after signs of a timid decline in the first half, resumed its rise due to the global economic crisis, ending the year at 13.5%. Other factors aside from the economic environment contributed to the contraction in the market for telecommunications services, such as reduced call termination rates and pressure on retail prices attributable to heightened competition in the mobile telephony and fixed Internet markets.

The fixed telephony market (including VoIP) continued its decline in 2011 (-6.5% in value, -2.7% in number of customers), although VoIP helped limit the fall in volumes.

The market for fixed Internet services grew by 1.4% in value and 11.2% in volume in 2011, totaling a shade more than 1 million customers as of end-2011. A certain number of households are continuing to use the mobile broadband to access the Internet, thanks to offers such as Orange’s Flybox or T-Mobile’s Flash-OFDM technology. These customers are counted with mobile broadband users.

Mobile Telephony

 

2011

2010

2009

Revenues (in millions of euros)

1,224

1,255

1,307

o/w subscriptions

1,051

1,074

1,105

o/w prepaid

173

181

202

Number of customers (in millions)

6.0

5.8

5.6

o/w subscriptions

4.1

3.9

3.6

o/w prepaid

1.9

1.9

2.0

Source: Orange Slovensko


The market for mobile telecommunications continued to decline, by 2.5% in value (Orange Slovensko estimate). The voice market contracted due to a drop in the volume of calls made, a reduction in the price per minute and, above all, the impact of the reduction in call termination rates for incoming calls (from 6.35 to 5.51 euro cents in June 2011). The market for mobile data continued to grow, thanks to the proliferation of data offers linked to the sale of smartphones and 3G modems, as well as the sale of laptops, netbooks, and tablets.

Mobile services revenues in Slovakia are still derived mostly from subscribers on contracts, with prepaid offers accounting for just 14% of the market (Orange Slovensko estimate).

The number of users of mobile telephony in Slovakia was 6 million as of end-2011, with postpaid customers representing two-thirds of the total and prepaid users, one-third (Orange Slovensko estimate). The mobile penetration rate is above 100%, and the average number of (voice) SIM cards per active user is 1.11 (source: The Slovak Telecom Market III, final report, May 10, 2011).




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   102





The Competitive Environment

BROADBAND INTERNET MARKET SHARE

[f7frt2011drfen034.jpg]

Source: Orange Slovensko

MOBILE MARKET SHARE

[f7frt2011drfen035.jpg]

Source: Orange Slovensko

Slovakia is an increasingly complex and competitive market, with a wide variety of offers available to consumers and businesses, including ADSL, fiber-to-the-home (FTTH), cable and mobile broadband Internet.

Orange Slovensko competes against two other operators, Telefonica O2, and T-Mobile, wholly owned by Slovak Telecom, itself 51% owned by Deutsche Telekom. O2’s 2007 entry into the Slovak mobile market increased competition. In 2011, O2 continued its strategy of increasing its market share, also turning to the higher value segments (offers for the business segment, with a price ceiling). This strategy has translated into a decline in average revenue per user (ARPU) and a redistribution of market share between operators. However, Orange Slovensko has maintained its number-one ranking in mobile telephony, with market share of nearly 49% in volume but more than 55% in value.

The Regulatory Environment

Regulatory framework and authorities

The Slovakian regulatory framework is based on Law No. 351 of September 2011 on electronic communications, which entered into force in November 2011 and transposed the European directives of 2009.

The Ministry for Transport, Construction and Regional Development is responsible for electronic communications.

The Telecommunications Office (TÚSR) is the regulatory body responsible for the communications market and for enforcing rules.

The Anti-Monopoly Office (PMÚSR) is in charge of protecting and promoting competition.

Mobile communications

SIGNIFICANT EVENTS 2011

May 2011

Mobile call termination rates: the TÚSR introduced symmetric rates for the three mobile operators at 5.51 euro cents per minute.

August 2011

GSM licenses: the TÚSR extended the 900/1,800 MHz licenses of Orange Slovakia and Slovak Telekom by ten years.

December 2011

Number portability: the TÚSR is reducing number portability times from five to four days beginning in April 2012.





2011 REGISTRATION DOCUMENT / FRANCE TELECOM   103





Mobile call termination rates

In May 2011, the Slovakian regulator TÚSR introduced symmetric rates (5.51 euro cents per minute) for the three mobile operators starting from June 1, 2011. This rate is based on a benchmarking method that uses the last simple average calculated by BEREC for the European Union, after implementing the LRIC (long-run incremental cost) method as these costs are not available. The termination rates will remain in place until May 31, 2012. The new rates will be applied on a yearly basis while new regulation based on the pure LRIC approach is not yet available.

Spectrum

Extension of the 900 and 1,800 MHz bands: in August 2011, the Slovakian regulator extended the 900/1,800 MHz licenses of the two main mobile operators (and the former 450 MHz license of Slovak Telekom) for a price of 40 million euros per license. This decision was confirmed by the TÚSR in November 2011.

Telefónica acquired a combined 2G/3G license for less than 5 million euros in 2006. This license will be valid until 2026.

Reuse of the 790-862 MHz band (digital dividend): this band had been temporarily allocated for digital broadcasting use until May 2015, but the entire band is now available and may be allocated to mobile operators.

Frequency blocks in the 2.6 GHz band were temporarily allocated to MMDS (Microwave Multipoint Distribution System) providers until December 2011. In December 2011, the TÚSR extended the MMDS allocations for another year.

In March 2012, the Slovakian regulator plans to organize frequency auctions in the 800 MHz, 1,800 MHz and 2.6 GHz bands shortly, with a 4G license granted to a new entrant.

Number portability

A new regulation on number portability was introduced by the TÚSR in December 2011. The entire process is reduced from five to four business days, as of April 1, 2012.

Fixed/broadband communications

KEY EVENTS

April 2011

Universal service: no recovery of the net cost of universal service for 2005 and 2006.

April 2011

Fixed-line call termination: Orange Slovensko was designated as a player with significant market power for fixed-line call termination, as well as the incumbent operator and seven other alternative operators.

August 2011

Wholesale unbundling market (2nd round): consultation on the market analysis is underway.

September 2011

Universal service: no recovery of the net cost of universal service for 2007 and 2008.

November 2011

Regulation of fixed call termination rates: significant drop in termination rates on the nine largest fixed-line networks in Slovakia.

November 2011

Fixed-line call origination: introduction of wholesale line rental as a new remedy in the fixed-line call origination market.


Universal service

The net cost of universal service for 2005 and 2006 has been a subject of discussion in Slovakia since 2007. In light of the Analysys Mason report, which concluded in December 2009 that the net cost of universal service did not represent an unfair burden for Slovak Telekom, the TÚSR issued a final ruling in April 2011 declaring that the universal service operator would not be entitled to recovery of net costs for the two years in question.

As a result, the administrative procedure regarding the net costs for 2007-2008 went much faster, with the universal service provider’s request being filed in December 2009 and the final decision handed down in September 2011. Once again, there was no unfair burden identified and, thus, no recovery of net costs.

The request for recovery of costs for the 2009-2010 period was filed in December 2011 and the decision should be made in 2012.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   104





Fixed-line call termination

Since regulation of fixed-line call termination began in Slovakia, a single player holding significant market power had been identified within this market: the incumbent operator of fixed-line telephony services. This approach changed with the rulings handed down by the TÚSR in October 2010 and in April 2011, and nine players holding significant market power are now being regulated. All must comply with a full set of regulatory restrictions, including price regulation. However, only the costs of the incumbent operator should be calculated.

Regulations on pricing were adopted in November 2011, with a termination rate of 0.5 euro cents per minute for local calls and 0.72 euro cents for calls in transit. New rate applies as of March 2012.

Fixed-line call origination

Wholesale line rental was introduced by the TÚSR in its second round of analysis of the fixed-line call origination market in November 2011. Nevertheless, since administrative procedures related to the major players in this market have not yet been completed, wholesale line rental will not be operational in Slovakia until the second half of 2012.

Wholesale unbundling market

A second round of regulations for market 4 were pursued in August 2011, with the third version of the market analysis being made available for comments, after two previous versions had been withdrawn. However, this version was also withdrawn and a fourth version has been published in January 2012. In the latest version, all remedies were proposed for access to both the copper local loop network and fiber.

Orange Slovensko’s activities

 

2011

2010

2009

Revenues (in millions of euros)

737

755

813

Number of subscribers (in millions)

   

Internet lines FTTH

51

47

37

Mobile customers

2.9

2.9

2.9

o/w broadband

2.1

2.1

1.4

Total ARPU (in euros per month)

19.1

20.4

21.3

Source: Orange Slovensko


Orange provides mobile services in Slovakia via its wholly owned subsidiary, Orange Slovensko (OSK).

Orange Slovensko was formed in 1996, and obtained its GSM license the same year. In August 2001, its license was extended to GSM 1800 technology. Orange Slovensko was subsequently granted a UMTS license in June 2002 for a 20-year period starting on the award date.

In 2006, Orange Slovensko entered the mobile broadband Internet market, with the launch of HSDPA technology on its 3G UMTS network. The following year, Orange Slovensko introduced triple play offers (fixed telephony, Internet access and TVoIP), using fiber-to-the-home (FTTH) technology; as of end-2011, this network covered 314,299 households, with speeds of up to 100 Mbits/s. In 2011, Orange Slovensko succeeded in maintaining a good level of annualized ARPU (230 euros), thanks to the segmentation of its offers and the launch in 2010 of a new concept, Orange Garancia, with a promise of getting the best offer available on the market after taking the customer’s profile into account. In October 2010, Orange Slovensko, in conjunction with Fun Radio, the second most popular radio station in Slovakia, launched a virtual operator under the FunFon brand, targeting the youth market. In 2011 FunFon topped 100,000 customers, making the brand the most popular among MVNOs in Slovakia.

Lastly, the fixed telecommunications market (FTTH) continued its growth, with the customer base increasing by 9.5% in a highly competitive market, and despite a limited extension of its coverage.




2011 REGISTRATION DOCUMENT / FRANCE TELECOM   105





Distribution

BREAKDOWN BY DISTRIBUTION CHANNEL
(IN % OF SALES ACTIONS)

[f7frt2011drfen036.jpg]

Source: Orange Slovensko

Orange Slovensko sells its products and services in Slovakia through various distribution channels:

Orange Slovensko retail stores, which only sell Orange products. In 2011, there were 155 such stores (five of which were directly operated and 150 of which were under franchise contracts);

sales teams attached to Orange stores (responsible for information and sales to VIP and business customers), and door-to-door sales specialists for FTTH products and services;

specialized distributors and retailers selling prepaid cards;

a specialized sales team under Orange Slovensko’s responsibility, dedicated to the acquisition and retention of business customers;

a customer service platform under Orange Slovensko’s direct management;

an on-line sales website (www.orange.sk/eshop/) where customers can obtain Orange products and services, and purchase accessories.

The Network

COVERAGE (IN % OF POPULATION)

 

2011

2010

2009

GSM Voice/Edge

99.7%

99.6%

99.6%

3G (UMTS)/HSDPA

71.1%

69.2%

67.8%

Number of 2G radio sites (in thousands)

1.96

1.94

1.90

Number of 3G radio sites (in thousands)

1.34

1.24

1.20

Source: Orange Slovensko


The investments made by Orange Slovensko in 2011 focused on improving the quality of 3G coverage in urban areas (densification, indoor coverage, migration to HSDPA+), and on modernizing the transmission network (backhaul refresh) to cope with the growth in traffic, and to continue improving bandwidth and reliability (FTTC proje