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UNCLAS SECTION 01 OF 03 PARIS 001520 
 
SIPDIS 
 
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TAGS: ECPS ETRD FR
SUBJECT: France: Telecom and Information Technology Update 
 
 
NOT FOR INTERNET DISTRIBUTION 
 
¶1. This is another in a series of periodic updates on the 
French telecommunications and information technology 
sectors, including internet and e-commerce. 
 
Contents: 
New CEO named for France Telecom (para 2) 
France Telecom Announces 2004 Results (para 3) 
A Victory for ART ... (para 4) 
... And a Setback (para 5) 
ART Finds Insufficient Competition in Mobile Phone Market 
(para 6) 
Orange and SFR Respond to ART Report (para 7) 
GOF Selects Standard for Subscription Digital TV (para 8) 
TF1 Predicts Large Growth in ASDL Subscribers by 2010 (para 
9) 
FT Joins Others to Bid for Stake in Czech Telecom Company 
(para 10) 
 
¶2.  New CEO named for France Telecom: Didier Lombard has 
been appointed Chairman and CEO of France Telecom (FT), 
succeeding Thierry Breton, who was appointed French finance 
minister following the resignation of Herve Gaymard. 
Lombard, 63, is head of strategy and partnerships at FT, and 
began his association with the company in 1967.  Breton, who 
took the helm of FT in 2002, is credited with implementing a 
three-year recovery plan, now in its final year, and Lombard 
is expected to continue his predecessor's strategy.  This 
will be the first time Lombard has run a publicly listed 
company.  Previously, he was scientific and technical 
director at the Ministry of Research and Technology, and 
later general manager of industrial strategy at the Ministry 
of the Economy, Finance and Industry.  Lombard also helped 
achieve the creation of STMicroelectronics, a French high- 
tech sector success, via a Franco-Italian agreement.  In 
addition to his FT experience, Lombard served as Ambassador- 
at-Large for international investment at the Ministry of the 
Economy, Finance and Industry from 1999 to 2003.  According 
to a source close to the departing Breton, Lombard's 
appointment is a sign of continuity of corporate strategy, 
although Lombard will face challenges in maintaining the 
momentum of recovery initiated by Breton. 
 
¶3.  France Telecom Announces 2004 Results:  France Telecom 
has announced that its net profit for the 2004 fiscal year 
was 2.8 billion euros; this was a decline of 13% and smaller 
than analysts' forecasts of a 3.15 billion euro profit. 
However, 2005 dividend payments for FY 2004 were 0.48 euro 
per share, almost twice as high as 2003's 0.25 euro 
dividend.  Dividend payments in 2005 amounted to a total 
outlay of 1.2 billion euros.  Investors noted, however, that 
return on FT shares was only 2%, well below the sector 
average of 3.8%.  FT has promised to raise its return to the 
industry average, without providing further details.  During 
FY 2004, FT saw declines in the fixed-line market that were 
somewhat compensated by growth in Wanadoo, FT's internet 
service unit.  In the last quarter of 2004, Wanadoo took 
41.6% of new subscribers to ASDL internet, giving the 
company a 46% share of France's 6.3 million ASDL users.  In 
2005, Wanadoo plans to launch the LivePhone, an internet- 
compatible telephone that will complement its popular 
LiveBox modem.  FT also recently sold 8% of its subsidiary 
PagesJaunes, ceding 22.3 million shares.  FT still remains 
the largest shareholder in the company, with a 54% stake. 
 
¶4.  A Victory For ART ...:  In a move that may pave the way 
for increased network access for FT competitors, French 
telecom regulator ART rejected a fixed charge increase by FT 
that contained no provisions for greater opening of the 
market.  The plan submitted by FT would have increased the 
fixed monthly subscription charge from 13 euros to 15.99 
euros over the period of 2004 to 2007, while simultaneously 
reducing pro-rated call charges by 26%.  After consultations 
with ART, the French government allowed FT to make a one 
euro increase in monthly subscription charges (to 14 euros), 
applicable only for 2005.  ART approval of further 
subscription increases for 2006 and 2007 is contingent upon 
FT's steps towards allowing greater market access. 
Competitors wish to see a 30% discount from the monthly 
retail charge to FT subscribers to establish the monthly 
wholesale rate that FT charges to competitors who wish to 
resell FT subscriptions.  (At present, the retail charge is 
10.87 euros next of taxes, while the wholesale charge is 
10.50 euros.)  FT has suggested an 8% discount, while ART is 
pressing for one at least twice as large.  In addition to 
the increase in monthly residential subscription charges, FT 
is also planning a 6% increase in subscription fees for 
professionals.  This new increase, which had been requested 
by former FT CEO Thierry Breton, has yet to be approved by 
ART. 
 
¶5. ... And a Setback:  The Conseil d'Etat, France's highest 
administrative court, ruled that the 2002 tariff scheme 
imposed on FT by ART lacked transparency.  The scheme 
applied to the tariffs assessed by FT for the use of its 
network by competitors.  ART would still like to see these 
tariffs lowered, but the court's ruling has weakened ART's 
hand considerably, just as the GOF has given it all future 
authority to regulate telecom tariffs.  According to the 
court, ART failed to disclose that in 2002 it changed its 
calculation method for determining the network unbundling 
tariff.  The 2002 scheme provided the basis for the one 
approved by ART and the GOF in January. Although the ruling 
has no immediate material impact on the company, it makes it 
possible for FT to sue the French state for indemnity. 
 
¶6.  ART Finds Insufficient Competition in Mobile Phone 
Market:  In December, ART found that France's three largest 
mobile operators, Orange, SFR and Bouygues Telecom were 
colluding to maintain a dominant position in the market that 
disadvantages competitors.  Of particular concern to ART 
were the "virtual" mobile companies (MVNO), which lease 
their mobile infrastructure from the major providers.  In 
its first analysis of the mobile market, ART maintained that 
the major operators must set more reasonable access 
conditions for the MVNOs that wish to use their networks. 
ART was also unimpressed by the recent profusion of 
agreements made between the major operators and various 
MVNOs.  In ART's view, none of the MVNOs have attained the 
critical size that would give them more influence and 
leverage via a vis their host operator.  Agreements with 
MVNOs were thus judged by ART to be insignificant as long as 
the major operators continue to set conditions of access 
that prevent the MVNOs from effectively competing in the 
market.  The fact that Bouygues Telecom has excluded itself 
from any agreements with MVNOs was taken by ART as a further 
sign of the unimportance of such deals, and suggested to ART 
that the three operators have not deviated from their 
strategy of collusion.  However, ART resisted calls from 
MVNOs to fix the operators' wholesale charges, responding 
that the MVNOs would eventually grow and be able to exert 
such downward pressure themselves. 
 
¶7.  Orange and SFR Respond to ART Report:  Responding to the 
ART analysis cited above, Orange and SFR had harsh words for 
ART's conclusions about the level of competition in the 
mobile phone market.  Orange denounced the report as full of 
"obvious errors of judgment" that gave a "false and 
disparaging" picture of the market.  SFR called the report 
"erroneous and biased," while Bouygues Telecom refused to 
comment on it.  Orange and SFR insisted that contrary to 
ART's assessment, competition within the mobile market is 
very intense, and that this greatly benefits French telecom 
consumers.  The two companies also criticized ART's 
dismissal of their agreements with MVNOs, insisting that 
their access charges are competitive, and that the virtual 
operators maintain a high level of independence from the 
host companies. 
 
¶8.  GOF Selects Standard for Subscription Digital TV:  The 
French government has chosen the MPEG4 standard for 
broadcasts of subscription digital terrestrial television 
(DTT), against the recommendation of the audiovisual 
administrator CSA.  The MPEG2 standard will be used for the 
13 free DTT channels that will begin broadcasting in March. 
The MPEG4 standard was reportedly selected for subscription 
DTT because of its greater signal compression, which will 
allow several high-definition channels to be launched within 
two years, in addition to the 31 DTT channels already 
planned.  According to the GOF, selecting the MPEG2 standard 
for subscription DTT would have delayed the arrival of high- 
definition television until 2015.  As a result of the 
decision to employ two broadcast standards, some short-term 
difficulties are anticipated for the launch of DTT. 
Subscription-based and free channels will share broadcast 
costs, but the smaller signal size of MPEG4 means that 
subscription channels may ask for a proportionately smaller 
cost share.  Also, broadcast bouquets currently consist of a 
mixture of free and subscription channels, but the MPEG4 
standard is most efficient if it is the sole standard in the 
bouquet.  Although transmission of the DTT channels is 
scheduled to start between September 2005 and March 2006, 
launch delays are possible as the MPEG4 decoders are not yet 
ready for commercial distribution. 
 
¶9.  TF1 CEO Predicts Large Growth in Television over ASDL: 
Patrick Le Lay, CEO of TF1, has projected that within five 
years, 2.5 million French homes will subscribe to free 
programming via ASDL television, and 1 million homes will 
have ASDL subscriptions to paid programming.  ASDL providers 
Neuf Telecom and France Telecom responded that their vision 
for the future of the ASDL market did not extend past two 
years.  However, current trends indicate that the figures 
put forth by Le Lay are highly plausible.  At the end of 
January 2005, the total number of ASDL subscribers in France 
cleared the 100,000 hurdle, and FT, which currently has 
90,000 of those subscribers, hopes to have 210,000 by year's 
end, while Neuf TV expects to have 100,000 subscribers. 
Sources project a total of 600,000 paying ASDL subscribers 
by the end of 2006, with one million by 2010.  Depending on 
the rate of distribution of Neuf TV modems and Freeboxes, it 
is also possible that Le Lay's prediction of 2.5 million 
free programming subscribers by 2010 may indeed come true. 
 
¶10.  FT Joins Others to Bid for Stake in Czech Telecom 
Company:  FT has joined a consortium to participate in the 
tender process for Cesky Telecom, the primary telecom 
operator of the Czech Republic.  Once the Government of the 
Czech Republic decided that it will sell its 51% stake in 
Cesky Telecom, France Telecom teamed up with an 
international consortium of three private investment firms 
to participate in the tender process of the National 
Property Fund (NPF) of the Czech Republic.  The value of 
this majority equity interest is estimated at $2.6 billion, 
according to news reports, which also noted that the Czech 
telecom company successfully turned a 2003 operating loss 
around in 2004 through growing sales and consolidation of 
its highly profitable mobile division.  Besides France 
Telecom, the consortium includes the Blackstone Group, CVC 
Capital Partners and Providence Equity Partners Inc.  Should 
their bid be successful, FT would enter into a strategic 
partnership with Cesky Telecom via a minority stake in the 
consortium. 
 
Leach