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France Telecom's Mixed Sac

Light Reading
News Analysis
Light Reading
7/27/2004

With debt levels generally under control, France Telecom SA (NYSE: FTE) and other major European operators have other hot topics to consider (see France Telecom Gets BBB+ Credit Rating and S&P Sees Euro Rebound).

Take broadband access, for example. The ongoing uptake of high-speed access lines, featured prominently in France Telecom's first-half financial results, is likely to be prioritized when BT Group plc (NYSE: BTY; London: BTA), Telecom Italia SpA (NYSE: TI), and Telefònica SA unveil their latest figures this week (see France Telecom Reports H1).

Broadband offers the earliest opportunity for the incumbent carriers to offer new services such as video and SIP-based conferencing that will capture and retain customers and help boost revenues and margins as traditional voice revenues dwindle.

At first glance, France Telecom's broadband figures are impressive. ADSL lines more than doubled compared with a year earlier, as the table below shows.

Table 1: France Telecom's ADSL Installed Base, June 2004

ADSL installed base H1 2004 H1 2003 % change
Total ADSL lines (in thousands) 4,687 2,172 115.8
Wanadoo ADSL lines 2,234 1,320 69.2
ISP & third-party operator ADSL lines 1,722 789 118.2
Unbundled lines 731 63 figure not given*
Source: France Telecom
Note: *France Telecom didn't give a % figure, as the base figure was so low, but it works out to about 1,160%




But the figures also show that France Telecom's retail Internet access business, Wanadoo SA, has fewer than half the total lines, and that the number of broadband customers that are managed and billed by third-party operators, including those that have unbundled the local loop and installed their own equipment in FT's local exchanges, is increasing at a much greater rate.

Unbundling, in particular, has attracted some fierce competitors, including the highly successful Free (a part of Iliad), neighbor Telecom Italia, and competitive carrier Groupe Cegetel (see Iliad Reports 2003 Revenues, Cegetel Picks Italtel for VOIP Over DSL, and Telecom Italia Not in Ruins).

FT's level of retail lines is a concern for some analysts. The telecom team at Lehman Brothers, for example, comments in a research note that, while the carrier's numbers are generally in line with expectations, the "slip in broadband retail share" is a "key negative."

But not everyone sees it that way. Tim Johnson at broadband consultancy Point Topic Ltd., says expanding the market as fast as possible is the best thing France Telecom could be doing at the moment, and that in time the incumbent's retail business will have enough natural advantages to win back more of the market.

"Obviously, having the retail customers provides greater margins -- it's a juicier market," says Johnson. "But these new figures are a mark of how competitive the French market now is. Until just last year, France Telecom was still following the model of squeezing the market and keeping out competitors. But regulatory changes and government pressure mean France now has a more competitive market than Germany, which used to be the model for broadband uptake in Europe. Now Germany is being left behind."

The analyst adds: "France Telecom's share of the retail lines might not be as high as it would like, but it's still increasing its retail customer numbers and making margins on the higher wholesale volumes. It needs to keep concentrating on increasing the size of the market."

FT does plan to build the broadband market further. It plans to have 90 percent of all phone lines DSL-enabled by the end of 2004 and 95 percent a year later, compared with 79 percent at the end of 2003. In doing so it aims to increase the number of ADSL subscribers (excluding unbundled lines) in France to 4.5 million by the end of this year, compared with 3.1 million at the end of 2003.

Across all its business units, the carrier recorded first-half revenues of €23.2 billion (US$28 billion), up 1.4 percent from a year earlier, and EBITDA of €8.9 billion ($10.7 billion), both at the high end of analyst forecasts.

The carrier's net debt actually increased to €48 billion, up from €44.2 billion sixmonths earlier, but the carrier said most of that, €3.6 billion, was due to accounting changes. That figure might also be challenged in the future by other external factors (see S&P Unfazed by France Telecom Spat).

— Ray Le Maistre, International News Editor, Light Reading


For more info on the state of industry financials, check out the coming Light Reading Live! event:

  • Light Reading's Telecom Investment Conference, in New York City, November 10.

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