Cegetel, the leading alternative service provider to France,
has been calling on the French government to unbundle the local
loop. Khaled Beydoun, a utilities equity analyst at HSBC,
examines the unbundling issue and the role of France's
regulatory authority, ART: "Cegetel feels very strongly that
the regulator is siding with France Telecom on the unbundling
issue. In theory the regulator had promised a decision some
time in the early part of this year. That hasn't come. This has
clearly affected Vivendi's expectations and performance on the
fixed line side. The local access issue is a very important
part of their multimedia strategy, as it gives them access to
Vivendi, one of the world's biggest water utilities, owns 44%
of Cegetel. It is also owned by such established international
operators as British Telecom (26%), SBC (15%) and Mannesmann
(15%). The operator's prime asset is its mobile operation SFR.
By the end of 1999 it will have over seven million subscribers.
Beydoun talks about the operator's mixed cellular performance
this year: "On the mobile side, they were doing very well until
the early part of this year, when they started to lose market
share to Bouygues Telecom. It was quite clear what was
happening. France Telecom was holding on to 50% of the market,
while Bouygues was taking market share directly from SFR. At
the end of the year the actual number of subscribers at SFR is
going to be higher than the initial target. They will have
about seven million subscribers, compared to a target of about
6.2 million subscribers in January this year. So there is
clearly an improvement, but the declining market share is
obviously a worry and it seems to be continuing."
As Beydoun explains, Cegetel has concentrated on signing
contracts with customers, rather than the pre-paid market: "I
think that the pre-paid market in France has become the key
focus for all mobile operators, but as far as Vivendi is
concerned, they prefer the contract customers and they clearly
have a much higher ARPU than the pre-paid users. In addition
the acquisition cost of pre-paid users is much higher. I think
that it was about Eu100 ($103) a customer, which is
significantly higher. I know that their position in the
pre-paid market is quite small. A very small percentage of
their customers is pre-paid. So we could continue to see them
lose market share, as the market grows on the pre-paid side.
Their percentage of net adds does not reflect the increase in
the pre-paid market."
Cegetel's success will be dependent on its ability to bundle
services. The operator has begun trialling ADSL services in
Monaco, where it has a majority stake in Monaco Telecom.
Cegetel's multimedia strategy has been consolidated by a number
of key moves by its main shareholder. Vivendi has acquired a
25.5% stake in BSkyB and has increased its stake in Canal +.
There is clearly potential for co-operation between Canal + and
BskyB, which could give Cegetel a foothold in the digital TV
market. Beydoun talks about this strategy: "I think that they
are going to use their advantage on the media side. I think
that they are going to use that advantage on the Internet side
where they have Canal + and part of BSkyB. I think that they
want to use the integration of those activities to boost their
communications strategy. They seem to shifting from previous
attempts to be a major pan-European mobile operator to become
more of a European multimedia leader, where they can also offer
value-added services by using the other assets that they have
in the communications division."
As Beydoun explains, Cegetel is a possible acquisition target:
"At the end of the day, they have one of the most attractive
assets in Europe. Vivendi and Bouygues are nothing outside
France. So the likes of Mannesmann, Vodafone AirTouch and
British Telecom would love to gain control of a French mobile
operator. To date, however, they have not had a chance to do
so. The immediate future will see the company continue to try
and gain access to the local loop and also continue to boost
its number of cellular subscribers. The fixed line market
continues to be competitive, with new entrants such as Tele2
adopting aggressive pricing strategies to gain market share,
which has put Cegetel's "Le 7" offering under pressure."
In an exclusive interview with Global Telecoms Business, the
CEO of Cegetel Philippe Germond talks about the telecoms market
in France and explains how Cegetel aims to keep the pressure on
Do you believe that the French government has been
effective in unbundling the local loop? Do you believe that the
market dynamics favour France Telecom?
Germond: The French government has made progress on
unbundling, but its position remains very minimalistic. It is
true that a French daily financial newspaper wrote last summer
that "other than a military coup d'etat, unbundling in France
A few weeks later, however, the French minister, Mr Pierret,
issued a positive statement on unbundling, limited to high
speed Internet access (ADSL) and did not rule out total
unbundling eventually, in other words for telephony. Today,
despite favourable statements from ART and the minister, the
situation remains uncertain and there is still resistance from
France Telecom, including for ADSL access.
You recently spoke out quite strongly against the
French government, questioning whether the government has been
acting more in the shareholder's interests, rather than those
of customers. Why do you think that this has been the
Germond: France Telecom really understands that, as
long as they are in a monopoly position in local access, there
is a huge cash flow to be generated by local access. They can
see competition in some of their activities. Let me provide an
example. Over the past five years the subscription fee to fixed
telephony increased by 60%. Local calls did not increase at all
over the past five years, while national and international
calls decreased by more than 60%.
So where there is no competition, there are no price
decreases. There is just a price increase in the monthly
subscription fee. That is why we think that it is time to open
up competition in local access. If we can't compete against
France Telecom in local access, the French consumer will be the
loser and we will be placed in a weaker position, as France
Telecom will be free to continue its dumping practices on
mobility, data and long-distance.
How is the unbundling issue affecting your operations?
Are you confident that the French regulatory authority will
handle the unbundling issue effectively? How do you perceive
developments in this area?
Germond: I am more confident today, because Mr
Pierret has, as I said, made some positive comments about
implementing some form of unbundling, which is kind of a half
open door. I believe that the regulator is keen to generate
real competition in access. Today we compete with France
Telecom on access through fibre-optic local loops. But the
economics of fibre-optic local loops is only good where you
have a highly dense business area. So you can only compete in
locations, such as the centre of Paris or the La Defense
district near Paris or in the major cities in France.
Broadband radio technology will provide another way to compete
against France Telecom in local access. National and regional
licences will be allocated in early 2000. Cegetel will do its
best to obtain a national licence. The other way is just
unbundling. In my opinion it is critical to have competition in
the residential and the operations market and unbundling
represents the only solution. The regulator will assume a
position over the next few days or few weeks. They will
incentivize us to negotiate with France Telecom. Sometimes I am
very optimistic. Maybe I can imagine that we will reach an
agreement with France Telecom.
If there is no agreement with France Telecom, we will go back
to the regulator to arbitrate on this issue. It is our
understanding that we may be in a position to deploy an ADSL
strategy during the second semester of 2000 or even earlier if
possible. As a matter of fact, we just launched an experiment
with ADSL unbundling in Monaco Telecom. As you know, we are the
number one shareholder in Monaco Telecom. Monaco Telecom's
network was deployed or implemented by France Telecom. As it
involves exactly the same equipment as in France, we can really
test ADSL as if we were on French territory.
What do you believe to be your competitive advantages
over France Telecom?
Germond: In terms of competitive advantages, firstly
we have to compete on price. In terms of positioning we have to
be cheaper than France Telecom on the new services we offer in
fixed telephony. This does not account for the positioning of
SFR, which has to be at the right price level. But price is the
Then we want to differentiate full services through
value-added services. For example, SFR is a metro company. We
have more than 40% market share in value. So we don't need to
compete simply on price. We have the right price in front of
So we charge almost the same price as France Telecom, but we
try to differentiate by offering better network quality and
value-added services that we put on the mobility network and
the handsets. How can we be less expensive? It is just a
question of cost structure. We have to be a low-cost company,
compared to an incumbent. We have to implement new technologies
and new service platforms as early as possible. We have to
implement Internet services as soon as possible.
How do you benefit from the presence of British
Telecom and Mannesmann as shareholders? Do they assist you most
in wireless and value-added services?
Germond: It is a considerable advantage to have
shareholders that are also major operators and provide us with
experience of their national markets. We have no specific
commercial agreements with Mannesmann, but we inter-connected
our backbone with Mannesmann's backbone in Germany and Italy.
We are the exclusive distributor of Concert products for
British Telecom. This is one way in which we differentiate
ourselves from some other new entrants, as we can provide
international services to large international companies linked
to BT. So we have an exclusive distribution agreement. It will
last for at least the next few years.
Do you envisage any changes in Cegetel's shareholder
structure? Mannesmann has hinted that it would like Internet
services to be sold by Cegetel in France. Does this create a
potential conflict of interest with British Telecom and its
Concert services? In your opinion, how could such a problem be
Germond: The Cegetel pool is remarkably stable,
despite the divergence of interests, which may divide our
shareholders on other European markets. Obviously, if one of
the minority shareholders wanted to leave Cegetel for specific
strategy reasons, Vivendi would exercise its pre-emption right.
How are you targeting the Internet services market?
Which services are you offering corporate customers in France?
How do you view the potential for E-commerce services?
Germond: As you know, France is a late arrival on the
Internet compared to the Scandinavian countries, Germany and
the UK. I am not talking about the US. So we can perceive
In terms of Internet services today, we provide Intranet
services to our enterprise customers. The second step on this
Intranet is to specifically provide voice over the data network
Internet. We can now provide voice services over that data
network from one site to another. This single point
differentiates us a lot from France Telecom.
The next step, which is not only a Cegetel step, concerns the
overall vertical portal strategy leading to E-commerce. It is
something we do at the Vivendi level with Havas and Canal +.
Evidently, there will be a lot of synergy with Cegetel in that
area. We have shared customers and we really want to leverage
that strategy. We do a lot of things in that area.
First of all we have initiated some investments - some at an
early stage, some later on - which help us gain an entry into
new start-ups and really understand what the business will be
in the Internet world. Secondly we signed an agreement with
Softbank, a JV to create an incubator in continental Europe.
So we will be a host and 50% shareholder in the European
subsidiary of US Internet companies that are already well
known. We launched recently five new companies through that
incubator, including E-Loan, BUY.COM and MessageMedia.
If I could continue on the creation by Vivendi and
Softbank of a $100 million wireless Internet investment fund,
which is buying stakes in companies such as E-Loan and BUY.COM.
How will these investments benefit Cegetel's operations?
Germond: Let us take MessageMedia as an example. It
is a message management service. The services of MessageMedia
can be sold by Cegetel Enterprises. Let us take the example of
Inter-Alliance. It is a web hosting, web forming company. So
their services will be sold by Cegetel Enterprises.
We fully benefit from the experience of these companies in the
US and implement their business model in Europe. A company such
as Inter-Alliance has a very strong industry process for web
hosting and web forming. In terms of the cost of web hosting,
we will be extremely well positioned. This will constitute
another differentiator for Cegetel Enterprises.
How many wireless subscribers do you have? How do you
intend to raise average revenue/subscriber? How do you view the
wireless market in France? What levels of churn have you been
Germond: We have just released the figure of six
million customers. We will have over seven million customers by
the end of this year. If we look forward one year, I believe
that we will have over 10 million subscribers by the end of
2000. So it is really a booming market. We take a fair share of
Our market share dropped slightly in September, as we decided
not to follow the crazy promotional tactics of our competitors
that started to celebrate Christmas three months early. We
initiated our promotions in October, which is a little earlier
than in previous years. If I can make one comment about the
French market, acquisition costs are far higher than the
average for Europe. So I believe that the mobile strategy
followed by some of our competitors is extremely dangerous. The
acquisition costs are increasing, while the ARPU is declining,
as there are more and more pre-paid card customers.
I believe that it is critical for France, like the UK, Germany
or Italy, to decrease its acquisition costs to improve the
profitability of mobile operators. Let me turn to your question
on ARPU. I believe that ARPU will continue to decline in 2000
and may start to increase in 2001, thanks to value-added
services and HTML web applications.
The rate of churn this year was about two points a month. It
has risen to 2.5 points. So we have launched a number of
loyalty programmes to decrease that churn level. It is really
critical to have the lowest churn level possible. If I were to
consider negative developments in 1999, I would rank at number
one the level of churn, which is slightly higher than that of
our competitors. But we have witnessed a strong improvement
over the past few months owing to the loyalty programmes that
have been launched.
How do you view the potential for wireless data
applications? Do you believe that this is a segment where you
have an edge over competitors in France? Which data
applications are you planning to launch? Which companies are
your main handset suppliers?
Germond: On the data side we were the first ones to
launch an HTML WAP (wireless application protocol) platform.
Today it is very limited with respect to customer numbers. But
if I look forward for the next two-three years, I consider that
to be a major opportunity in terms of market share and growth.
I believe that many people in French industry will have two
handsets, as will be the case in any other country One will be
a very small handset for the voice. The other one will be for
data. I believe that data is going to be a critical application
for mobility in the future. We are going to implement GPRS on
our network in 2000.
GPRS will represent a very strong improvement in terms of
speed and data usage rates. So we need to be very competitive
in terms of data applications, mobile portal environments,
E-commerce on mobile. We do a lot of work around that. Alcatel
was the very first supplier for HTML WAP handsets. By the end
of this year there will be many other suppliers, such as
Motorola, Nokia and Sagem, which will launch HTML WAP handsets.
Why did you decide to terminate your Tam Tam paging
services? Why do you think that paging services never took off
Germond: There is no future for paging services in
France. There are a few reasons for that. Firstly, paging in
the US is still a very active business for one very basic
reason. When you have a mobile phone and receive a call, as a
mobile user you pay for the call you receive. This not the case
with GSM. So you keep your handsets on all day in France,
Germany and the UK, which is not the case in the US. This is
one reason for the very high activity in the paging business in
Secondly, you can obtain a free handset when you subscribe to
a mobile service, whereas you have to pay about Eu50 ($51.5)
for a pager. So people are moving more and more into mobile
telephony rather than paging. So the children's market was the
only real market for paging. But you generated a very limited
amount of revenue from children. In fact you cannot make any
positive gains from that business. That is why we decided to
stop selling new pagers about a year ago and spend about a year
to convert our pager customers to mobile telephony through a
number of promotions, which have been very successful.
Therefore we decided to stop the service and the network.
How much are you spending on fixed network
modernization in 1999? Which are your main suppliers? What has
been the main focus of your capital expenditure
Germond: It is not network modernization, as our
network was built very recently. The principal investments were
made during the second semester of 1997. So it represents more
of an investment in expanding our network. In fact we connect
to five-six additional local switches of France Telecom to
achieve better termination costs.
We are investing above all in the expansion of our fibre-optic
network. We will spend this year investing in fibre local
loops. Investments in our joint subsidiary with the SNCF,
Télécom Développement, will total about
Fr1 billion ($157 million) in 1999. We are focusing on network
expansion and connection to more and more France Telecom local
switches. It is quite easy for us, as we are using the French
railways. In most cases the local switches of France Telecom
are located in cities downtown at the railway stations. So it
is quite easy for us to do that kind of inter-connection.
When do you expect to launch customer trials for ADSL
services? How extensive will these trials be? What are the
benefits of DSL technology?
Germond: This is quite a difficult question to
answer, as it really depends on the decision of the regulator,
the minister and France Telecom. We will launch trials as soon
as we are allowed to do so. That is why we are pro-actively
testing the technology in Monaco, where we can do whatever we
want, since we own Monaco Telecom.
The extent of our deployment of ADSL technology really depends
on the economic environment. When I refer to the economic
environment, I mean the price that is established for
unbundling. What will be the price for renting a copper link
and what will be the benefit?
I strongly believe that if you look forward 5-10 years from
now, almost every single household in France will be able to
access Internet applications at home and will want or require
broadband access, and not narrowband, as you need to have
broadband access, if you want to achieve good economies from
the usage of multimedia applications or the Internet. So ADSL
will provide the right way to provide broadband Internet access
France Telecom is ready to offer full-scale ADSL
services to customers. Are they likely to gain from having
first mover advantage in this space? Do you believe that they
have an unfair advantage in the provision of ADSL
Germond: Yes. That is why we have been fighting quite
a lot against the possibility of France Telecom's deployment of
ADSL everywhere in France. So far they have been allowed to run
up to six tests. There are six districts in Paris, where France
Telecom is allowed to deploy ADSL and three cities around Paris
and that is it. So they are not allowed to deploy any ADSL on a
national basis. I strongly believe that it is totally unfair to
allow France Telecom to do this, while preventing the
competition from doing so. It really provides them with a
strong advantage. It would be very difficult for a new entrant
to recover, if France Telecom was allowed to deploy ADSL on a
Could you tell us about your plans to offer telephone
services over the Internet? When do you plan to offer
integrated fixed and mobile phone services to businesses? How
important is the issue of number portability?
Germond: In response to your first question, we
launched new business services about two weeks ago. One was
voice over IP. If you are at an enterprise and a customer of
Cegetel for data communications, you can put voice on IP with
Cegetel on your data network. So that service is now available
If I turn to your second point, as a business today you can
integrate the numbering of mobile phones in the internal phone
system of an enterprise. We announced the integration of mobile
telephony into an enterprise's Intranet a couple of weeks ago.
So this really is fixed/mobile convergence on the one hand, and
Internet telephony convergence on the other hand.
How do you view the prospects for Internet telephony?
Do you believe that voice over IP is a feasible
Germond: Yes. We are already offering it for
businesses with enterprise-dedicated networks, which we control
from end to end. In the short term, however, I do not think
that voice over IP will take a major share of the market, in
particular owing to quality concerns. It will be an incremental
business for companies, rather than a major area over the next
few years, especially in the residential market.
This year the company is expecting turnover of about
Eu425 million ($438.6 million), compared to Eu288 million in
1998. What have been the main growth generators this year to
spark this big increase in profits?
Germond: There has been significant growth in mobile
telephony. We had 4.1 million customers at the end of last
year. As we will add three million customers this year, this
represents significant growth in 1999.
In addition, le 7, which is a long-distance service, will
triple its turnover this year. So it has recorded very
significant growth. Cegetel Enterprises will double its
turnover. Depending on the size and area of different
businesses, they are not experiencing the same growth levels.
But every single business is accruing very high growth. All
together it will represent more than 50% growth, which is very
high for that part of the company.
Can you see a point in the future where Cegetel may
enter the stock market as an independent entity? Do you
envisage a point, where you would need to go to the capital
markets to fund ambitious expansion plans?
Germond: No. Cegetel does not need to be listed for
one very simple reason: we have sufficient capital today to
cover future investments. In fact our debt level is below our
equity level. So we don't have any issue with raising money
Cegetel will be net cash flow positive next year. We are in a
very sound financial position. For example, we have the
requisite finances, if we want to deploy extensive ADSL in the
French market. There are no grounds for raising capital through
How do you view Tele2 as a competitor? Tele2 launched
the concept of a single tariff, maintaining that customers
value easy-to-understand telephony services.
Germond: The interesting thing about Tele2 is that
when they launched their service in April, they proposed 44
centimes a minute for off-peak and peak hours. So they were
cheaper in peak hours and more expensive in off-peak hours. But
they offered the same price for every single minute. So it was
a pretty good move and pretty creative. Unfortunately, I was
very surprised when Tele2 came back in September with a new
proposal and new pricing of 38 centimes a minute. So this is a
price decrease. But at the same time they have an invisible
first minute of 60 centimes.
So in fact they had said at the very beginning of April that
they would be simple. And that they would not be like France
Telecom or Cegetel. But they are not simple any more. I don't
understand exactly why they changed their pricing strategy, but
now they have exactly the same structure as Cegetel, except
that they don't have peak and off-peak hours and are more
expensive in off-peak hours than we are.
They have been quite successful. They say that they have about
400,000 customers, but they have not released any information
about their turnover, usage and traffic. Consequently we don't
know anything else about Tele2.
Do you expect to see prices for telephone calls
dramatically fall over the next 12 months? Do you believe that
there is still room for widespread decreases? How would you
compare your prices to those of France Telecom and Tele2?
Germond: Currently, our prices are about 30% cheaper
than France Telecom. So this is pretty aggressive positioning.
Prices have declined more than we expected at the beginning of
the year. In fact, when we forecast the price decreases - at
some point in time after the arrival of Tele2 on the French
market - we asked ourselves whether we should follow Tele2 or
not. We decided to follow Tele2, expecting some pricing
We achieved that pricing elasticity: we initially issued a
forecast of 1.1 million lines connected to "7" by the end of
1999 and we will reach 1.4 million lines. So this was a good
move. Is there any additional major room for price decrease?
When I look at the prices for long distance in France, we offer
some of the cheapest prices in Europe. We are not far off US
prices. Therefore, I do not believe that there is that much
room for additional big price decreases in 2001. There will be
some price decreases, but not the 20% or even 30% price
decreases that occurred in 1999.
Do you believe that inter-connection rates are fair in
France? The agreement which sees France Telecom pay Cegetel 3.8
centimes a minute for Internet inter-connection marks the first
time that separate voice and data inter-connection rates have
been agreed. How do you view this agreement?
Germond: Globally speaking, the inter-connection
rates we pay to France Telecom are always too expensive. They
are currently in the medium range expensive level for Europe.
We expect an additional price decrease, as does any other
country every year.
So we expect at least a 15% price decrease or even 20% in 2000
compared to 1999. We also expect a specific Internet
inter-connection rate lower than voice inter-connection (France
Telecom is currently proposing a surtax on Internet
Secondly it is clear that the 3.8 centimes we receive from
France Telecom for the Internet termination fee is really low,
compared to the costs that we incur. I heard that a fee of 3.8
centimes had been set really to hurt free access providers,
rather than the local loop operators. But the 3.8 centimes
hardly covered the cost of local loops. So we were a bit
disappointed with the 3.8 centimes termination fee. Now that we
have made an effort on our inter-connection rate, France
Telecom must do its bit. This is an issue we are debating
strongly with the regulator.
Could you tell us about the goals of the
Télécom Développement JV? Could you tell
us about your partnership with the SNCF?
Germond: The mission of Télécom
Développement, which is a 50/50 JV between Cegetel and
the SNCF, is to deploy, operate and maintain the backbone. That
is their mission. They provide switched minutes to Cegetel.
They provide these line services to Cegetel. That is the
mission of Télécom Développement.
Télécom Développement was very efficient
in deploying their backbone in 1997 and 1998. They do a very
good job expanding that backbone. So we are very satisfied with
this deployment and with the network quality which benefits our
It is a very good partnership between Cegetel and the SNCF.
Télécom Développment is in a very good
financial situation and will be EBITDA positive in 2000, which
represents the third year of operations. So that is a very good
How do you view the regulatory environment in France?
Do you believe that the French market lags behind its western
Germond: Not really. I believe that in some areas the
regulatory environment in France has improved significantly. We
expect the regulatory environment to be more dynamic in some
other areas, especially with respect to the issue of local
I always talk about that subject, because I firmly believe
that it is a critical issue. I look at France Telecom as the
monopoly with local access: it is able to generate huge cash
flows based on local access. They can totally squeeze the
competition in those areas of communications. Therefore it is
absolutely critical that the regulator understands that and
really promotes real competition on local access.
This has been understood by most regulators in Europe. In
France we are late. But we are not only late owing to the
regulator. You really have to understand the economics of the
new entrants. It is also attributable sometimes to the
political environment. However, as I told you, I have seen some
improvements recently and I am more optimistic about that
What are your hopes and ambitions for the company over
the next two-three years? Where would you hope to position the
company on the European telecoms landscape? What trends do you
see emerging in European communications over the next five
Germond: Our ambition is to continue to grow as much
as possible and to provide a return on capital/employee for our
shareholders, and also have happy and satisfied customers and
employees. But any company would tell you that.
We have set the following target for 2003: to have about 20%
market share in long-distance telephony, 40% market share in
the cellular market in terms of value, 20% market share in the
enterprise services market, and something like between 5%-10%
in the local access market. This figure is dependent on the
possibility of effecting the unbundling process in France.
In other words the company would probably have something like
25% of the dual telecommunications market at that time.
Currently I believe that we have about 15% market share of the
total telecoms market in France today, including mobility,
local access and other services. So we expect to grow quite a
lot. Cegetel is a company, which will resemble within the next
four-five years a Eu10 billion ($10.3 billion) kind of a
company, and will hopefully be a very profitable company, at
least sufficiently profitable to provide a good return for our
Is there anything would you like to add?
Germond: You asked a question about Cegetel in
Europe. Cegetel is not allowed to invest in Europe. It is a
purely French operator, as stipulated in the shareholder
agreements. But Vivendi is allowed to invest in Europe. The
shareholder agreements of Cegetel do not prevent Vivendi from
investing in Europe. So we can't really look at different
If you look at One-2-One, we were surprised by the price paid
by Deutsche Telekom for One-2-One, which is 24 times the EBITDA
value of the operator for 2000, which is a lot. At the same
time we were a bit surprised by the price paid by Mannesmann
for Orange. It is almost a world record in terms of the
price/customer. It works out at about $9,000 a customer.
If we apply the same multiples to SFR, the value of SFR would
probably be about Eu50 billion ($51.5 billion). The market
consensus accords us a value of Eu30 billion or a little more.
So when we looked at the prices paid by some of the players in
Europe, which are highly dilutive acquisitions, we decided not
to go for this kind of aggregation.