Stéphane Richard: I’m in favour of consolidation, but it takes a
year to get approval from the European Commission, and it’s
Europe should have one telecoms market, with one telecoms regulator — instead of the 27 regulators that now work across the 27 member countries of the European Union.
That’s the ambitious aim of Stéphane Richard, chairman and CEO of France Telecom-Orange — an aim he shares, he says, with a number of CEOs of other European incumbents. And they said as much to Joaquín Almunia, the European Commissioner with the competition portfolio, at a fiery meeting in Brussels in December 2012.
“During this meeting I was in charge of telling Mr Almunia something that was not very nice to hear,” says Richard. The message they told him was: “We think that the policy led by the European Commission in terms of competition policy and anti-trust is not terribly favourable.”
The problem, they explained to Almunia, is that: “The telecoms industry in Europe is very fragmented, with more or less 100 players in the European Union, when you have three in China or four in the US.”
Is consolidation the answer? Richard cites the example of Orange Austria, of which France Telecom owned 35% until the beginning of January. Hutchison Whampoa bid successfully in February 2012 to buy the company for €1.3 billion from the two shareholders — the other being private equity investor Mid Europa Partners — and merge it with H3G Austria, the local version of Three.
It took 11 months to get the deal through Austrian regulators and Almunia and his colleagues in Brussels.
“I’m in favour of consolidation of the industry in Europe,” says Richard. “I told Mr Almunia that it was a problem when in some countries there is an attempt to consolidate the market — like in Austria — it takes one year to get approval from the Commission, and then if I may say so it’s a very expensive approval [process].”
What was the reaction to this criticism at the December meeting in Brussels which — says Richard — included the CEOs of Deutsche Telekom, Telecom Italia, Telefónica, KPN, Belgacom and others?
“Mr Almunia was a little bit angry,” says Richard. The Commissioner’s response, he says, was: “Stéphane, you should not tell these kind of things because it is true that the European telecoms industry is fragmented, but it’s not my fault, or the Brussels commission’s fault, but it is only due to the fact that there is no single telecom playing field in Europe.”
Almunia has “no alternative but to tackle the competition market by market”, he told the gathered CEOs. “The political and legal constraints in Europe do not enable me to do it differently,” Almunia told them.
One regulator, not 27
His answer was for him and the operators, the big telcos, to work together to “claim the creation of a real Europe of telecoms, with a single regulatory and legal framework and space, with one regulator and not 27 regulators”, Almunia told them. “And if this was realised, we could have an approach to competition in Europe totally different from what it is today. And we could then imagine having much less players than we have today.”
However, just before Global Telecoms Business interviewed Richard, reports appeared that the European Commission was looking at something totally different — a Europe-wide network infrastructure.
Richard dismisses this idea: “I am very sceptical about the feasibility of a European network company, because it would imply that the networks were separated from the incumbents in every country in Europe, and to be honest I think there are some countries where this operation is impossible, or would be very, very complicated,” he says.
“I think there is a little bit of confusion between two different things. Both Mr Almunia and the CEOs of the incumbents agree that it would be better for us to have a single European space in telecoms and a single regulator — why not?
“But it is totally different to say we need a single network operator in Europe. It would mean that all the current owners of the infrastructure and especially the incumbents would be deprived of their assets. Nobody knows if it would be government-owned or European-owned or if each of the incumbents should be shareholders. I see this as an extraordinarily complicated project and I don’t see any realistic way to do it.”
Where did the idea come from? It’s hard to say, but Richard thinks it has developed from the fact that the mobile-only operators, “led by Vodafone and [CEO] Vittorio Colao”, are looking at converged networks. “You have in Europe a debate between the main incumbents and the mobile-only players,” he says. “The big trend is convergence. If you’re mobile-only it’s a problem because more and more you have to integrate fixed and mobile telecoms needs in a single offer.”
This is a challenge for companies that are mobile-only, or mobile-only in most countries. “They are clearly lobbying strongly in order to separate this access to network and infrastructure in order to be more competitive in the convergence [market],” he says.
There is increasing competition, he admits. “A good example is the French market,” he notes. With the increasing number of players — and with European Commission limits on cross-border roaming fees — margins are decreasing. Yet operators need to invest in high-speed broadband, fixed and mobile.
Competition from Free
In France the market has been challenged by the entry in early 2012 into the mobile business by Iliad’s Free, set up in 1999 by entrepreneur Xavier Niel as an internet provider and now also a fixed-market operator.
“For customers [Free’s arrival] is good news because prices have decreased almost 50%,” says Richard. “So it’s very good news.”
But for the established operators — France Telecom as well as Bouygues and Vivendi’s SFR — “it’s a major challenge because when you have prices decreasing so quickly you have to adapt and at the same time you have to invest heavily in 4G and in spectrum”. In its home country “we have spent more than €3 billion to buy spectrum”, he says.
“The most visible impact of this is the stock price of France Telecom which is more or less at its lowest point for 15 years.” The share price started 2013 at €8.38, about half what it was five years ago.
The result of Free’s competition is that “the French market today is among the cheapest in terms of mobile telecom prices in the world”, says Richard. “We have recently ordered a study by Arthur D Little comparing prices in mobile services in six big countries — the US and five European countries. And this study shows that France is by far the cheapest with a ratio that is nearly one to two compared to the UK and one to three compared to Germany and one to four compared to the US.”
Those comparisons are for similar bundles, he says, including unlimited calls and text messaging and “a certain quantity of data”.
This “very competitive market in France” has meant margins have “decreased very sharply”, he adds. “Clearly we have to adapt. It’s a major challenge.”
But Orange — France Telecom uses the brand in most of its operations around the world — “is doing quite well [in France] and better than the others, for several reasons”, he says.
The company has launched its own cut-price challenge — a SIM-only, contract-free mobile launched in early 2012 under the brand Sosh, “a new range available only on the web but with very attractive prices”.
At the same time it is benefiting from the fact that France Telecom also offers home broadband, internet access and IPTV. “Our quad play offer means that in the same contract you get triple play at home and a mobile bundle — and this is very attractive. We have today more than 2.5 million customers in France for this offer and this has been very efficient in the competition.”
The quad-play bundle is marketed under the name Open, he adds. “As you can see we love English in this country.”
But France Telecom has another way of insulating itself from competition from Free: the newcomer has not yet built out a nationwide network, and uses a roaming agreement with France Telecom-Orange to achieve coverage in many parts of the country.
“This is something that is quite controversial in France, especially among our competitors — but the fact is that we have significant revenues coming from the traffic generated by Free,” says Richard. “We have more or less €500 million a year of revenues coming from Free.”
How will Orange continue to compete against Free? Richard believes that the introduction of 4G is the answer. “The challenge for us is to create more value and to increase prices because there is an improvement in the quality,” he says. The idea is “to sell a little more expensive services providing a different quality of service and customer experience”.
And he dismisses Free as “part of the previous cycle”. It is, he says, “the end of the previous cycle, based on voice revenues — voice and SMS — and the beginning of the data era”, while France Telecom-Orange is at the beginning of the next cycle. “Free is very much limited to this moment in history,” he adds. The next era will consist of super-fast services based on 4G and on new services such as machine-to-machine and contactless transactions.
But will Free continue its competition as operators move to 4G? Richard is doubtful: the company has “very limited resources to invest”, he says. If it wanted to do 4G “it would probably try to do network sharing”, he suggests.
Not that network sharing is unknown to France Telecom. In Europe the company has a couple of network sharing deals — with Deutsche Telekom in Poland and with Vodafone in Spain. In the UK the company has taken the next step, creating Everything Everywhere with Deutsche Telekom in a 50-50 joint venture.
Such as merger is unlikely in France, he says: “To be honest the competition authority in France would oppose any kind of combination between players in the mobile industry. The real prospect is very, very limited.”
It’s a matter of choosing “different priorities” for each market in Europe. “It is a consolidation issue. Quite clearly there is a problem. In Europe our view is that we have to be very pragmatic. We have to seek for any kind of optimisation. And then the main strategy is to go as quickly as possible to 4G and convergence between fixed and mobile.”
Meanwhile there are a few consolidation opportunities in some countries. TeliaSonera has put its 76% stake in Spanish mobile operator Yoigo up for sale. “We are interested. We have submitted an offer and we’ll see,” says Richard.
So the creation of EE, as the UK business has rebranded itself, is an isolated case? “I tend to think so. In the UK we had two operators that are comparable in size and are part of two groups that are friends,” he says. “We have been able to create governance for a 50-50 split that is working well.”
That friendship with Deutsche Telekom had another result at about the same time, a 50-50 joint venture on procurement. “It delivers what was expected,” says Richard about Buyin, as the unit is named.
“We are still on the learning curve and we still have much more to settle in the future. We are happy with the way it is working. It took only a few months to recruit teams from Germany and France. We have a business that is well integrated in France and Germany. I view this as a real success.”
Joint procurement — if it is to work effectively — surely means that ultimately France Telecom and Deutsche Telekom will have to bring together their shopping lists. Richard agrees that “to converge your technology choices” gives an opportunity “to be more effective with your technology programme”, but he warns that it is not as simple as that “there are a lot of differences market by market”.
Vectoring versus fibre
For example, fixed broadband strategy has to be different, because Germany is more densely populated than France, and Deutsche Telekom has more competition from cable operators than does its French partner. That means “Germany is probably more focused on vectoring on the copper network than France, where fibre is probably the technology choice for very high speed broadband”.
Collaboration with Deutsche Telekom is still developing. “There is more to come,” he says, “probably in the area of new services innovation. It makes sense to cooperate.” He lists areas such as e-health, e-education and wifi access where the two companies are working together. The collaboration includes “20-25 projects”, he says.
But France Telecom-Orange is not just France, and not just Europe. Richard sees Africa and the Middle East as its big growth opportunity. Indeed, he believes those areas have more opportunity for growth than Latin America — the area where rival European operators Telefónica and Telecom Italia have major interests.
“Latin America does not offer the same opportunity for growth as Africa and the Middle East,” repeats Richard. “We have made a good choice. In 20 years’ time it is likely to be the part of the world with the highest growth rate — in economic development and demography.”
The group has already launched 3G in 14 countries in Africa and the Middle East, he notes. “And we are working on investing in 3G services and smartphones in more and more countries.”
Meanwhile the company is expanding its mobile banking services, under the Orange Money brand. “We have nearly five million users — a big success.” There are just two players of significance in mobile banking in Africa, he adds: “Vodafone Kenya [Safaricom] and ourselves. We believe there is huge potential for growth in mobile banking.”
There is an operator in the region called Orange, but which has no connection to France Telecom. Orange Israel was set up when Hong Kong’s Hutchison Whampoa owned the global brand: it had been the main investor in the original Orange, the UK company, in the mid-1990s. Other non-France Telecom versions of Orange, in Hong Kong, Australia and elsewhere, have since been rebranded, but not the one in Israel.
“The company [Partner Communications] in Israel used the Orange brand without paying anything,” says Richard. “We have negotiated with them to come back to a more regular standard and we have a licence agreement. They are paying a fee.”
Though this is a more normal relationship, it’s still a bit odd, and Richard agrees. The Middle East is a “troubled area”, he accepts, and “we are totally conscious about the problems” that can be caused — especially when France Telecom operates a business under the Orange brand in neighbouring Jordan.
“There is a problem with people using Orange and arriving in Israel and in the Palestine territory,” he says. “It is not so easy to manage. But at least we are back to a normal legal situation and framework.”
Is the situation likely to change? Richard is non-committal about this, saying only that “we don’t have an investment in the operator” and that “there is no specific discussion” about any such investment.
Incidentally Hutchison Whampoa, the parents of the Orange brand, had a brief flirtation with Partner Communications during 2012: it announced it had bought control of the company for $125 million cash in June; then in August announced it had had second thoughts and was not going ahead after all. The conditions were not met, said the Hong Kong company, though it added no more than that. Nevertheless, it’s intriguing.
So, where next for France Telecom? It’s important, says Richard, that the company makes “an effort to put the group ahead and competitive in innovation”, adding that “innovation should be understood from the network and the service points of view”.
Innovation “does not just come from the big internet groups in Silicon Valley”, he adds, though “they have been spectacularly good and efficient in the past 10 years in bringing new services”.
But operators “have a lot to bring” in terms of innovation, too, he adds, including in “the internet of things, contactless services, public transport [and] cloud-based services”.
Operators should be able to create value out of the specific relationships they have with customers and users, he notes, such as “guarantees of safety of personal data that they won’t find among the internet players”.
Richard is a keen enthusiast for Joyn, the GSM Association-backed attempt by the mobile industry to create its own social media service. “What we have to do is catch up with social media,” he says. “This is what we are going to do with Joyn.”
Joyn users will be able to exchange contacts and messages and to share files and video using the system. Three South Korean operators and three in Spain — including Orange Spain — are already offering it to their customers. “It will be a market-by-market launch,” says Richard. “We are going to launch it in France in June.”
It is something different that will be available across a range of operators, and will allow them to offer a service to compete with Facebook, he suggests. “I expect this become to more and more popular — as Facebook did.”
He already knows of one keen user, the CEO of Vodafone: “Vittorio Colao showed me he has a mobile phone with Joyn,” says Richard.
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