Broadband, IPTV and Fibre in 13th November 2009 [2009-110]

Executive Summary

French broadband market growth remains robust: • Shrugging off the recession, the French broadband market is set to reach 19.6 million connections by the end of 2009, up 1.9 million on 2008 – only 12% less than the level of adds of 2008 • Despite the consolidation among altnets of recent years, price competition for the triple play (a bundle of broadband, and TV) remains intense • With 2009 better than we expected, we now anticipate a sharper slowdown in net adds in 2010, with 1.4 million, and the total reaching 22.8 million by 2012 (70% household penetration)

Market share dynamics favour SFR to the detriment of Orange: • France Télécom’s Orange remains the leader with 8.8 million subscribers in Q3 2009 (a 46.0% market share), followed by Iliad (23.1%) and SFR (22.4%), with a distant fourth (about 5%) • Orange’s share of net adds fell sharply in 2009 (Table 1), thanks to the more credible competition that SFR has waged since the merger with Neuf Cegetel in 2008, and also the aggressive cross-marketing of broadband by DSL new entrant Bouygues – the first to introduce a quad play offer • Iliad’s net subscriber recruitments are down in 2009 due to continued high levels of churn at Alice – in contrast, subscriber growth of the Free brand remains healthy • Numericable’s relaunch has yet to deliver solid subscriber growth

Table 1 Operator shares of broadband net subscriber additions (Jan-Sept)

60% 49% 50%

40% 33% 28% 30% 23% 20% 13% 12% 10% 6% 0% 0% 2008 2009

Or ange Iliad SFR Bouygues

Note: SFR and Iliad 2008 figures are pro forma, as if mergers had taken place on 1st January 2008. [Source: Enders Analysis]

Fixed Line Telecoms/Media François Godard +39 3355 289127 [email protected] Broadband, IPTV and Fibre in France 13th November 2009

Triple play – a bundle of broadband, telephony and TV - is the market standard: • Iliad offers IPTV to about 70% of the population, with a similar figure for SFR, while France Télécom offers IPTV or satellite TV to virtually all households • IPTV and digital cable penetration was an estimated 26% in 2009, with 36% penetration likely in 2012 (Table 2) • Due to unbundlers’ full LLU offers initiated in 2005, followed by the introduction of naked DSL offers in 2007, the share of alternative DSL operators’ customers paying a line rental subscription to France Télécom has dropped to 16% in 2009

Table 2 Broadband and digital cable/IPTV household penetration

80% 70% 65% 68% 70% 61% 55% 60% 49% 50% 34% 36% 40% 30% 26% 22% 30% 18% 20% 10% 0% 2007 2008 2009f 2010 2011 2012

Br oadband Digital cable and IPTV

[Source: Enders Analysis]

In contrast to VoIP, TV has proved hard to monetise: • Since 2005, the ARPU of Iliad rose mainly due to the migration to full LLU by Free subscribers, allowing it to capture revenues from termination charges and from out- of-bundle calls of subscribers without FT PSTN lines • Subscribers are only too happy to take TV services, as long as they are ‘’, with low willingness to pay for on-demand: TV services contributed only €2 to Iliad’s ARPU of €36/month in Q2 2009, a figure that has been constant for some time • Orange’s strategy of launching a premium channel offer to a national audience via TV-over-DSL and satellite-based offers has yielded poor results: unable to defend its market share, Orange cut its headline offer in October to €37.9/month • Existing offers underperform on programming, in particular high definition (available on DTT), consumer interface, and advertising to ‘educate’ users • An enhanced television offer, lifted to international standards, could underpin either triple play price rises or the launch of a ‘full basic’ layer of services at a higher price

Without a strong TV revenue line, the roll-out of FTTH will continue to be slow: • Altnets are investing, mainly in laying fibre in open access public infrastructures like the sewers in • The regulatory framework for in-building network mutualisation is imminent and will mandate the multi-fibre architecture favoured by altnets • FT will lead on in-building network deployment, with Iliad and SFR net wholesale buyers of IRUs • Numericable is ahead of altnets on fibre, but lacks the funds to exploit its advance • Due to the slow pace of FTTH, altnets have a limited interest in accessing Numericable’s fibre network, to the disappointment of its private equity owners

2 Broadband, IPTV and Fibre in France 13th November 2009

Broadband Market Forecasts

Subscriptions

Growth of the French broadband market in 2009 shrugged off the recession, milder and shorter than in the UK.1 In June 2008, we expected 19.3 million connections for the end of 2009 (Triple Play in France [2008-50]), and we now forecast 19.58 million. The successful SFR relaunch and aggressive quad play promotions by DSL entrant Bouygues Télécom mitigated the downward trend – Q3 2008 was the first to record a year on year increase in DSL net adds since Q2 2006, according to preliminary figures. As a result, we expect the level of net additions in 2009 to be down only 12% on 2008. Based on PC penetration trends, we expect a much lower level of net additions in 2010, and are maintaining our forecast of 22.8 million connections in 2012 (Table 3).

Table 3 Broadband connections (000)

25,000 22,037 22,835 20,949 19,578 20,000 17,691 15,551 15,000

10,000

5,000 2,856 2,140 1,887 1,371 1,088 798 0 2007 2008 2009f 2010 2011 2012

Connections Net additions

[Source: Enders Analysis from Arcep]

Table 4 Household penetration forecast

80% 72% 73% 67% 70% 68% 68% 70% 70% 70% 64% 63% 66% 65% 60% 59% 61% 60% 51% 54% 50% 46% 40% 30% 20% 10% 0% 2007 2008 2009f 2010 2011 2012

PC Internet Broadband

Base: 27.0m households in 2009. [Source: Enders Analysis from Médiamétrie]

1 The recession ended in Q2 in France and 2009 GDP is expected to be down 2.3% on 2008, while the UK is expected to exit recession in Q4 2009, with GDP to be down 4.3% on 2008. 3 Broadband, IPTV and Fibre in France 13th November 2009

We forecast household PC and internet penetration to reach 73% and 70% in 2012 respectively (Table 4). Unconnected PC homes will become a rarity (and may be using wireless networks). Narrowband connections, now below 700,000, will also become negligible. A small contribution to broadband market growth (230,000 in 2009-2012) is expected from the connection of second homes. We estimate 2.7 million business broadband connections at the end of 2009, rising to 2.9 million in 2012.

DSL remains the dominant access technology with 94% of connections at mid-2009. The broadband lines supplied over ‘other’ technologies include 50,000 FTTH subscribers on the local networks of Orange, SFR and Free, and about one million subscribers to the Numericable coax network, of which 170,000 are served by a fibre- to-the-building (FTTB) link.

IP services

VoIP telephony services are replacing analogue telephony in France with 15.6 million VoIP serviced ‘lines’ in June 2009 (Table 5), of which 6.3 million ‘lines’ for FT and 9.2 million for altnets.

Table 5 Altnet VoIP services adoption (Million accesses)

10 9 8 7 6 5 4 3 2 1 0

3 09 00 0 2 2 Q4 Q2 Call selection and pre-selection Altnet VoIP

[Source: Enders Analysis from Arcep]

A significant trend is the loss to France Télécom of the underlying line rental customer relationship thanks to the take-off of full unbundling in 2005 and of naked DSL2 in 2007. Iliad fostered the migration off the PSTN system by bundling in line rental to its triple play package in 2005, allowing its subscribers to save the monthly fee paid to FT. At Q2, 28% of voice fixed lines (including cable) were exclusively running VoIP, 16% were both analogue (PSTN) and VoIP, and 56% were still exclusively analogue (down from 65% a year earlier). The share of altnet DSL operators’ customers paying a line rental subscription to France Télécom dropped from 93% in 2004 to 16% in 2009.

By December 2009, the share of outgoing fixed voice traffic on VoIP ‘lines’ should pass the 50% threshold; at Q2 it reached 48%, up from 43% a year earlier. Nevertheless, despite 44% of subscribers having unlimited VoIP calls packages, total fixed line voice minutage continued to decline in 2009 – by 2.2% in the year to Q2 2009.

2 A naked DSL line is a FT line sold wholesale to altnets or retailed directly to consumers without analogue voice, PSTN service (i.e. subscribers pay no FT line rental). Altnets use naked DSL in off-net areas (1.3 million accesses in June 2009) and FT nationally (2.6 million accesses in September 2009).All naked DSL lines are retailed bundled with a VoIP access. 4 Broadband, IPTV and Fibre in France 13th November 2009

TV-over-DSL has been a notable success in urban areas of France (satellite reception is usually not permitted in collective housing estates), and it is bundled in triple play packages at no extra cost. We estimate 5.3 million active subscribers in 2009; we have overlaid disclosed subscriber numbers on household surveys from TV regulator CSA.

We forecast an increase in the IPTV + digital cable base to just below 10 million in 2012 (Table 6). One factor is the rise in IPTV coverage due to the expansion of the LLU footprint3, which we estimate from 61% of households to 70% by 2012, and the other factor is an increase in the share of eligible households turning on the TV service from 57% to 62% – those not doing so typically have and/or digital terrestrial. In contrast to IPTV, adoption of digital cable TV (excluding collective contracts) has been growing at a snail’s pace and will reach only 1.9 million subscribers in 2012, with the increase being due mostly to ‘white goods’ retailer Darty.

Table 6 Digital TV subscribers through DSL, FTTH and cable (HH m)

9 8.0 7.3 8 6.3 7 6 5.3 5 4.1 4 3.2 3 1.7 1.7 1.8 1.9 1.3 1.5 2 0.9 1.1 1.2 0.5 1 0 2005 2006 2007 2008 2009f 2010 2011 2012

Cable DSL & FTTH

[Source: Enders Analysis]

Retail Market

The year 2009 has seen a major shift in the pattern of recruitment in favour of SFR, France’s No. 2 mobile operator, whose share of net adds rose to 28% in the first nine months, up from 6% a year earlier. Four factors mainly contributed: • Churn reduction • Brand synergies • National marketing • Distribution through the retail chain

In June 2008, SFR acquired Neuf Cegetel, which had suffered high churn due to its acquisition-driven model. The migration of subscribers to SFR, finalised in Q2 2009, has reduced SFR’s broadband churn rate to 14% in H1 2009, from 20% in 2008.

As from October 2008, SFR started retailing all fixed line products under its brand in conjunction with the pre-existing ‘neufbox’ brand for the triple play router and TV set- top. This had an immediate positive impact on SFR’s marketing of broadband because

3 In theory altnets offer TV to all LLU subscribers, but we believe the actual coverage is lower, thus our estimate of 61% in 2009 vs. 75% total LLU coverage. FT’s DSL TV footprint is also believed to be around 60%. 5 Broadband, IPTV and Fibre in France 13th November 2009

SFR is one of France’s best brands with a high consumer rating on service; in 2008, SFR was France’s second biggest advertiser (Orange was third placed).

Consistent with its national advertising and mobile footprint, SFR was able to extend active marketing of its broadband package to all areas of France. In a stroke, SFR’s addressable market rose from about 75% of the population to close to 100%. SFR continues to charge an extra €5/month for connections made outside unbundling areas (Free has national pricing of €29.99/month, but is commercially mostly active on-net).

Finally, SFR started to retail broadband packages through its 800 shops; noting that Iliad has no retail presence, while Orange and Numericable also sell fixed line through shops. In our view, the shops are an increasingly important channel to market, reaching older and less techno-friendly households converting to the internet. They are also, in theory, a good tool to showcase products like PVRs and pay-TV – but SFR has to arbitrage floor space and staff attention between fixed and mobile products.

The SFR marketing push into non-LLU areas has mainly hurt Orange; in the first three quarters of 2009, Orange captured only 33% of broadband net adds, down from 49% a year earlier. Under pressure, Orange cut by €5/mo the price of its headline offer in October to €37.9/month (Table 7), shrinking the premium it commands over SFR in off- net areas from €8 to €3/month – the new price is officially a limited offer but previous price cuts were also introduced cautiously.

Table 7 Headline retail offers (October 2009)

Advertised Triple play (€/mo) Optional TV equipment (€/mo) Powerline Retail bandwidth plugs chain? On-net Elsewhere (Mbit/sec) HD STB Multiroom PVR 49 Orange 37.90 18 7 5 For sale deposit Included Free 29.99 28 Included Included Included No on PCs SFR neufbox 29.90 34.90 20 Included /a 5 For sale Yes 31.90 5 5 99 one off For sale Numericable n/a 100 Yes 19.90 DTT only n/a For sale

Note: Triple play price includes line and router rental, unlimited calls to fixed lines (domestic only for Orange, global for the others), internet access and basic TV. [Source: Enders Analysis]

Iliad has also seen a decline in its share of net adds, from a historical peak of 29% in Q3 2008 to 10% a year later. This is chiefly due to the (undisclosed) high churn at Alice, the downmarket brand Iliad acquired in August 2008 to secure the second place in the French broadband market. Now that the migration of subscribers to full price bundles is complete, Iliad should return to a healthier pace of subscriber growth.

Mobile operator Bouygues Télécom launched its DSL offer in Q3 2008, but ramped up in Q2 2009 with its ideo bundles. The total number of Bboxes reached 173,000 in Q3. Bouygues is the first operator to offer a ‘quad’ play in which the cost of fixed+mobile services is substantially lower than that of the sum of the individual components. Aggressively cross-marketed to Bouygues mobile subscribers, a Bouygues Box triple play can be added to their monthly package for as little as €13/month4, a discount of 57% over the SFR or Iliad subscription – at these prices, the Bouygues quad play must be cross-subsidised. We expect Bouygues will have a

4 For subscribers with evening unlimited calls from 20:00 or more extensive packages. For other subscribers, the extra cost of the Bouygues Box service is €17-20 per month. Contracts are for 24 months for subscribers living in LLU areas. 6 Broadband, IPTV and Fibre in France 13th November 2009

sizeable impact on the broadband supplier choice of its mobile subscriber base (ten million lines), but a limited effect in the broader marketplace. Bouygues may, however, play a key role in any future fixed line consolidation scenario in France.

Numericable, which does not disclose comparable subscriber figures, had about one million broadband customers at mid-2009 according to our estimate – it retails only on- net where its market share is about 18%. It has improved its churn rate from a sky high peak of 30% in 2008 to 18.5% last August mostly thanks to the end of aggressive door- to-door retailing and better customer service. New €19.9/month packages5 and the fibre-based 100Mbit/sec headline bandwidth should help to improve sales performance in H2 2009. If Numericable further reduces its churn rate, the €19.9 package may even become NPA-positive.

Numericable also is the ‘white label’ supplier of the retail chain Darty, with disappointing results to date: Darty had 210,000 subscribers in January 2009, nine quarters after the launch of the DartyBox. Darty cut prices in mid-2009 but, despite aggressive promotion, early results continue to be poor. Numericable is expecting to conclude another ‘white label’ supply contract in the near future.

Looking ahead, Orange could take 40% of net adds in 2009-2012, compared to 27% for SFR and 20% for Iliad. Recent price cuts will help Orange recover from its recruitment difficulties in 2009, but we doubt it will return to the lofty share of 50% or more of net adds Orange realised before SFR became an active national competitor. Moreover, Iliad and SFR are continuing to expand coverage of LLU, which reached 75% of households in June 2009, up from 71% in 2008 and 64% in 2007 (subsidised local fibre networks linking FT exchanges to unbundlers’ backbones are crucial to this increase). We forecast 2012 subscriber counts to reach 10.3 million for Orange, 5.3 million for SFR and 5.1 million for Iliad (Table 8). Finally, we expect that Numericable and its resellers together will pass the 1.6 million subscribers mark in 20126.

Table 8 Forecasts of broadband subscribers by operator (000)

12,000 10,270 9,516 9,951 10,000 8,968 8,326 8,000

6,000 4,981 5,052 5,141 5,268 4,489 4,389 4,763 4,759 4,225 3,879 4,000

2,000

0 2008 2009f 2010 2011 2012

Iliad SFR Orange

[Source: Enders Analysis]

5 This is about to include basic TV as Numericable starts to distribute the package of free to air channels in the unencrypted DVB-T format, which needs no decoder for integrated digital TV sets, and cheap DTT set-tops for the others – to upgrade to a larger themed TV offer, subscribers need the Numericable STB for which they have to change package. A separate €19.9 package offers internet access plus the HB set-top and the larger basic TV bouquet, but without VoIP. 6 Excluding Numericable’s TV only subscribers. 7 Broadband, IPTV and Fibre in France 13th November 2009

From an investor’s point of view, pricing remains the depressing aspect of the French market. Hopes had been raised that an upward drift to retail price levels, mainly through ‘hidden’ charges, might accompany the end of the consolidation phase of the unbundling that started in 2002 and the rising adoption of TV-over-DSL, but these have not materialised.

IPTV

French fixed line operators have successfully fostered adoption of TV-over-DSL, while being largely ineffectual at monetising the service. Orange, the broadband market leader, will likely have 2.8 million TV subscribers by the end of 2009 (Table 9), with an adoption rate of 31% among its broadband base. We expect Orange will have 2.1 million TV subscribers on IPTV and 700,000 through satellite. Iliad, which has always bundled TV-over-DSL into its broadband packages where available, reports 100% adoption among its unbundled subscribers; we estimate, based on surveys, that less than half have a permanent connection to the TV set. SFR’s TV penetration of its broadband base is similar to Orange’s, noting that Neuf Cegetel had offered TV on an opt in basis, thus reducing take-up. SFR now bundles TV into the basic triple play offer.

Table 9 Active IPTV subscribers by provider (000)

6,000 200 5,000 1,400 4,000 100 900 200 3,000 750 2,100 1,708 2,000 1,149 300100 1,000 577 1,345 1,496 1,650 20050 865 0 41 14692 280 2003 2004 2005 2006 2007 2008 2009f

Iliad (e) Orange SFR Others (e)

Note: Orange figures are as published, Iliad’s are estimates and SFR’s too, from 2008. SFR’s figures before 2008 are Neuf Cegetel’s. [Source: Enders Analysis]

TV-over-DSL is popular because it is available at no charge. Broadband subscribers are supplied with a set-top box at no extra cost to their subscription (or a modest €49 deposit at Orange). Subscribers receive a good selection of entertainment channels, including some HD feeds7, and are offered on-demand content from other third parties. Paying for content has failed to gain traction among broadband subscribers, in line with the poor results of paid-for video-on-demand in other major broadband markets. In the pay-TV market, Canal+ has had reasonable success in migrating its terrestrial subscriber base to TV-over-DSL (we estimate it may be at around 700,000 in 2009), and DSL operators receive a commission, possibly as low as 15%.

7 For subscribers too far from the central office to get an HD signal over DSL, set-tops include a DTT MPEG-4 tuner allowing to pick off the air the four national free-to-air HD channels (provided an aerial is connected). 8 Broadband, IPTV and Fibre in France 13th November 2009

The trend in the ARPU of Iliad, the IPTV pioneer, is a telling example (Table 10). Since 2005, ARPU rose mainly on the back of the migration to full LLU by Free subscribers. Iliad’s value added services revenues were derived from the capture of termination charges from incoming calls, plus an increase in the number of out-of-bundle calls as subscribers abandoned their FT PSTN lines. ARPU growth has, however, slowed since 2008 as, clearly, TV services have been unable to become the new growth engine. We estimate that television generates only €2 out of Iliad’s ARPU of €36/month disclosed for Q2 2009, a figure that has been constant for some time.

Table 10 Iliad monthly ARPU per subscriber (€ per month)

38 37 36 35 34 33 32 31 30 2005 2009 Q1 Q3 Free Group (Free + Alice)

[Source: Enders Analysis from Iliad]

Since 2008, Orange has greatly developed its TV offer by buying the rights to domestic football games, and complementing its TV-over-DSL footprint with a satellite offer to make it a truly national television service. Orange hoped that this differentiation from Iliad and SFR would allow it to better defend market share, but this did not prove to be the case as Orange was recently forced to reduce retail prices. Sales of premium Orange Sport and Cinéma Séries subscriptions have also disappointed (596,000 in September 2009), and rely on promotions (the project’s cost benefit has yet to be disclosed). In our view, the looks, live content and sales pitch of Orange channels make the venture appear driven by engineers rather than television professionals.

We do believe there is some sizeable revenue potential in IPTV, but its realisation in France depends on an ecosystem that has yet to emerge. Operators have failed to create the offers that would entice subscribers to upgrade to higher priced services. They have prioritised paid-for VoD, although this is a struggling proposition everywhere8, while the offer of free on-demand or catch-up TV programmes is very limited. Digital video recorders have been tossed at subscribers without the advertising expenditure that, in the UK and the US, has ‘educated’ viewers to the new technology. Moreover, the interfaces of on-demand DVR services are often badly designed – typically, a viewer watching a TV series live has to navigate a tunnel of menus to find the previous episode or to program the recording of the next. Free distribution of high definition channels over DTT has hurt paid-for HD options.

8 In the US consumer spending on video rental has been migrating to VoD very slowly, the potential is much lower in France where rental has always been marginal. 9 Broadband, IPTV and Fibre in France 13th November 2009

Operators cannot look for revenues to the slow growing market for premium and subscription-financed themed channels in France. In our view, their opportunity lies with enhanced bouquets of FTA channels, offering many more HD services than are available on DTT, and a large selection of ‘free’ on-demand programming, notably from the leading FTA channels – accessible through an intuitive and fast interface with DVR functions. If the premium content of Canal+ was fully integrated in such an environment (rather than being segregated on its own electronic programme guide as now), its appeal would also increase. Such a bundle of services, well executed, could justify either an increased price for the basic package or the establishment of a new basic tier for, say, an extra €5 per month.

Next Generation Access Deployment

The lack of a working business model to raise TV ARPU is one factor in the slow progress of FTTH deployment. To recap events to date: seeking an ‘effet d’annonce’, Iliad announced in September 2006 the potentially capex-heavy plan to deploy FTTH, with perfect timing, as its rival Neuf Cegetel had its IPO scheduled for the following month. Both Orange and Neuf, now SFR, duly followed with their own FTTH plans.9

No capex race, however, was triggered by these announcements: three years later, FTTH subscribers still only number 50,000 (in June 2009). Since 2006, the three operators have been engaged in a game of tactical positioning with the government – committed to the roll-out of very high speed broadband – and regulator Arcep. Altnets are investing, but mainly to lay fibre in the ‘visitable’ public sewage system of Paris, and also in a few similar provincial public infrastructures, with about 1.5 million homes passed at building level. This is the cheapest and easiest part of their FTTH plans. SFR and Iliad’s own fibre deployment in FT ducts, and the in-building fibre upgrades has barely begun.

France Télécom has been doing more, including new build, and has laid fibre in its own ducts to pass possibly 3.5 million homes. FT could have opted for a faster roll-out, but it is understood that any aggressive marketing without a framework for competitors’ access to its network would have led the regulator or the courts to stop it. Thus FT could not initiate a capex race with a view to outspending its rivals as other European incumbents have done.10

Operators also blame the slow regulatory process. In 2008 Arcep mandated FT to produce a cost-oriented duct wholesale access offer, which seems satisfactory to SFR and Iliad. However, Iliad has refused to lay fibre in buildings without an acceptable framework for network ‘mutualisation’ from Arcep, now expected by the end of 2009.

Based on household density, Arcep proposes to split France into three zones (only the size of the first zone has been estimated with precision): • Zone 1, where infrastructure-based competition is economically possible, concerns areas where over 50% of homes are in buildings of 12 or more dwellings, amounting to 5.5 million homes • Zone 2, where competition is viable only if the network is shared, concerns medium density suburbs mixing small collective buildings and individual houses, amounting to a further 5 million homes

9 NGA in France [2008-116]. 10 NGA in The [2008-118], NGA in [2008-121], NGA in Spain [2009-029], NGA in [2009- 045] and NGA in [2009-013]. 10 Broadband, IPTV and Fibre in France 13th November 2009

• Zone 3, where fibre deployment is not economically viable, concerns the remaining 16 million mostly-detached homes, and where subsidies are under consideration

Zone 1 is where operators have focused their investment. In its upcoming ruling, Arcep will accede to Iliad’s demand (supported to some degree by SFR) for a ‘multifibre’ in- building network solution, in contrast to FT’s proposed ‘monofibre’ architecture. An operator that signs up a building for fibre upgrade must publicly invite third parties that wish to have their fibre laid in the building by the operator to come forward. According to Iliad, the marginal cost of extra fibre being laid is very small, while FT claims it is high. FT is expected to do the lion’s share of in-building fibre deployment, with Iliad and SFR net wholesale buyers of capacity through indefeasible rights of use (IRUs). They may wrangle with FT over its wholesale price list.

According to the multifibre network solution, each flat will be equipped with a fibre socket hosting three or four LAN plugs, one for each operator, connected to a cabinet in the basement (or outside for buildings with less than 12 flats). Operators will link the cabinet to their own networks. In theory, subscribers that want to upgrade from DSL or change FTTH provider will only have to switch plug (a new router and set-top box will also be required). Iliad claims the multifibre solution will prevent FT from monopolizing the in-building network and charging altnets for costly services like switching the subscriber to a new provider.

In our view, FT effectively controls the pace of FTTH deployment in France. SFR and Iliad’s gains from a faster deployment would need to come from higher market shares of options take up since neither will charge more for fibre than for ADSL. Orange hopes instead to grow broadband revenue from FTTH, charging a premium of €10/month over its ADSL packages. It will be interesting to see if FT’s premium of €18/month in relation to Iliad and SFR proves sustainable, since customers in upgraded building will be able to easily switch to a low cost provider. (We understand that in the small number of buildings where fibre has been deployed, market shares have not changed as a result.)

Altnets expect to save their LLU rental fees paid to FT as subscribers migrate to FTTH (and capex are substituted to opex), with Iliad claiming the migration is cash flow neutral (which remains to be seen). Aside from that aspect, we cannot see what Iliad has to gain from FTTH capex since in Paris, where broadband adoption is highest and close to 75%, Iliad is already the leading provider. Iliad also needs to plan large investments in its network and in handsets if it obtains the 4th licence for which it is the only bidder (Iliad unopposed for 4th mobile licence [2009-107e]). SFR appears also to be in no hurry to invest in FTTH.

In Zone 2, ‘mutualisation’ points where operator fibre links connect to building networks will be located on or under public ground. Arcep is looking at an island-by-island model under which a single operator would upgrade a block of buildings and should release a paper in the coming months. We think it likely that deployment will not get under way for several years.

Although Zone 3 is a non starter for fibre, agitation on the incipient ‘digital divide’ is building the pressure on the government to subsidise. A bill adopted in July by the Senate and currently being debated by the National Assembly would allow local governments to own up to 50% of companies operating ‘passive’ networks. It would also create a fund to invest in digital networks (the Fonds d’aménagement numérique du territoire), which could receive a capital injection from the ‘grand emprunt’ the

11 Broadband, IPTV and Fibre in France 13th November 2009

Government hopes to borrow in 2010 (according to the latest indications, high speed Internet has slipped in the list of priorities for usage of the bond issue proceeds).

Arcep has started work on the technicalities of broadband upgrades in Zone 3, exploring the unbundling of the PSTN sub-loop – under such a model the last mile would remain in copper. France Télécom has yet to establish a position on the issue. On the one hand, it could lose control over a part of the network (though not the ultimate customer connection), but on the other hand, FT would be spared the high capex cost of a fibre loop-to-sub-loop upgrade in low density areas, where it has the highest market share.

Numericable’s fibre-to-the-building network covers four million homes mostly located in Zone 1. Despite aggressive pricing, neither Numericable nor Darty have gained much traction from being first to the FTTx market. Highly indebted Numericable cannot afford to advertise the superiority of its network, or to drive demand for TV by lifting its packages to international standards (or to deploy fibre to the rest of its nine million homes passed in its coverage areas). As a result, the competitive pressure of Numericable has failed to be a catalyst for investment in FTTH by the ADSL operators.

The potential for either Iliad or SFR to seek to gain access to Numericable’s fibre network remains a tantalising prospect. A merger is a much-discussed option as is Numericable’s offer of wholesaleg access to its network. However, to the great misery of Numericable’s private equity owners, the slow pace of fibre deployment in France puts no altnet in a hurry to buy Numericable’s assets or to conclude a national wholesale deal, besides local agreements to use cable’s ‘dark fibre’.

In this context, we do not expect fibre-based offers to be actively marketed before mid- 2010. The pace of in-building roll-out is difficult to predict, and operators could meet bottlenecks in the supply of installers in Paris if deployment was to suddenly accelerate. Iliad’s target of four million homes passed in 2012 (which, by definition, includes homes passed by its competitors as well), is unlikely to be met. As a result, we believe that fibre-based subscriptions will reach about half a million in 2012 (Table 11). In the meantime, Numericable will continue migrating its subscribers to FTTB at a casual pace while reseller Darty will recruit directly on fibre, leading the network to the threshold of one million fibre subscribers in 2012.

Table 11 Fibre penetration forecasts (000 subscribers)

1,000 1,000 800 700 500 600 450 400 250 250 130 100 200 40 60 0 2008 2009f 2010 2011 2012

FTTH FTTB/coax

[Source: Enders Analysis from Arcep]

12 Broadband, IPTV and Fibre in France 13th November 2009

To conclude, the only aspect of the French broadband market that is supportive of investment in FTTH at this point is the adoption of TV-over-DSL by a substantial and rising share of broadband subscribers. The principal reason for investing in fibre would be to increase revenues through enhanced IPTV services like multiroom HDTV.

However, we do not expect operators to rush to invest in a new, costly technology whose ability to drive revenue growth remains largely theoretical, based on experience with IPTV to date. However attractive this model may be on paper, it has failed to materialise in France. Numericable, whose network has a superior broadcast capacity than DSL, is struggling to sell pay-TV and is competing on broadband with TV-less packages. The shrewder operators would be those exploring more attractive TV offers to foster a sustainable demand for higher bandwidth.

www.endersanalysis.com [email protected]

Important notice: By accepting this research note, the recipient agrees to be bound by the following terms of use. This research note has been prepared by Enders Analysis Limited and published solely for guidance and general informational purposes. It may contain the personal opinions of research analysts’ based on research undertaken. This note has no regard to any specific recipient, including but not limited to any specific investment objectives, and should not be relied on by any recipient for investment or any other purposes. Enders Analysis Limited gives no undertaking to provide the recipient with access to any additional information or to update or keep current any information or opinions contained herein. The information and any opinions contained herein are based on sources believed to be reliable but the information relied on has not been independently verified. Enders Analysis Limited, its officers, employees and agents make no warranties or representations, express or implied, as to the accuracy or completeness of information and opinions contained herein and exclude all liability to the fullest extent permitted by law for any direct or indirect loss or damage or any other costs or expenses of any kind which may arise directly or indirectly out of the use of this note, including but not limited to anything caused by any viruses or any failures in computer transmission. The recipient hereby indemnifies Enders Analysis Limited, its officers, employees and agents and any entity which directly or indirectly controls, is controlled by, or is under direct or indirect common control with Enders Analysis Limited from time to time, against any direct or indirect loss or damage or any other costs or expenses of any kind which they may incur directly or indirectly as a result of the recipient’s use of this note.

© 2009 Enders Analysis Limited. All rights reserved. No part of this note may be reproduced or distributed in any manner including, but not limited to, via the internet, without the prior permission of Enders Analysis Limited. If you have not received this note directly from Enders Analysis Limited, your receipt is unauthorised. Please return this note to Enders Analysis Limited immediately.

13 Please note: The below disclaimer ('Importance Notice') replaces the existing disclaimer in this research note for Venture Insights subscribers.

Important notice: By accepting this research note, the recipient agrees to be bound by the following terms of use. This research note has been prepared by Venture Insights Pty Ltd and Enders Analysis Limited and published solely for guidance and general informational purposes to authorised users under the terms of a licence agreement between Venture Insights Pty Ltd and its subscriber. You need to be expressly authorised to use it, and it may only be used for your internal business purposes and no part of this note may be reproduced or distributed in any manner including, but not limited to, via the internet, without the prior permission of Venture Insights Pty Ltd. If you have not received this note directly from Enders Analysis Limited or from Venture Insights Pty Ltd, your receipt is unauthorised. If so, or you have any doubt as to your authority to use it, please return this note to Venture Insights immediately. This research note may contain the personal opinions of research analysts based on research undertaken. This note has no regard to any specific recipient, including but not limited to any specific investment objectives, and should not be relied on by any recipient for investment or any other purposes. Venture Insights Pty Ltd and Enders Analysis Limited give no undertaking to provide the recipient with access to any additional information or to update or keep current any information or opinions contained herein. The information and any opinions contained herein are based on sources believed to be reliable but the information relied on has not been independently verified. Neither Venture Insights Pty Ltd nor Enders Analysis Limited nor their respective officers, employees and agents make any warranties or representations, express or implied, as to the accuracy or completeness of information and opinions contained herein and exclude all liability to the fullest extent permitted by law for any direct or indirect loss or damage or any other costs or expenses of any kind which may arise directly or indirectly out of the use of this note, including but not limited to anything caused by any viruses or any failures in computer transmission. The recipient hereby indemnifies Venture Insights Pty Ltd, Enders Analysis Limited and their respective officers, employees and agents and their related entities against any direct or indirect loss or damage or any other costs or expenses of any kind which they may incur directly or indirectly as a result of the recipient’s use of this note. © 2015 Venture Insights Pty Ltd and Enders Analysis Limited. All rights reserved.