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Electronic Communications Regulation in France

Global Forum

November 9th, 2006

Gabrielle Gauthey

Commissioner-ARCEP 1

Implementation of the framework and topics in France

I. The French market

II. Broadband regulation

III. Fixed markets regulation

IV. FTTx

V. Fixed-mobile convergence

VI. Spectrum issues 2

Implementation of the framework and hot topics in France

I. The French Telecommunications market

II. Broadband regulation

III. Fixed markets regulation

IV. FTTx

V. Fixed-mobile convergence

VI. Spectrum issues 3

The French market : number of subscribers

Number of suscribers by services

in thousand

60 000

48,6 million 50 000

40 000 37,2 million*

30 000 Fixed subscriptions Internet subscriptions 20 000 Mobile customers 13,9 million of which 10,5 million broadband Internet subscribers

10 000

0 *Includes since 2005: France Télécom’s 2001 2002 2003 2004 2005 Q1 2006 subscriptions, telephony over DSL, and telephony over cable

Source: ARCEP 4

Investments 1/2 Global trend

Investments during accounting period

Millions € 1998 1999 2000 2001 2002 2003 2004 2005

Investments (former regulatory framework) 5 538 5 909 7 832 9 182 5 699 5 437 5 343

Variations (%) 6.7% 32.5% 17.2% -37.9% -4.6% -1.7%

Investments (new regulatory framework) 5 495 6 307

Variations (%) 14.8%

Telecommunication investments variations Million €

Source: ARCEP 5

Implementation of the framework and hot topics in France

I. The French Telecommunications market

II. Broadband regulation

III. Fixed markets regulation

IV. FTTx

V. Fixed-mobile convergence

VI. Spectrum issues 6

Overview of the French broadband market

As of Sept 30 2006, there are 11,7 million broadband subscribers:  11,1 million DSL residential subscribers, more than 90% of the total broadband market  630 000 cable modem subscribers  The market grew by 116% in 2003, by 84% in 2004 and by 44% in 2005  Revenue has reached 2,4 billion euros in 2005 Broadband Broadband subscribers

 7 residential ISPs: FT/Orange (-ex Wanadoo), Free, Neuf-Cegetel, AOL, Club Internet, Tele 2, Telecom Italia France (Alice) Club Internet 4% 4%  Prices have significantly decreased. Broadband residential offers are offered as low as 15 € per month (bundled with CPS) for an 8 Mbit/s speed, and triple play for 30€ for a 25 Mbit/s speed Alice AOL 6%  Speed is increasing: 8 Mbit/s with ADSL, up to 20 Mbit/s with 7% ADSL2+, offered by some French ISPs Orange NeufCegetel 47% 14%  New services have been developed : TV over DSL, VoIP (“triple play”) Free 18%  Professional offers: data, VPN…

strong competitive dynamicstrong competitive Main DSL market players The retail broadband market is not regulated in France with market shares A (January 2006) 7

Overview of the broadband access in OECD countries

OECD Broadband subscribers per 100 inhabitants, by technology, June 2006

DSL Cable Other

30

25 OECD average 20

15

10

5

0 c k s m s g l ic li r d a d d y a m r a e a y n y a d l d y d y o e d n n o te i li n i l n b r n b c a n n e n a e d d u a u r c a g n a e ic a r a a a i a p o t n a a a t u la u la la k u e m la l o l l w d n g g t s tr p I t g r p x n r e r n r e n l S a b a m r a p e n o u e re K e i o a i e J u r s r S o e e r e e e Ic z F w K d m A F u e I u P T R M h t N C B e P Z R G D t i S d te A G H k e w i x w h te n u c a N S i L e e v n U N z lo Source: OECD U C S 8

Broadband wholesale offers in France

MDF managed IP Internet ATM network backbone network contents CEx

≈ 12500 central ≈ 130 ATM ≈ 20 broadband 1 national exchanges switches access servers delivery point

Other OLO LLU OLO’s network ISP

ATM Bitstream OLO’s network ISP

IP Bitstream OLO’s network ISP

National IP broadband offer for ISP ISP

Market 11 : LLU Market 12 : Bitstream Market 12bis 9

Local Loop Unbundling and Bitstream Access

•LLU is of utmost importance for the development of competition in France  As of June 30 2006, LLU accounted for 32% of all DSL lines (3.35 million lines, of which 1.24 million full LLU)  LLU is the only way for competitors to provide “triple play” services  New entrants made important investment to extend their networks • Recent tariffs evolutions  Tariffs for collocation fees decreased  Tariffs for full LLU have been reduced from 10,50 € to 9,50 €, as of July 1, 2005, and 9,29€ as Local loop Unbundling of January 19th 2006 •Market analysis has confirmed current obligations  Transparency (reference offer), non discrimination, accounting separation, access, cost orientation and cost accounting obligations

• Bitstream access is gaining ground in France Competitive carriers usage of  A way to provide competitive broadband services in wholesale offers : areas not covered by LLU IP or ATM traffic LLU delivered  Bitstream will allow competitive carriers to provide 60% at a regional level VoIP service 40%

offers)  Market analyses imposed a cost orientation obligations on bitstream, as far as it does not lead Estimates as of

Bitstream Access Access Bitstream to squeeze January 1, 2006 (regional wholesale 10

Three wholesale broadband offers : geographical architecture

• Increased capillarity for the OLOs  more investments in facilities, networks…  more independency (technical / economical) towards France Télécom

National offer Bitstream offer Local Loop Unbundling – 1 delivery point – regional delivery (20 – need to bring optical fibber – no need for a to 130 points) till the central exchanges network – need for a national – need for a national and network regional capillar networks 11

Implementation of the framework and hot topics in France

I. The French Telecommunications market

II. Broadband regulation

III. Fixed markets regulation

IV. FTTx

V. Fixed-mobile convergence

VI. Spectrum issues 12

VoIP situation in France

• Communications over IP grew reaching 17% of the fixed line traffic in Q2 2006 and over 4,8 millions subscribers (15% fixed subscriptions) Market

Services of voice over broadband accesses are growing in the residential market  Most traditional ISPs are providing double or triple play offers including a fixed telephone service based on ISP, some including international calls in their basic offer Market Residential

• France ranks 3rd, just behind USA (2nd) and Japan (1st) in terms of VoIP subscribers (source IDATE) International

• No asymetric regulation • Symetric regulation : obligations similar to any electronic communication providers if actors

Regulation can be qualified as such 13

Deregulation of the retail markets

• Towards a total deregulation of the retail fixed telephony markets by september 2008

• Retail market evolutions  WLR offer effective at wholesale level  Increase of competition pressure on retail markets thanks in particular to increase of VoB telephony

• ARCEP has proposed a retail market deregulation in several phases:  alleviating France Telecom's obligations on residential market by 2006 Withdrawal of all the obligations except for non discrimination, and cost accounting obligations  this alleviating does not apply to bundles between communication and access  going further to progressively extend the deregulation to the global fixed telephony retail market Conditions : efficiency of WLR efficiency of accounting separation 14

Implementation of the framework and hot topics in France

I. The French Telecommunications market

II. Broadband regulation

III. Fixed markets regulation

IV. FTTx

V. Fixed-mobile convergence

VI. Spectrum issues 15

Fiber is a technological cut off

Technology Downstream rate Upstream rate

ADSL2+ at main distribution frame 8 - 16 Mb/s < 1 Mb/s

Cable: tree structure 5 - 30 Mb/s < 5 Mb/s

Wimax : shared bandwidth 10 - 20 Mb/s 10 - 20 Mb/s

VDSL2 floor distributor 20 - 40 Mb/s 5 - 20 Mb/s

FTTB (fiber to the building then VDSL2) 40 - 70 Mb/s 15 - 35 Mb/s

FTTH (fiber to the home) > 100 Mb/s > 100 Mb/s 16

Which economic equation ?

• Very high, even in densely populated areas • Concentrated on civil engineering works and wiring inside buildings  local peculiarities

Costs  operational difficulties • Sharing, especially using existing infrastructures (sewer system in , cable ducts) changes the economic equation considerably

• Speeds are not really justified for residential customers at present • Uncertainty regarding additional income (HDTV, VOD, access to premium contents, ….) Incomes

Partial deployments (high density areas)

Risks Inefficient investments

Re-monopolisation 17

Which investment model?

Passive investment (civil engineering Active assets (main distribution frame, works, fibre): terminals):  Long return on investment  Rapid return on investment  Sharable  Operators’ core business

Two investment models

Integrated operator Shared liabilities

 Municipalities and/or utilities using  Currently preferred by liabilities incumbents  Operators implementing active assets 18

Which technical architecture?

Two main architectures

PON (tree) Point to point (star)

 More commonly used by incumbent operators (Japan,  More commonly used in USA) public projects  Less easily shared  Can be unbundled and (bitstream) upgraded  Less upgradable  Requires more ductwork (terminals) 19

What public action is needed (1/2)?

Lower entry barriers for all players

To civil engineering works

To wiring inside buildings

Encourage open architectures

Public networks

Guarantee equitable sharing of value

With respect to broadcasting and internet players 20

Which regulation ?

• Perfectly understandable that those who want to invest need predictability, and a reasonable return on investment

• No “one size fits all” around the world

• No regulation holiday in a “one platform” country that would lead to a new monopoly

• But regulation is not “black or white” : European framework provides a tool-box of graduated remedies

• Find a way to keep the infrastructure open while ensuring profits on new investment, whose financing would be shared. 21

Implementation of the framework and hot topics in France

I. The French Telecommunications market

II. Broadband regulation

III. Fixed markets regulation

IV. FTTx

V. Fixed-mobile convergence

VI. Spectrum issues 22

Fixed-Mobile convergence Definition

Mobile Network 2 separate access Pricing Bundle Fixed/mobile convergence Fixed Network Commercial bundle corresponds to complementary offers between fixed and mobile usage 2 separate access Mobile Network + Unified Enhanced services taking Intermediate voice mail advantages of 2 networks convergence + Substitutable offers Fixed Network Intelligent management not part of convergence of incoming calls Mobile Network New type of access Mobile offer Mobile Network in home zone Taking advantages of Technical merged networks convergence + Fixed Network Intelligent management of both incoming & outgoing calls 23

Fixed-Mobile convergence Market structure in most European countries

New entrants Integrated operators Mobile operators Fixed operators Have both networks Need access to : No need of access to Need access fixed local loop another network to fixed network mobile network Most relevant structure to (through MVNO offers) provide F/M Convergence

Competition through access regulation of the essential Fixed market fixed local loop

Potential competition IF Oligopoly Mobile market Market 15 (MVNO) is competitive

Potential competition IF Oligopoly through access regulation of the essential Convergence Market 15 (MVNO) is competitive fixed local loop market

IMPACT The success of convergence offers could drastically reduce the number of market players if appropriate access to fixed and mobile networks are not satisfactorily provided. Risks : extended dominance of the integrated operator and extension of the mobile oligopoly to F/M convergence market and then to the whole electronic communications sector 24

Fixed-Mobile convergence Conclusion

•New issues arising with fixed/ mobile convergence: 2 bottlenecks instead of one  Horizontal integration as well as vertical

•Convergence market will develop differently in different European countries, regulators will need :  Flexibility in market definition and analysis  Flexibility of remedies depending on the seriousness of the bottlenecks identified

• Which solutions ?  Ensuring a minimum level of competition on an oligopolistic market : need for effective tools to access mobile networks  New remedies for the integrated operator : equality of access = some kind of functional separation (need a new understanding of non discrimination) 25

Implementation of the framework and hot topics in France

I. The French Telecommunications market

II. Broadband regulation

III. Fixed markets regulation

IV. FTTx

V. Fixed-mobile convergence

VI. Spectrum issues 26

Forthcoming spectrum issues

•Objective of the review : add flexibility for spectrum management

•Proposals from the European Commission :  Strengthen services and technology neutrality : introduce freedom to use any technology in a spectrum band and to offer any electronic communications service  Open selected bands to trading rights of use  Widen allocation of spectrum resources without authorization  Impose when possible general authorisation as a principle  Allow Pan European services European review  Strengthen European coordination for spectrum management

• Flexibility is indeed required but necessity to take into account at the same time  interferences and interoperability issues  European harmonisation’s needs (like for GSM or UMTS)  Efficient allocation of a scarce resource Issues • Analog switchover to come  French bill under examination at Parliament proposes 2011  Questions will arise concerning use of digital dividend 27

Conclusion

• Market analysis well in place  Towards deregulation from some of the markets  Concentration on remaining bottlenecks and on wholesale markets

• New challenges to come  fixed-mobile convergence  NGN roll-out, especially NGN access

• Review launched this year by the Commission needs to address those issues  Deregulation : no “black and white” markets, which tools are necessary to monitor the transition from regulation to deregulation?  Integrated operators and market by market approach : how to regulate cross market issues?  How to tackle joint dominance?  Integrated operators and equality of access : how to guarantee real equality of access ? from accounting to functional separation?  NGN and the debate on regulatory holidays 28

Thank you for your attention