May 3, 2012 9:45 am

France Telecom hurt by low-cost rival

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France Telecom

France Telecom has suffered an 8 per cent decline in operating profit and a fall in sales in the first three months of the year, largely because of the launch of an ultra-low-cost mobile phone competitor in its domestic market.

France’s biggest telephone company on all measures said earnings before interest, tax, depreciation and amortisation fell to €3.43bn in the first quarter of 2012, compared with €3.73bn in the same period last year.

The results are being watched closely by analysts and investors to assess the impact of the launch of Free Mobile, which entered the market in January. Shares in France Telecom, which operates the Orange brand, rose 3 per cent to €10.55 as the company said it was sticking with full-year guidance of €8bn operating cash flow, despite the domestic price war.

The arrival of Free, owned by French billionaire Xavier Niel through his listed company Iliad, has taken a heavy toll on France’s big three incumbent mobile operators after it slashed prices – including limited offers at no charge to existing customers of its fixed-line business.

Gervais Pellissier, France Telecom’s deputy chief executive, estimated that the former state-owned monopoly had lost 615,000 net clients in France since Free confirmed its launch at the end of 2011. Mr Niel has not said yet how many customers Free has won, but experts say they believe it is at least 2m.

France Telecom says it is better protected against the impact of Free’s launch than its biggest rivals, Vivendi’s SFR and Bouygues Telecom, because it has signed a roaming agreement to provide much of its network capacity to the new rival. On Thursday, it said it expected this would be worth €1bn in revenues in the next three years.

Mr Pellissier said: “The negative effect of the fourth entrant on our mobile revenue was almost fully compensated by the revenue from our roaming contract with Free.”

The roaming agreement has caused a bitter row between France Telecom and its two large rivals, with Vivendi accusing the dominant operator of allowing Free to launch with prices that would otherwise have been unsustainable without the roaming deal.

The fallout has already cost the former boss of SFR, Frank Esser, his job and sparked a bout of soul-searching at Vivendi that has included an admission that the separation of its telecoms and media businesses was not “taboo”. SFR has recruited Michel Combes, the former head of Vodafone’s European operations, as chief executive to develop a new strategy.

There have also been suggestions that Free’s launch could lead to the loss of 10,000 jobs in the French telecoms industry, a hugely emotive issue at a time of growing unemployment. François Hollande, the Socialist candidate who is favourite to win the French presidency in a vote on Sunday, has promised to protect jobs.

Group sales at France Telecom fell 3 per cent to €10.9bn during the first quarter. Stéphane Richard, chief executive, stressed that the company’s sales had stood up relatively well in France, when stripping out the impact of extra taxes. He also said the company was also doing well in Spain and Egypt.

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