When Stephane Richard stands up to present France Telecom’s 2011 profits on Wednesday, this most laconic of chief executives could be forgiven for looking a little more ill-at-ease than usual.

For France’s biggest telephone company is under serious attack domestically, and investors will want to hear what Mr Richard is doing about it.

The source of his angst is Xavier Niel, a telecoms billionaire who started out selling online adult entertainment services but has become France’s most successful entrepreneur. Iliad, a company 65 per cent owned by Mr Niel, has already shaken up the telecoms establishment with cheap internet services.

Now it is making an equally bold attempt to break the hold of France’s big three mobile operators – France Telecom, Vivendi’s SFR and Bouygues Telecom – over a market worth up to €25bn in yearly sales.

The January launch of Iliad’s Free Mobile was long anticipated but its pricing model – including an offer where existing fixed-line customers are given limited mobile services for free – has alarmed the sector.

“Xavier Niel shocked everybody by coming in so incredibly low on price,” says a France Telecom insider. “But it looks unsustainable economically; especially if they are really building long term.”

The main complaint from incumbents, who invest billions on networks, antennas and towers, is that Mr Niel is attempting to compete on the cheap. Free claims it can build a network covering France for €1bn, a fraction of the usual cost.

France’s telecoms regulator allowed Free to launch even though it was only able to cover 27 per cent of the country from the start. The remainder comes from a roaming agreement with France Telecom.

But France Telecom complains that Free is in fact struggling to provide as little as 5 per cent coverage and that its own services could suffer as it props up its rival – even though Mr Richard’s company is paid when Free uses its network.

“Undoubtedly they’ve had a considerable marketing success, and hats off,” says the France Telecom insider, who estimates 2m subscribers may already have joined Free.

“But the network problems go to the heart of the economics of its offers.”

Iliad declined to comment on claims of technical problems.

It appears, though, that Mr Richard will have little option but to share its network. A senior sector executive says: “The French telecoms regulator, Arcep, wanted a market disrupter so it’s going to have to back it.” Rivals have asked Arcep to examine the coverage issue.

But the bigger worries for France Telecom, SFR and Bouygues run far beyond technical issues.

The arrival of an aggressive competitor poses a real threat to earnings in a key market. SFR contributed almost 40 per cent of Vivendi’s €4.9bn earnings before tax and amortisation in the first nine months of 2011. France provided about half of France Telecom’s sales in the same period.

HSBC analysts say Free’s arrival could mean the incumbents’ mobile revenues fall as much as 5.5 per cent this year and next.

A big question for investors, which Mr Richard will be asked on Wednesday, is about the impact on dividends, particularly at France Telecom and Vivendi, which yield 12 per cent and 9 per cent respectively.

HSBC believes the companies will still generate enough cash to support their dividend policies, though France Telecom may have to cut after 2013.

Mr Richard is still refraining from criticising Mr Niel in public. But the financial stakes are such that in private the gloves appear to be off.

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