Service Providers

France Telecom Soaring While AOL Struggles in European ISP Market

Broadband connectivity is helping France Telecom gain ground — while AOL is slipping — in the European Internet Service Provider (ISP) market.

With 7.6 million broadband subscribers at the end of last year, France Telecom is the largest broadband service provider in Europe, and holds a tenuous lead over its American and European rivals, according to the latest Strategy Analytics Broadband Service Provider survey.

“Today France Telecom remains the undisputed largest broadband service provider in Europe,” said Martin Olausson, a senior analyst for telecom, at the London office of Strategy Analytics. “However, with several large competitive operators still standing as acquisition targets in Europe, that could quickly change.”

By the end of 2005, there were 76 service providers in Europe, accounting for more than 52 million broadband subscriptions in 20 European countries. That was an increase of 53 percent from the same period in 2004, according to Strategy Analytics, the Boston-based IT and telecom research consultancy, and represents 86 percent of the total 2005 European broadband market.

Telecom Italia Catching Up

These rivals are chasing after France Telecom, based in Paris. After a robust fourth period for Telecom Italia, in which it netted a million new subscribers, the Italian telco reclaimed the number two position on the European top-list, surpassing Germany’s Deutsche Telekom’s broadband division, T-Online.

AOL is struggling to grow in France and Germany, and Spain’s Telefonica surpassed AOL for the first time in a year in terms of new subscribers. For the first time in a year-and-a-half NTL’s merger of the Telewest network gave it an edge over UK stalwart, BT.

Germany’s Arcor, owned by Vodaphone, continued to show robust growth, climbing up from the number 19 spot to number 16, and surpassing three incumbents — PT, TDC and Belgacom.

Acquisition Provides Boost

France Telecom’s position was bolstered by its acquisition of Spanish mobile phone company Amena, according to Cesar Bachelet, an analyst with London-based telecom consultancy Ovum. Without the potency provided by that purchase, the company’s growth would have only been 2.2 percent, rather than 10.3 percent, or just over US$13 billion.

“The gross operating margin, a proxy measure for EBITDA [earnings before interest, taxes, depreciation and amortization] rose by 6.7 percent, which translates into a mere 0.1 percent pro-forma,” said Bachelet. “As a result, profitability was reduced, with the gross operating margin rate declining by 1.2 percentage points — 0.7 percentage points pro-forma — to 36.5 percent.”

With the exception of the mobile operations and the relatively small directories business, where revenues grew by 24.5 percent, Bachelet continued, revenues for France Telecom diminished “pretty much everywhere else.” He added that the transition to next-generation IP-based services in both the consumer and business markets is currently a “double-edged sword” for most fixed line, traditional telcos.

New Competition

“The revenues generated by the new services remain insufficient to offset the decline in traditional revenues, and in some cases, notably for VoIP and business IP solutions, their adoption actually exacerbates the problem through revenue cannibalization,” said Bachelet.

“Through a combination of slowing overall growth and increased marketing expenditure in ever more competitive markets, profitability is gradually being eroded. France Telecom was one of the first Western European incumbents to embrace convergence as a strategy to extricate itself from this predicament.”

However, he said the success of the company this coming year will not come so much from new converged products and services, the revenue potential of which is as yet unproven, but rather from greater efficiencies achieved by ending the duplication of networks, systems and staff. “Although these less glamorous, largely invisible activities may not grab the headlines, they will be key to delivering the numbers, by maintaining, and eventually growing, the bottom line again,” said Bachelet.

As if to confirm that theory, this month France Telecom announced massive layoffs at its Orange Division, based in the UK. Faced with a relentless decline in its traditional, land-line based voice business, France Telecom said it would reduce headcount by 17,000 by 2008, overall.

Further layoffs will come from the merger of Dutch ISP Wanadoo and Orange in the Netherlands, according to France Telecom.

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