1

Press Update

Developing High-Speed Internet in France

ART's opinion on France Telecom's IP/ADSL offers

7 May 2002

2

The high-speed Internet value chain

Consumer Access Origination and transport

ISPs

France Telecom

Competing operators

France Telecom

Competing operators

Wanadoo

Competing ISPs

Full unbundled accessShared access

Option 5

Option 3

Option 1

There must be effective competition along the entire value chain

3

ART's goals to encourage the development of residential ADSL

•Effective competition along the entire value chain

– Access: the decision of 16 April 2002 on the pricing and operating conditions of unbundling (full unbundled access and shared access)

– Origination and transport: the need for an offer under option 3, allowing operators to complete deployment for unbundling and to compete with France Telecom's option 5 offers (IP/ADSL)

– Internet service: to make ISPs' ADSL offers viable, while ensuring operators benefit from viable equitable conditions on the market, via unbundling and option 3

4

The current situation on the residential market

ISPs currently pay France Telecom a monthly fee of €39.70 (before tax) per subscriber for IP/ADSL offers (collection + access), an amount greater than their revenues.

An operator wishing to compete with IP/ADSL offers using option 3 would bear average monthly costs of €49.20:

• monthly payment to France Telecom of €42.20

• own costs of approx. €7.00

Subscriber

Third party operator ISP

ADSL Pack: €38 before tax (€45 including VAT)

Option 5: €39.70 before tax

FT

Option 3: €49.20 before tax = €42.20 + €7.00

Competing IP/ADSL

offer

New estimates based on average speed of 23 kbit/s per subscriber, as per current operating conditions

This squeeze effect prevents the development of competing IP/ADSL offers

5

Observation: France Telecom's proposals lead to a long-lasting impasse

ISPs would pay France Telecom a monthly fee for IP/ADSL offers (collection + access) of €28.00, i.e. a 30% decrease, thereby making their offers profitable.

However, any operator wishing to compete with IP/ADSL offers using option 3 would bear average monthly costs of €39.10:

• monthly payment to France Telecom of €32.10

• own costs of approx. €7.00

A short-term drop in expenses for ISPs, but which would make France Telecom the sole provider for ISPs, with no possible competition on the collection market.

Subscriber

Third party operator ISP

ADSL Pack: €38 before tax (€45 including VAT)

Option 5: €28.00 before tax

FT

Option 3: €39.10 before tax= €32.10 +€7.00

Competing IP/ADSL

offer

6

ART's opinion: set reference values adapted to opening competition on the residential ADSL market

Reference value of €30:

Compatible with the arrival of competitors through unbundling under the conditions established on 16 April 2002

Leads to a 25% decline in the expenses borne by ISPs

Calls for a change in the conditions of option 3, whose cost should not exceed €19 (collection at the switch) and €23 (collection at the ADSL area).

Adding their own expenses, operators would have estimated monthly expenses of €30, allowing them to compete with France Telecom's IP/ADSL offers.

Subscriber

Third party operator ISP

ADSL Pack: €38 before tax (€45 including VAT)

Option 5: €30 before tax

FT

€30 before tax = €19 + €11 €30 before tax = €23 + €7

Competing IP/ADSL

offer

• a coherent solution

• guarantees the best chances of economic viability along the entire chain

• suited to the development of competition, which once established, should put downward pressure on prices

Option 3

7

The pricing opinion of 30 April (cont'd)

•Currently: ART's opinion is unfavourable on the charges for the IP/ADSL collection offer and the IP/ADSL 512 offer (pricing decision submitted on the evening of 29 April, a pricing opinion will be published at a later date for the other measures)

•By 28 May 2002: – France Telecom must modify its proposals for IP/ADSL

offers which will have to be submitted to a new pricing opinion

– France Telecom must make functional changes to its option 3 offer