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Press Release

The development of broadband internet in

France

16th April 2002

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The development of broadband

•The value chain

•Conditions for developing competition

•France Télécom’s proposals

•Action by the Authority

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Description of the value chain

•Flowcharts

•The offers involved

•Technical diagrams

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The broadband internet value chain

Consumer Access Routing and transport

ISP

France Télécom

Rival operators

France Télécom

Rival operators

Wanadoo

Rival ISPs

fully unbundled accessshared access

Option 5

Option 3

bitstream access

Option 1

Effective competition must affect every part of the value chain

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Internet user

Third party operator ISP

ADSL Pack

IP/ADSL: access + transport (“option 5”)

France Télécom

Unbundling (“option 1”)

Competing “IP/ADSL” offer

Description of the value chain (1/5) Flowchart: the pack

“ADSL Connect ATM” (bitsream access (“ option 3”)

The customer purchases the ADSL access plus the ADSL subscription from the ISP

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Internet user

Third partyoperator ISP

“IP/ADSL”: transport

France Télécom

Unbundling (option 1)

Competing “IP/ADSL” offer

“LigneADSL”

ADSL Subscription

Description of the value chain (2/5) flowchart

Bitstream Access : “ADSL Connect ATM” (option 3)

The customer purchases the “Ligne ADSL” from France Télécom and the ADSL subscription from the ISP

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Description of the value chain (3/5) Offers involved

•Aimed at operators:

– Option 1: local loop unbundling• two kinds of LLU access offers to the copper pair (full unbundling, shared access);• allows the operator to have full control over the offers made to the final customer;• regulatory status: a reference offer from France Télécom, which ART may modify

– Option 3 : bitstream access• offer wholesale France Télécom’s “Ligne ADSL” and deliver traffic at intermediary

levels of France Télécom’s network, aimed at operators as a complement to unbundling;

• enables competition on IP/ADSL offers aimed at ISPs;• regulatory status: special access; ART may especially settle disputes between

operators in terms of technical and tariff conditions.

•Aimed at internet service providers:

– Option 5:• two elements: IP/ADSL access (resale of France Telecom’s “Ligne ADSL”) and

“IP/ADSL” transport (data flow);• regulatory status: offer subject to approval by the Ministry.

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Description of the value chain (4/5) technical diagram

Copper pair

DSLAM

BAS

IP transport network

ATM BackboneFilter

ADSL Modem

Subscriber ISP

INTERNET

Unbundling (option 1)

IP/ADSL + regional “IP/ADSL” transport, 17 regions (option 5)(resale offer - residential market and SoHo)

“IP/ADSL” + national “IP/ADSL” transport (option 5)(resale offer - residential market and SoHo)

Regional “ADSL Connect ATM”, 41 zones (option 3) (wholesale offer - residential market and SoHo)

ADSL Access ATM and IP transportSubscribers ISP

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Description of the value chain (5/5) technical diagram

“IP/ADSL” - National delivery to ISPs (option 5)

Bitstream Access : “ADSL Connect ATM” - Delivering traffic to operators (option 3)

Non-existent offer

Total or partial unbundling (option 1)

Subsc r i be r s

Internet Backbone

National ADSL delivery point (1)

Broadband network access point (41)

Subscriber switching

Main Distribution Frames (around 2000 installed)

ISPTransportAccess

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Conditions for developing competition

•Objectives

•The role of bitstream access (“option 3”)

•The residential market: a crucial market

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Conditions for developing competition (1/3)Objectives

• Consumers require efficient competition throughout all segments in the chain:– downstream: a variety of offers from access providers;

– upstream: conditions for operator involvement, allowing competition in offers aimed at access providers.

The Authority’s aim is to meet the conditions for long-lasting, effective involvement of operators,

by means of unbundling and option three, provided both at the same time

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Conditions for developing competition (2/3) The role of bitstream access (“option 3”)

• Nation-wide unbundling coverage, which is a highly capital-intensive task, will take several years;

• ISPs expect increased competition from operators that will be diversified and likely to cover the whole country in order to make competitive broadband internet offers;

• Operators need bitstream access (“option 3”) in order to enter the ADSL market, even in areas that will be unbundled later.

The development of competition in the residential market requires rapid, simultaneous and complementary

implementation of unbundling on the one hand and bitstream access (“option 3”) on the other.

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Conditions for developing competition (3/3) The residential market, a crucial market

• It generates volume and therefore reduces entry costs

•A requirement for deploying unbundling outside of large cities

These features make the residential market a market in itself, in which balanced competitive

conditions must prevail.

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France Télécom’s announcements

•Unbundling (option 1)

•Bitstream access : “ADSL Connect ATM” (option 3)

•Offers to ISPs (option 5)

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France Télécom's announcements (1/3)Unbundling

France Télécom has notified the Authority of a new reference offer, the main points of which were made public on Thursday, 11th April. This new offer does not fulfil the market’s expectations in terms of the following essential points:

– The tariffs, especially for partial unbundling, appear to be too high for operators to be able to compete with FT’s offers to internet service providers;

– The new proposals regarding co-location of technical equipment in the main distribution frame sites are not efficient. On the one hand, the terms and conditions proposed involve high surcharges, and on the other hand, this solution is presented an “interim” measure and non-permanent;

– The offer does not include any specific progress aimed at allowing alternative operators to compete with France Télécom’s xDSL retail offer in term of delivery times.

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France Télécom's announcements (2/3)Bitstream Access (“Option 3”)

On Thursday, France Télécom publicly announced the adjustments it intends to make to the bitstream access “ADSL Connect ATM” (option 3) offer. These developments are still not enough to enable balanced development of competition:

– the tariffs are still incompatible with the creation of offers to compete with those provided by France Télécom;

– the operating terms and conditions, which involve significant surcharges for operators, have not been considerably improved;

– the deployment calendar, in relation to “IP/ADSL”, will exacerbate the time squeeze between FT and its competitors.

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France Télécom's announcements (3/3)Offers to internet service providers

France Télécom has announced a significant drop in tariffs which is beneficial for ISPs in the short term, but discourages alternative operators from entering the market, and thus may harm all players in the medium term.

Internet user

Third partyoperators ISP

ADSL Pack : €38 ex. VAT (€45 inc. VAT)

“IP/ADSL”: today: €35.9 ex. VAT

FT

Option 3: today: €40.5 ex. VAT

IP/ADSLcompetingoffer/

FT announcement: €26.1 ex. VAT

FT announcement: €30.6 ex. VAT

At the moment, an operator purchases an bitstream acces (“option 3”) offer from FT for €40.5 and has to compete with an “IP/ADSL” offer for €35.9.

FT’s announcements aggravate the existing squeeze

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Action by the Authority

•Unbundling (option 1)

•Offers to ISPs (option 5)

•Bitstream Access (option 3)

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Action by the Authority regarding unbundling (1/3)Operating terms and conditions

Access is the first link in the value chain that starts with the subscriber.

Applying the Council Regulation of 18th December 2000, the Authority has thus decided to make immediatly modifications of the technical terms and conditions:

– co-location terms and conditions, which are simplified and thus much less costly, making deployment likely in the provinces and medium-sized cities;

– reduction of entry costs (cable, electricity, air-conditioning), in line with the decision taken regarding splitters within the scope of the ruling on LD Com’s dispute in mid-March;

– application of the non-discrimination principle will enable alternative operators to deliver xDSL access with similar terms to FT.

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Action by the Authority regarding unbundling (2/3) Simpler and less expensive co-location

Operators’ equipment

France Télécom’s equipment

Common access to main distribution frame

Dedicated room

Dedicated access

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Action by the Authority regarding unbundling (3/3)Tariffs

Monthly tariffs aimed at efficient cost levels, enabling the residential market to be targeted

2001 Tariff Decision by ART on 16th

April 2002Change

Fully unbundled access (€/month)

14.5 10.5 -28%

Shared access (€/month)

6.1 + filter on request

2.9 including filtering

Installation costs (€)

107.9 78.7 -27%

Tie cable, L120 type (€)

on request

Monthly payment, all inclusive: 162 or 97

depending on the co-location solution

These tariffs are valid in all of France and they take into account the foreseeable pace of deployment in all areas of the country; they will apply as of 2nd May, 2002 and, according to the data available, up until the end

of 2003

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Action by the Authority regarding “IP/ADSL” (1/3)

France Télécom has made announcements regarding the following tariff changes:

– “IP/ADSL” transport, which is currently being examined,

– “IP/ADSL” access, which the Authority has not yet been notified.

Taking into account the global nature of the offer, the Authority wishes to gain a better knowledge of all its parts before taking an overall position.

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Action by the Authority regarding IP/ADSL (2/3)Elements of the analysis

Notwithstanding the final decision, the main elements of the analysis may now be stated:

- France Télécom’s proposals lead to a time lag between “IP/ADSL” and bitstream access (“option 3”) offer availability (time squeeze);

- France Télécom’s proposals regarding option 3 do not allow the operators to compete with the “IP/ADSL” offers (tariff squeeze);

- A balance should be found between the access and transport segments, as operators may compete on the second segment via bitstream access (“option 3”) offer.

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Action by the Authority regarding IP/ADSL (3/3)

The Authority is beginning to bring the players together and analyse France Télécom’s public announcements.

It will announce its decision on the “IP/ADSL” tariff change by 30th April

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Action by the Authority regarding Bitstream Access offer (“option 3”)

In February 2002 the Authority took the initiative to enter into in-depth co-operation with the main players in the market. The operators’ expectations have now been clearly defined:

– simplification of the offer and, therefore, disappearance of the current operational surcharges;

– merger of current residential and professional offers into one single offer, enabling sharing of equipment and management systems;

– cost oriented tariffs, especially access, at levels that are consistent with those for the retail and “IP/ADSL” offers on the residential market.

Operators are now invited to engage in bilateral negotiations with France Télécom, after which the Authority may be asked to intervene, especially in the case of a dispute.

The Authority is ready to examine any changes to the offer that France Télécom may propose.