UPDATE 1-France Telecom sees light at end of the tunnel-CEO

Wed Feb 27, 2013 12:38pm EST

* Cost cuts will bear fruit next year-CEO

* France mobile prices will stop falling next year-CEO

* Against Bouygues re-use of 3G spectrum for 4G this year

By Leila Abboud

PARIS, Feb 27 (Reuters) - France Telecom's chief executive is confident he can stabilise operating profits next year because of a big cost-cutting push and the expected bottoming out of mobile prices in its home market.

Stephane Richard said that investors might be sceptical that he could deliver on the financial pledge but they were underestimating the group's dedication to wringing out costs in France.

"We believe that there will be no further room for price cuts in mobile in France beyond next year and starting next year we'll be able to measure the impact of our action on cost reduction," he told Reuters in an interview while attending the the Mobile World Congress in Barcelona.

"That will allow us to stabilise EBITDA."

The French market has been rattled by the arrival of low-cost player Iliad's Free Mobile service, which has taken a 7 percent share since launching a year ago.

France Telecom, Vivendi's SFR and Bouygues Telecom hit back, causing a 13 percent drop in mobile prices last year, according to the telecoms regulator.

"In the end, the effect of the arrival of the fourth player will be to lower prices by 25 percent in France in the space of two years," said Richard. "It's gigantic and something few industries could handle."

To cope, SFR and Bouygues are laying off workers and cutting costs.

Meanwhile France Telecom, which is 27 percent state-owned and still has many former civil servants on protected terms among its workforce of 105,000 in France, is relying on retirements to cut its domestic workforce by 30,000 by 2020.

"The group is engaged in an intense effort to reduce our costs. The majority of the savings will come by shrinking the French workforce," said Richard.

France Telecom wants to reduce operating costs, including on marketing and IT, by 500 million euros in France this year. Through 2015 headcount will be reduced by 7,000, helped by a part-time work scheme for older workers.

Despite these efforts, investors are not returning to France Telecom en masse. Its shares slumped 31 percent last year and are down 13 percent this year compared with a 1 percent fall for Europe's telecom sector index.

Credit ratings agency Standard & Poors put France Telecom on 'negative watch' on Wednesday over concerns that its prospects were weakening this year because of France and Poland, and said it will decide whether to downgrade the group in the coming weeks.

A regulatory decision that will affect France Telecom's fortunes in its home market is also looming.

The French telecoms regulator ARCEP is expected to decide by March 19 whether to allow third-place mobile group Bouygues the right to re-use its radio spectrum in the 1800 megahertz band for super-fast fourth generation mobile broadband services.

If Bouygues gets permission, it could get a head start on rivals in rolling out 4G in France because it has big amounts of spectrum in that band and could make the switch more quickly than the others can build their networks.

Richard said he was opposed to allowing Bouygues to launch with those frequencies before the end of this year.

"If the authorities allow it, they will hand one player greater 4G coverage than the others and that is not fair," he said, pointing out that the four operators shelled out 3.6 billion euros for 4G licences two years ago.

France Telecom is in the midst of building its 4G network and has so far launched only in a handful of cities, aiming for 30 percent coverage by the end of the year.

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