Orange defends mobile lead in France - Defensive strategy at Orange France linked to higher-value subscribers, MVNOs and service bundling

Orange reported a solid showing in its French mobile business in the first quarter, helping it to offset losses in its legacy fixed business and protect its market leadership in mobile. The success was linked to a strong focus on higher-value contract and smartphone customers; a growing MVNO business; and the bundling of mobile with other service offerings.

The France Telecom-owned operator still derives around half of its total group revenue from France. In the first quarter, total French revenue fell 2.5 percent to EUR5.6 billion, a decline attributed to a 4.9 percent revenue decline at its fixed business. However, mobile revenue rose 2 percent to EUR2.7 billion and now accounts for 47.6 percent of its total French revenue, up 2.1 percentage points from the same period a year ago. The highlight at the mobile unit was a EUR128 million increase in non-voice revenue, which more than compensated for a EUR92 million decline in voice income. Meanwhile, fixed-line revenue was hit by ongoing PSTN line losses, which accelerated over the year and resulted in a 13.6 percent drop in traditional fixed-line service revenue.

Orange's mobile customer base in France rose by a modest 1.9 percent from the year earlier period (to 26.7 million), but it is the shift in the mix of these customers, in line with what the operator calls its "value protection strategy," that is particularly noteworthy. The focus on higher-value customers meant that contract subscribers accounted for more than 70 percent of all customers for the first time in Q1, up 4.5 percent from a year ago to 18.9 million. By contrast, the operator saw a 3.8 percent decline in its prepaid base, backing up its claim that most mobile subscriber "leakage" is coming from its lower-value customer base.

Within its growing contract customer base is evidence of a major shift towards smartphone ownership, which was largely responsible for the uplift in non-voice revenue. Smartphone penetration as a percentage of contract customers hit 30 percent in the quarter, up 13 percentage points year-on-year. Data revenue now accounts for 18.5 percent of total mobile service revenue, up from 15.3 percent a year ago. But these increases were not quite enough to compensate for declining voice income in terms of ARPU, which dropped from EUR397 to EUR384 in the quarter on an annual rolling basis.

One major factor underpinning the growth in lucrative contract customers has been the bundling of mobile contracts as part of a quadruple-play offering; subscribers to Orange's 'Open' quad-play package rose 70 percent year-on-year in the quarter to 509,000. However, such bundles became subject to a significant VAT rise (from 5.5 percent to 19.6 percent) implemented in France at the beginning of the year, which impacted results. Orange vowed not to pass this rate increase onto consumers, taking a related EUR33 million charge at its mobile arm in Q1 as a consequence. French consumer law relating to the tax rise also meant that some mobile subscribers were able to exit contracts without penalty, which was a major reason behind Orange's record high contract churn rate of 15.8 percent in the quarter.

Orange's retail market share in France for the quarter was 41.6 percent, down from 42.8 percent a year earlier. However, the operator significantly expanded its MVNO business during the year, which meant that its network market share is now 5 percent higher than retail at 46.6 percent - a level it has maintained for the last three quarters. Orange's MVNO customer base was up 22.7 percent year-on-year, surpassing the 3 million mark for the first time. According to the latest GSMA Intelligence data, Orange is the host network for 14 French MVNOs. The largest is Virgin Mobile France, which had 1.9 million subs at end of Q1 2011 (up 11.8 percent year-on-year), and accounts for almost two-thirds of Orange's MVNO total. Another notable MVNO is Metropole Television's M6 Mobile, in which Orange is a joint-venture partner (and therefore counted as a standard Orange mobile unit rather than an MVNO). M6 Mobile had 2 million subs at the end of 2010, up from 1.6 million a year earlier.

Joss Gillet, Senior Analyst, GSMA Intelligence:

Any signs of substantial and consecutive revenue losses from its domestic market would trigger an alarming crisis for France Telecom. Last year, almost 90 percent of the group's profits were generated from France and its overseas operations are not yet in a position to offset any revenue declines. Hence, the large investments to keep its French operation stable. FT-Orange has reported that two thirds of its commercial cost increases in 1Q11 came from France and Spain (combined), mainly due to higher marketing expenses and large smartphone subsidies. Overall, such expenditure helped to retain high-value contract customers and to stabilise ARPU since non-voice revenue is now largely offsetting declines in voice revenue. Nevertheless, reducing operating expenses is a critical goal for the group if it wants to preserve cash flows and still keep investing in network infrastructure. With labour expenses representing 21 percent of total revenue and mobile opex rising fast, pressure on margins will intensify in 2011. Its wholesale strategy is mainly focused on stabilising its customer market share since, in most cases, MVNOs compete in the prepaid segment. However, an innovative content strategy is likely to boost demand and generate additional revenue, especially once its partnership with Canal+ (the country's main satellite TV provider) materialises. In anticipation of Free Mobile's launch in 2012, locking in high-value customers into bundled and data-centric offers is a winning first step in preparation for further competition.

Orange France mobile data, Q1 2011
Source: GSMA Intelligence, company data

¹ Annual, rolling
² Total minutes used over the preceding 12 months (outgoing, incoming and roaming calls, excluding MVNOs) divided by the weighted average number of customers over the same period, expressed in minutes as a monthly usage per customer