Orange Bets Spain Bargains Will Beat Telefonica

Nov. 22 (Bloomberg) — France Telecom SA predicts it will keep grabbing market share in Spain by offering subsidized
smartphones, beating rivals Vodafone Group Plc and Telefonica SA which abandoned this approach.

“There’s no need to end subsidies,” Jean Marc Vignolles,
chief executive officer of France Telecom’s Orange Spain unit, the country’s third-biggest phone operator, said in an interview at the company’s Madrid office. “I have not personally seen any evidence that our two competitors have benefited from such a radical move. They’ve suffered commercially.”

Telefonica and Vodafone, Spain’s biggest and second-biggest
phone companies, respectively, this year stopped subsidising smartphones as part of longer-term contracts. That helped Orange attract users wanting a handset without having to pay for it up- front as Spain experiences its worst economic crisis in decades and the highest unemployment rate in the European Union.

Orange’s strategy is working as Telefonica, Europe’s most
indebted phone company, needs to cut spending to preserve cash, said Alexander Wisch, an analyst at S&P Capital IQ Equity
Research in London.

Not Sustainable

“Other operators including Orange are grabbing market
share. Telefonica is aware of that but its priority is to
conserve cash,” he said. “I don’t think this is sustainable in the long term, but in the short term it is definitely good in terms of cash conservation.”

France Telecom dropped 1 percent to 8.15 euros in Paris
trading as of 1:17 p.m. while Telefonica declined 0.1 percent to 10.15 euros in Madrid and Vodafone fell 0.8 percent to 157.85 pence in London.

Orange Spain’s nine-month revenue climbed 1.2 percent to 3
billion euros ($3.83 billion), making the country France
Telecom’s second-biggest by sales. Madrid-based Telefonica’s nine-month revenue from Spain fell 13 percent, while Vodafone’s service revenue at its Spanish unit dropped 11 percent in the six months through September.

While offering subsidied smartphones can boost sales, it
can also reduce profit margins because carriers often sell the devices at a loss to get customers to sign one-year or two-year contracts. Users of devices such as the Apple Inc. iPhone are lucrative in the long run because they spend more money each month to surf the Web, send e-mail and watch videos.

Vignolles didn’t specify the effect of subsidies on
Orange’s profitability, saying that he’s focused on “profitable growth.” In the first half, Orange Spain’s earnings before
interest, taxes, depreciation and amortization climbed 19
percent to 455 million euros.

Debt Pile

To win customers, Telefonica and Vodafone are now bundling
packages that offer products in combination at a saving.
Telefonica started offering its Movistar Fusion bundles in
September that combine voice, broadband and pay-television
offerings.

Angel Vila, Telefonica’s finance chief, has said that the
removal of subsidies led to “significant savings in commercial costs.” Telefonica said this month its net debt shrank to 52.8 billion euros ($67 billion) from 58.3 billion euros in June. Its year-end target is 50 billion euros.

“Bundling won’t protect revenue in the short term, but it
was a necessary pain,” Jonathan Dann, a London-based analyst at Barclays, said by phone.

Necessary Pain

Last week, Vodafone’s Spain unit started new offerings that
combine Internet, voice, text messaging and cloud services.

“We no longer talk about whether or not subsidies would
work,” Vodafone spokesman Pepe Romero said. “We now believe
the key issue is to provide our customers with all services and a handset at a very competitive price.”

Orange Spain forecasts growth will continue at the pace of
previous years, Vignolles said.

“As far as 2012 is concerned we are confident to deliver
growth in line with our results so far, as the impact” of
competitors’ bundled services “is rather limited,” Vignolles said. “October figures were very satisfactory. We are at the end of November and commercial momentum has not slowed.”

In September, Orange Spain gained 24,660 mobile-phone
clients, raising its market share by customers to 21.21 percent from 21.07 percent in August. Telefonica lost 253,520 mobile customers and its market share fell to 36.96 percent. Vodafone lost 178,300, reducing its share to 27.42 percent, according to Spain’s telecommunications market commission, or CMT.

France Telecom is looking for growth outside its home
country, where mobile operator Iliad SA had 6.4 percent of the market at the end of September after beginning services this year with cheap packages starting at 2 euros a month.

Yoigo Sale

As part of its focus on growth, Orange Spain is interested
in acquisitions that could boost its market share. The company is “participating” in the sale process of TeliaSonera AB’s
Spanish wireless unit Yoigo, Vignolles said.

Last week, Lars Nyberg, chief executive officer of
TeliaSonera, Sweden’s biggest phone operator, said he isn’t in a hurry to sell Yoigo.

“We’re not in a rush either to buy Yoigo and we shouldn’t
buy it at any price,” Vignolles said. “It’s clear that there will be no crazy bid from the group. We should consider, based on all conditions of the purchase agreement, whether it makes sense to make an offer or not.”

Yoigo gained 40,040 mobile phone customers in September,
taking its market share to 6.11 percent, according to CMT.

Strategic Market

Orange Spain will “clearly” be able to deliver growth in
2013 without a potential integration of Yoigo, which may also face some regulatory issues, Vignolles said.

“I prefer steady and continuous growth rather than ups and
downs,” Vignolles said. “There’s no rush,” to overtake
Vodafone as the second-biggest phone operator in Spain, he said.

At the end of the first nine months of this year, Orange
Spain’s mobile market share by service revenue was 22.9 percent, which compares with 17.9 percent at the end of 2007, according to Vignolles.

“We have reduced the gap with obviously our leading
competitors,” Vignolles said. “Our focus is on profitable
growth and maintaining this pace of growth. That has accelerated very significantly in the last two years, which is evidence that our business model is strong while our competitors are facing significant issues.”

France Telecom considers Orange Spain a strategic asset and
it’s “definitely” a market where France Telecom wants to grow “despite a very challenging” economy, Vignolles said.

Spain’s government expects economic output to keep
contracting next year after five rounds of austerity to tackle the budget deficit.

“We are preparing for a very tough 2013,” Vignolles said.
“But we’re looking for the end of the tunnel. The company would do even better in a growing environment and results would be even more spectacular.”

To contact the reporters on this story:
Manuel Baigorri in Madrid at
mbaigorri@bloomberg.net ;
Marie Mawad in Paris at
mmawad1@bloomberg.net

To contact the editor responsible for this story:
Kenneth Wong at
kwong11@bloomberg.net

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